**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**

**\[Docket ID. OTS-2007-0015\]**

**\[RIN 1550-AC17\]**

**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:** Proposed rule; request for public comment.

**\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_**

**SUMMARY:** The Board, OTS, and NCUA (collectively, the Agencies) are
proposing to exercise their authority under section 5(a) of the Federal
Trade Commission Act to prohibit unfair or deceptive acts or practices.
The proposed rule would prohibit institutions from engaging in certain
acts or practices in connection with consumer credit cards accounts and
overdraft services for deposit accounts. This proposal evolved from the
Board's June 2007 Notice of Proposed Rule under the Truth in Lending Act
and OTS's August 2007 Advance Notice of Proposed Rulemaking under the
Federal Trade Commission Act. The proposed rule relates to other Board
proposals under the Truth in Lending Act and the Truth in Savings Act,
which are published elsewhere in today's **Federal Register**.

**DATES:** Comments must be received on or before **August 4, 2008.**

**ADDRESSES:**

Because paper mail in the Washington DC area and at the Agencies is
subject to delay, we encourage commenters to submit comments by e-mail,
if possible. We also encourage commenters to use the title "Unfair or
Deceptive Acts or Practices" to facilitate our organization and
distribution of the comments. Comments submitted to one or more of the
Agencies will be made available to all of the Agencies. Interested
parties are invited to submit comments as follows:

[Board]{.underline}: You may submit comments, identified by Docket No.
R-1314, by any of the following methods:

-   [Agency Web Site]{.underline}:
    [http://www.federalreserve.gov](http://www.federalreserve.gov/).
    Follow the instructions for submitting comments at
    <http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm>.

-   [Federal eRulemaking Portal]{.underline}:
    [http://www.regulations.gov](http://www.regulations.gov/). Follow
    the instructions for submitting comments.

-   [E-mail]{.underline}: <regs.comments@federalreserve.gov>. Include
    the docket number in the subject line of the message.

-   [Facsimile]{.underline}: (202) 452-3819 or (202) 452-3102.

-   [Mail]{.underline}: Jennifer J. Johnson, Secretary, Board of
    Governors of the Federal Reserve System, 20th^ ^Street and
    Constitution Avenue, NW, Washington, DC 20551.

All public comments are available from the Board's web site at
<http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm> as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW) between 9:00 a.m. and 5:00 p.m. on weekdays.

[OTS:]{.underline} You may submit comments, identified by OTS-2007-0015,
by any of the following methods:

-   [Federal eRulemaking Portal:]{.underline} Go to
    [http://www.regulations.gov](http://www.regulations.gov/), select
    "Office of Thrift Supervision" from the agency drop-down menu, then
    click submit. Select Docket ID "OTS-2007-0015" to submit or view
    public comments and to view supporting and related materials for
    this notice of proposed rulemaking. The "User Tips" link at the top
    of the page provides information on using Regulations.gov, including
    instructions for submitting or viewing public comments, viewing
    other supporting and related materials, and viewing the docket after
    the close of the comment period.

-   [Mail:]{.underline} Regulation Comments, Chief Counsel's Office,
    Office of Thrift Supervision, 1700 G Street, NW, Washington, DC
    20552, Attention: OTS-2007-0015.

-   [Facsimile:]{.underline} (202) 906-6518

-   [Hand Delivery/Courier:]{.underline} Guard's Desk, East Lobby
    Entrance, 1700 G Street, NW, from 9 a.m. to 4 p.m. on business days,
    Attention: Regulation Comments, Chief Counsel's Office, Attention:
    OTS-2007-0015.

-   [Instructions:]{.underline} All submissions received must include
    the agency name and docket number for this rulemaking. All comments
    received will be entered into the docket and posted on
    Regulations.gov without change, including any personal information
    provided. Comments, including attachments and other supporting
    materials received are part of the public record and subject to
    public disclosure. Do not enclose any information in your comment or
    supporting materials that you consider confidential or inappropriate
    for public disclosure.

-   [Viewing Comments Electronically:]{.underline} Go to
    [http://www.regulations.gov](http://www.regulations.gov/), select
    "Office of Thrift Supervision" from the agency drop-down menu, then
    click "Submit." Select Docket ID **"**OTS-2007-0015" to view public
    comments for this notice of proposed rulemaking.

-   [Viewing Comments On-Site:]{.underline} You may inspect comments at
    the Public Reading Room, 1700 G Street, NW, by appointment. To make
    an appointment for access, call (202) 906-5922, send an e-mail to
    <public.info@ots.treas.gov>, or send a facsimile transmission
    to (202) 906-6518. (Prior notice identifying the materials you will
    be requesting will assist us in serving you.) We schedule
    appointments on business days between 10:00 a.m. and 4:00 p.m. In
    most cases, appointments will be available the next business day
    following the date we receive a request.

[NCUA]{.underline}: You may submit comments, identified by number RIN
3133-AD47, by any of the following methods:

-   [Federal eRulemaking Portal]{.underline}:
    [http://www.regulations.gov](http://www.regulations.gov/). Follow
    the instructions for submitting comments.

-   [NCUA Web Site]{.underline}:
    <http://www.ncua.gov/news/proposed_regs/proposed_regs.html>. Follow
    the instructions for submitting comments.

-   [E-mail]{.underline}: Address to <regcomments@ncua.gov>. Include
    "\[Your name\] Comments on Proposed Rule Part 706" in the e-mail
    subject line.

-   [Facsimile]{.underline}: (703) 518-6319. Use the subject line
    described above for e-mail.

-   [Mail]{.underline}: Address to Mary Rupp, Secretary of the Board,
    National Credit Union Administration, 1775 Duke Street, Alexandria,
    Virginia 22314-3428.

-   [Hand Delivery/Courier]{.underline}: Same as mail address.

**FOR FURTHER INFORMATION CONTACT:**

[Board]{.underline}: 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:]{.underline} April Breslaw, Director, Consumer Regulations, (202)
906-6989; Suzanne McQueen, Consumer Regulations Analyst, Compliance and
Consumer Protection Division, (202) 906-6459; Glenn Gimble, Senior
Project Manager, Compliance and Consumer Protection Division, (202)
906-7158; 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]{.underline}: 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 proposing several new provisions
intended to protect consumers against unfair or deceptive acts or
practices with respect to consumer credit card accounts and overdraft
services for deposit accounts. These proposals 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]{.underline} 15 U.S.C.
57a(f)(1), 45(a).

**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 Proposal). The purpose of TILA is
to promote the informed use of consumer credit by providing disclosures
about its costs and terms. [See]{.underline} 15 U.S.C. 1601
[et]{.underline} [seq]{.underline}. TILA's disclosures differ depending
on whether the consumer credit is an open-end (revolving) plan or a
closed-end (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. While 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]{.underline} 72 FR at 32948-52.

In response to the June 2007 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
comments, however, urged the Board to take additional action with
respect to a number 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
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.

**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]{.underline} 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 the
    Home Owners' Loan Act (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 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 recognized in its ANPR that the financial services industry and
consumers have benefited from consistency in rules and guidance as the
federal banking agencies and the NCUA have adopted uniform or very
similar rules in many areas. 72 FR at 43571. OTS emphasized in its ANPR
that it would be mindful of the goal of consistent interagency standards
as it considered issues relating to unfair and deceptive acts or
practices. [Id]{.underline}.

OTS received 29 comment letters on its ANPR, including thirteen from
financial institutions and their trade associations, three from consumer
advocacy organizations, two from members of Congress, one from the FTC,
and ten from others. Generally speaking, the commenters agreed on only
one point . . . that OTS should adopt the same principles-based
standards for unfairness and deception used by the FTC, the other
federal banking agencies, and the NCUA.

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 questioned the need for any new OTS rules. 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. They explained the reasons they use the particular practices
listed and how some benefit consumers. Some commenters urged OTS to
await the Board's rulemaking under the Home Ownership and Equity
Protection Act (HOEPA) on unfair or deceptive acts or practices and then
follow the Board's lead.[^1] They also opposed using state laws as a
model or converting guidance to rules. Further, they opposed OTS
expanding its advertising rules.

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 but not limited to those the ANPR indicated OTS
might target. One emphasized that whatever OTS does must not preempt
state laws on unfair and deceptive acts or practices.

A joint comment from House Financial Services Committee Chairman Barney
Frank and Subcommittee on Financial Institutions and Consumer Credit
Chairman Carolyn Maloney, urged OTS to proceed promptly to adopt
comprehensive regulations on unfair and deceptive acts or practices. A
comment from Senator Carl Levin urged OTS to move ahead with rulemaking;
he focused his comment on unfair or deceptive credit card practices.

A comment from the FTC summarized the FTC's interest and experience with
respect to financial services, described how the FTC has used its
unfairness and deception authority in rulemaking and law enforcement
actions, and recommended that OTS consider the FTC's experience in
determining whether to impose rules prohibiting or restricting
particular acts and practices.

OTS received comments on several practices relevant to the specific
credit card practices addressed in today's proposal:

-   OTS received comments on the practice of "universal default" or
    "adverse action pricing," which the OTS ANPR described as imposing
    an interest rate increase that is triggered by adverse information
    unrelated to the credit card account. The OTS ANPR contrasted this
    practice to long-established risk based pricing. Consumer groups
    supported prohibiting these practices as abusive and unfair to
    consumers. They cited inaccuracies in the credit reporting system
    and disparate racial impact as reasons to prohibit using credit
    reports or credit scores to impose penalty rates. On the other hand,
    several industry commenters defended these practices. They commented
    that credit cards should be priced to reflect their current risk.
    They argued that otherwise, credit card issuers would build a risk
    premium into all rates to the detriment of other customers.

-   OTS received comments on the practice of applying payments first to
    balances subject to a lower rate of interest before applying
    payments to balances subject to higher rates of interest, as well as
    the practice of applying payments first to fees, penalties, or other
    charges before applying them to principal and interest. Consumer
    groups supported prohibiting these practices as abusive and unfair
    to consumers. On the other hand, several industry commenters
    defended these practices. They commented that if these practices
    were prohibited fewer products would be available to consumers such
    as zero or low-cost balance transfers. Some commented that applying
    payments in this manner was fundamental and would impose significant
    implementation costs to change.

-   OTS received comments on the practice of imposing an
    over-the-credit-limit fee that is triggered by the imposition of a
    penalty fee (such as a late fee) and the practice of charging
    penalty fees in consecutive months based on previous late or
    over-the-credit-limit transactions, not on new actions. Consumer
    groups supported prohibiting these practices and prohibiting any
    over-the-credit-limit fee where the creditor approved the
    transaction or padded the credit limit, as abusive and unfair to
    consumers. On the other hand, several industry commenters defended
    these practices. They commented that the practices deter future
    defaults and are a way to charge a little more to a customer who has
    demonstrated higher risk without permanently raising the customer's
    borrowing costs. They argued that otherwise, these costs would be
    passed on to borrowers who do not go over their credit limit or pay
    late.

Consumer groups also commented on additional credit card practices of
concern that are relevant to the practices addressed in today's
proposal. They urged that payment cut-off times be prohibited and that
payments be treated as timely if they are postmarked as of the due date.
They also urged that subprime credit cards be prohibited if less than
\$300 of available credit is left after initial fees are subtracted or
initial fees total more than 10% of the overall credit line.

**C. Related Action by the Agencies**

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.
Among the topics discussed were the Board's previously announced plan to
issue a proposal under the FTC Act and the Board's June 2007 Proposal.
In addition, the Agencies have 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 has also been informed by the results of consumer
testing conducted on behalf of the Board in connection with its June
2007 Proposal under Regulation Z. Based on this and other information
discussed below, the Agencies have developed proposed rules under the
FTC Act prohibiting specific unfair acts or practices regarding consumer
credit card accounts.

Finally, the Agencies have also gathered information from a number of
recent Congressional hearings on consumer protection issues regarding
credit 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. Members of
Congress have proposed several bills addressing consumer protection
issues regarding credit cards.[^4]

**D. Agency Actions on Overdraft Services**

Overdraft services are sometimes offered to transaction account
customers as an alternative to traditional ways of covering overdrafts
([e.g.]{.underline}, overdraft lines of credit or linked accounts).
Coverage is generally "automatically" provided to consumers that meet a
depository institution's criteria, and the service may extend to check
as well as other transactions, such as automated teller machine (ATM)
withdrawals, debit card transactions and automated clearinghouse (ACH)
transactions. Most institutions state that payment of an overdraft is at
their discretion. If an overdraft is paid, the consumer will be charged
a flat fee for each item. A daily fee also may apply for each day the
account remains overdrawn.

In response to the increased availability and customer use of these
overdraft protection services, the FDIC, Board, OCC, OTS, and NCUA
published guidance on overdraft protection programs in February
2005.[^5] The Joint Guidance addresses three primary areas -- safety and
soundness considerations, legal risks, and best practices -- while the
OTS guidance focuses on safety and soundness considerations and best
practices. The best practices focus on the marketing and communications
that accompany the offering of overdraft services, as well as the
disclosure and operation of program features, including the provision of
a consumer election or opt-out of the overdraft service. The Agencies
have also published a consumer brochure on overdraft services.[^6]

In May 2005, the Board separately issued revisions to Regulation DD and
the staff commentary pursuant to its authority under the Truth in
Savings Act (TISA) to address concerns about the uniformity and adequacy
of institutions' disclosure of overdraft fees generally, and to address
concerns about advertised overdraft services in particular.[^7] The goal
of the final rule was to improve the uniformity and adequacy of
disclosures provided to consumers about overdraft and returned-item fees
to assist consumers in better understanding the costs associated with
the payment of overdrafts. In addition, the final rule addressed some of
the Board's concerns about institutions' marketing practices with
respect to overdraft services.

In addition to regulatory actions, there has also been significant
Congressional interest in overdraft services, with legislation
introduced seeking to curb some of the perceived abusive practices
associated with these services. In June 2007, a hearing was held to
discuss the proposed legislation with testimony from consumer advocates
and industry representatives.[^8]

**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
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).[^9]

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 Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC).
[See]{.underline} 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]{.underline} 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]{.underline} 15 U.S.C. 57a(b)-(e),
(g)-(j); 15 U.S.C. 57a-3.

**B. Standards for Unfairness Under the FTC Act**

Congress has codified standards developed by the Federal Trade
Commission (FTC) for the FTC to use in determining whether acts or
practices are unfair under section 5(a) of the FTC Act.[^10]
Specifically, the FTC Act provides that the FTC has no authority to
declare an act or practice is 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]{.underline} 15 U.S.C. 45(n).

In proposing 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 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 has not taken similar action in generally applicable
guidance,[^12] the commenters on OTS's ANPR who addressed this issue
overwhelmingly urged OTS to 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]

First, 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 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]

Second, 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.[^18] 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.[^19] Accordingly,
the test is not whether the consumer could have made a wiser decision
but whether an act or practice unreasonably creates or takes advantage
of an obstacle to the consumer's ability to make that decision
freely.[^20]

Third, 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.[^21] Generally, it is important to consider both the costs
of imposing a remedy and any benefits that consumers enjoy as a result
of the practice.[^22] 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.[^23]

**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.[^24] 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.[^25] Although these standards have not been codified, they
have been applied by numerous courts.[^26] Accordingly, in proposing
rules under section 18(f)(1) of the FTC Act, the Agencies have applied
the standards articulated by the FTC for determining whether an act or
practice is deceptive.[^27]

A representation or omission is deceptive if the overall net impression
created is likely to mislead consumers.[^28] The FTC conducts its own
analysis to determine whether a representation or omission is likely to
mislead consumers acting reasonably under the circumstances.[^29] 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.[^30] 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.[^31]

A representation or omission is material if it is likely to affect the
consumer's conduct or decision regarding a product or service.[^32]
Certain types of claims are presumed to be material, including express
claims and claims regarding the cost of a product or service.[^33]

**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.[^34] Thus, the
Agencies are not required to adopt the most restrictive means of
preventing the act or practice, nor are they required to adopt the least
restrictive means.

**III. Summary of Proposed Revisions**

In order to best ensure that all entities that offer the products
addressed in the proposed rule are treated in a like manner, the Board,
OTS, and NCUA have joined together to issue today's proposal. This
interagency approach is consistent with section 303 of the Riegle
Community Development and Regulatory Improvement Act of 1994.
[See]{.underline} 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. In today's proposal, 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. Accordingly,
the Agencies have endeavored to propose rules that are as uniform as
possible. The Agencies also consulted with the two other federal banking
agencies, OCC and FDIC, as well as with the FTC.

The effort to achieve an even playing field is also furthered by the
Agencies' focus 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 recognize 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 these rules. The Agencies believe,
however, that FTC-regulated entities represent a small percentage of the
market for consumer credit card accounts and overdraft services. For
OTS, addressing certain deceptive credit card practices in today's
proposal, rather than through an interpretation or expansion of its
Advertising Rule, also fosters consistency because the other Agencies do
not have comparable advertising regulations.

[Credit Practices Rule]{.underline}

The Agencies are proposing to make non-substantive, organizational
changes to the Credit Practices Rule. Specifically, in order to avoid
repetition, the Agencies would 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 have made additional, non-substantive changes to the organization
of their versions of the Credit Practices Rule.

[Consumer Credit Card Accounts]{.underline}

The Agencies are proposing seven provisions under the FTC Act regarding
consumer credit card accounts. These provisions are 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 be prohibited from treating a payment as late
for any purpose unless consumers have been provided a reasonable amount
of time to make that payment. The proposed rule would create 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.
Elsewhere in today's **Federal Register**, the Board has made two
additional proposals under Regulation Z that would further ensure that
consumers receive a reasonable amount of time to make payment.
Specifically, the Board is proposing to revise 12 CFR 226.10(b) to
prohibit creditors from setting a cut-off time for mailed payments that
is earlier than 5:00 p.m. at the location specified by the creditor for
receipt of such payments. The Board is also proposing to add 12 CFR
226.10(d), which would require 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, when different annual percentage rates apply to different
balances, institutions would be 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. The specified methods
are applying the entire amount first to the balance with the highest
annual percentage rate, splitting the amount equally among the balances,
or splitting the amount pro rata among the balances. Furthermore, when
an account has a discounted promotional rate balance or a balance on
which interest is deferred, institutions would be required to give
consumers the full benefit of that discounted rate or deferred interest
plan by allocating 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 be prohibited from denying consumers a grace period on purchases
(if one is offered) solely because they have not paid off a balance at a
promotional rate or a balance on which interest is deferred.

Third, institutions would be prohibited from increasing the annual
percentage rate on an outstanding balance. This prohibition would not
apply, however, where a variable rate increases due to the operation of
an index, where a promotional rate has expired or is lost (provided the
rate is not increased to a penalty rate), or where the minimum payment
has not been received within 30 days after the due date.

Fourth, institutions would be 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 may be
assessed.

Fifth, institutions would be prohibited from imposing finance charges on
balances based on balances for days in billing cycles that precede the
most recent billing cycle. The proposed rule would prohibit 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 be prohibited from financing security deposits
or fees for the issuance or availability of credit (such as
account-opening fees or membership fees) if those deposits or fees
utilize the majority of the available credit on the account. The
proposal would also require 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. In addition,
elsewhere in today's **Federal Register**, the Board is proposing to
revise Regulation Z to provide that a creditor that collects or obtains
a consumer's agreement to pay a fee before providing account-opening
disclosures must permit that consumer to reject the plan after receiving
the disclosures and, if the consumer does so, must refund any fee
collected or take any other action necessary to ensure the consumer is
not obligated to pay the fee.

Seventh, institutions making firm offers of credit advertising multiple
annual percentage rates or credit limits would be 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]{.underline}

The Agencies are proposing two provisions prohibiting unfair acts or
practices related to overdraft services in connection with consumer
deposit accounts. The proposed provisions are intended to ensure that
consumers understand overdraft services and have the choice to avoid the
associated costs where such services do not meet their needs.

The first would provide that it is an unfair act or practice for an
institution to assess a fee or charge on a consumer's account for paying
an overdraft unless the institution provides 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 does not opt out.
The proposed opt-out right would apply to all transactions that overdraw
an account regardless of the 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 prohibit certain acts or practices associated
with assessing overdraft fees in connection with debit holds.
Specifically, the proposal would prohibit an institution from assessing
an overdraft fee if the overdraft is caused solely by a hold placed on
funds that exceeds the actual purchase amount of the transaction, unless
this purchase amount would have caused the overdraft.

Elsewhere in today's **Federal Register**, the Board is also proposing
to address potentially misleading balance disclosures by generally
requiring depository institutions to provide only balances that reflect
the consumer's own funds (without funds added by the institution to
cover overdrafts) in response to consumer inquiries received through an
automated system such as a telephone response system, ATM, or an
institution's web site.

**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.[^35] 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 and loan institutions, 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 payment-systems policies
of the Board. The Agencies have adopted rules substantially similar to
the FTC's Credit Practices Rule.[^36]

As part of this rulemaking, the Agencies are proposing 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.

[Proposal]{.underline}

[Subpart A---General Provisions]{.underline}

Subpart A contains general provisions that apply to the entire part. As
discussed below, there are some differences among the Agencies'
proposals.

[\_\_.1 Authority, purpose, and scope]{.underline}[^37]

The provisions in proposed §\_\_.1 are largely drawn from the current
authority, purpose, and scope provisions in the Agencies' respective
Credit Practices Rules.

[\_\_.1(a) Authority]{.underline}

Proposed §\_\_.1(a) provides that the Agencies have issued this part
under section 18(f) of the FTC Act. In OTS's proposed rule, this
provision further provides that OTS is also exercising its authority
under various provisions of HOLA, although the FTC Act is the primary
authority for OTS's rule.

­[\_\_.1(b) Purpose]{.underline}

Proposed §\_\_.1(b) provides 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 provides that the part
contains provisions that define and set forth requirements prescribed
for the purpose of preventing specific unfair or deceptive acts or
practices. The Agencies note 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, it clarifies 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.

[\_\_.1(c) Scope]{.underline}

Proposed §\_\_.1(c) describes the scope of each agency's rules. The
Agencies have each tailored this paragraph to describe those entities to
which their part applies. The Board's provision states that its rules
would apply to banks and their subsidiaries, except savings associations
as defined in 12 U.S.C. 1813(b). The Board's provision further explains
that enforcement of its rules is allocated among the Board, OCC, and
FDIC, depending on the type of institution. This provision has been
updated to reflect intervening changes in law. The Board's Staff
Guidelines to the Credit Practices Rule would be revised to remove
questions 11(c)-1 and 11(c)-2 and the substance of the Board's answers
would be updated and published as commentary under proposed § 227.1(c).
[See]{.underline} proposed Board comments 227.1(c)-1 and -2. The
remaining questions and answers in the Board's Staff Guidelines would
remain in place.

OTS's provision would state 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. The entire
OTS part would have the same scope. OTS notes that this scope is
somewhat different from the scope of its existing Credit Practices Rule.
OTS's Credit Practices Rule currently applies to savings associations
and service corporations that are wholly owned by one or more savings
associations, which engage in the business of providing credit to
consumers. Since the proposed rules would cover more practices than
consumer credit, the reference to engaging in the business of providing
credit to consumers would be deleted. The reference to wholly owned
service corporations would be updated to refer instead to subsidiaries,
to reflect the current terminology used in OTS's Subordinate
Organizations Rule.[^38]

The NCUA's provision would state that its rules apply to federal credit
unions.

[227.1(d) Definitions]{.underline}

Proposed §\_\_.1(d) of the Board's rule would clarify that, unless
otherwise noted, the terms used in the Board's proposed §\_\_.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).
OTS and NCUA do not have a need for a comparable subsection so none is
included in their proposed rules.

[227.2 Consumer-Complaint Procedure]{.underline}

In order to accommodate the revisions discussed above, the Board would
consolidate the consumer complaint provisions currently located in 12
CFR 227.1 and 227.2 in proposed § 227.2. OTS and NCUA do not currently
have and do not propose to add comparable provisions.

[Subpart B---Credit Practices]{.underline}

Each agency would place the substantive provisions of their current
Credit Practices Rule in Subpart B. In order to retain the current
numbering in its Credit Practices Rule, the Board would reserve 12 CFR
227.11, which currently contains the Board's statement of authority,
purpose, and scope. The other provisions of the Board's Credit Practices
Rule (§§ 227.12 through 16) would not be revised.

OTS is proposing the following notable changes to its version of Subpart
B:

[Section 535.11 Definitions (existing section 535.1)]{.underline}

OTS would delete the definitions of "Act," "creditor," and "savings
association" as unnecessary. For the convenience of the user, OTS would
incorporate the definition of "consumer credit" into this section,
instead of using a cross-reference to a definition contained in a
different part of OTS's rules. OTS would move the definition of
"cosigner" to the section on unfair or deceptive cosigner practices. OTS
would merge the definition of "debt" into the definition of "collecting
a debt" contained in the section on late charges. OTS would move the
definition of "household goods" to the section on unfair credit contract
provisions.

[Section 535.12 Unfair credit contract provisions (existing section
535.2)]{.underline}

OTS would revise the title of this section to reflect its focus on
credit contract provisions. OTS would delete the obsolete reference to
extensions of credit after January 1, 1986.

[Section 535.13 Unfair or deceptive cosigner practices (existing section
535.3)]{.underline}

OTS would delete the obsolete reference to extensions of credit after
January 1, 1986. OTS would substitute 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 section on state exemptions. OTS would also clarify that the date
that may be stated on the cosigner notice is the date of the
transaction. NCUA would make similar amendments to its rule in § 706.13
(existing § 706.3).

[Section 535.14 Unfair late charges (existing section
535.4)]{.underline}

OTS would revise the title of this section to reflect its focus on
unfair late charges. OTS would delete the obsolete reference to
extensions of credit after January 1, 1986. Similarly, NCUA would
propose revisions to § 706.14 (existing § 706.4).

[Section 535.15 State exemptions (existing section 535.5)]{.underline}

OTS would revise the subsection on delegated authority to update the
current title of the OTS official with delegated authority to make
determinations under this section.

[Request for Comment]{.underline}

The FTC's Credit Practices Rule included a provision allowing states to
seek exemptions from the rule if state law affords a greater or
substantially similar level of protection. [See]{.underline} 16 CFR
444.5. The Agencies adopted similar provisions in their respective
Credit Practices Rules. [See]{.underline} 12 CFR 227.16; 12 CFR 535.5;
12 CFR 706.5. In the absence of any legal requirement, however, the
Agencies do not propose to extend this provision to the proposed rules
for consumer credit card accounts and overdraft services.[^39] The
Agencies note that only three states have been granted exemptions under
the Credit Practices Rule.[^40] 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 request 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 greater or substantially
similar level of protection.

In addition, OTS also requests comment on whether the state exemption
provision in its Credit Practices Rule should be retained.

**V. Section-by-Section Analysis of the Consumer Credit Card Practices
Subpart**

Pursuant to their authority under 15 U.S.C. 57a(f)(1), the Agencies are
proposing to adopt rules prohibiting specific unfair acts or practices
with respect to consumer credit card accounts. The Agencies would locate
these rules in a new Subpart C to their respective regulations under the
FTC Act. These proposals should not be construed as a definitive
conclusion by the Agencies that a particular act or practice is unfair
or deceptive.

**Section \_\_.21---Definitions**

Proposed § \_\_.21 would define certain terms used in new Subpart C.

[\_\_.21(a) Annual percentage rate]{.underline}

Proposed § \_\_.21(a) defines "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 corresponds to the definition of "annual percentage rate" in
12 CFR 226.14(b). As discussed in the Board's official staff commentary
to § 226.14(b), this computation does not reflect any particular finance
charge or periodic balance. [See]{.underline} comment 14(b)-1. This
definition also incorporates the definition of "periodic rate" from
Regulation Z. [See]{.underline} 12 CFR 226.2.

[\_\_.21(b) Consumer]{.underline}

Proposed § \_\_.21(b) defines "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.

[\_\_.21(c) Consumer credit card account]{.underline}

Proposed § \_\_.21(c) defines "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 incorporates the definitions of
"open-end credit," "credit card," and "charge card" from Regulation Z.
[See]{.underline} 12 CFR 226.2. Under this definition, a number of
accounts would be excluded consistent with exceptions to disclosure
requirements for credit and charge card applications and solicitations.
[See]{.underline} proposed 12 CFR 226.5a(a)(5), 72 FR at 33045-46. For
example, home-equity plans accessible by a credit card and lines of
credit accessible by a debit card are not covered by proposed §
\_\_.21(c).

[\_\_.21(d) Promotional rate]{.underline}

Proposed §\_\_.21(d) is similar to the definition of "promotional rate"
proposed by the Board in 12 CFR 226.16(e)(2) elsewhere in today's
**Federal Register**. The first type of "promotional rate" covered by
this definition is any annual percentage rate applicable to one or more
balances or transactions on a consumer credit card account for a
specified period of time that is lower than the annual percentage rate
that will be in effect at the end of that period. Proposed comment
21(d)(1)-1 clarifies that, for purposes of determining whether a rate is
a "promotional rate" when the rate that will apply at the end of the
specified period is a variable rate, the rate offered by the institution
is compared to the variable rate that would have been disclosed at the
time of the offer if the promotional rate had not been offered by the
institution, subject to applicable accuracy requirements.
[See]{.underline}, [e.g.]{.underline}, 12 CFR 226.5a(b)(1)(iii);
proposed 12 CFR 226.5a(c)(2)(ii), 72 FR at 33047.

The second type of "promotional rate" encompassed by the definition is
any annual percentage rate applicable to one or more transactions on a
consumer credit card account that is lower than the annual percentage
rate that applies to other transactions of the same type. This
definition is meant to capture "life of balance" offers where a special
rate is offered on a particular balance for as long as that balance
exists. Proposed comment 21(d)(2)-1 provides an example of a rate that
meets this definition.

**Section \_\_.22---Unfair acts or practices regarding time to make
payment**

The Agencies are proposing to prohibit 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. Currently, 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 ([i.e.]{.underline}, the "grace
period"). 15 U.S.C. 1666b(a). Federal law 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 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]{.underline} 12 CFR
226.5(b)(2)(ii); comment 5(b)(2)(ii)-1.

In its June 2007 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]{.underline} 72 FR at 32973.

The Board received comments from individual consumers, consumer groups,
and a member of Congress indicating that consumers were not being
provided with a reasonable amount of time to pay their credit card
bills. Comments 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 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 comments indicated that consumers
are unable to accurately predict when their payment will be received by
a creditor due to uncertainties in how quickly mail is delivered. Some
comments 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.

Comments from industry, 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
comments also stated that providing additional time for consumers to
make payments would be operationally difficult and would reduce interest
revenue, which would have to be recovered by raising the cost of credit
elsewhere.

The Agencies understand that, although increasing numbers of consumers
are receiving periodic statements and making payments electronically, a
significant number still utilize mail. In addition, the Agencies
recognize that, while first class mail is often delivered within three
business days, in some cases it can take significantly longer.[^41]
Indeed, some large credit card issuers recommend that consumers allow up
to seven days for their payments to be received by the issuer via mail.
Accordingly, in some cases, a statement sent 14 days before the payment
due date may not provide consumers with a reasonable amount of time to
pay in order to avoid interest charges, late fees, or other adverse
consequences.

The Agencies recognize that, in enacting § 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. At
the time of its June 2007 Proposal, the Board believed that consumers
might benefit from receiving additional time to make payment. The Board
understands that most creditors currently offer grace periods and that
they use a single due date, which is both the 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). For that reason,
the Board sought comment on whether it should request that Congress
increase the 14-day minimum mailing requirement with respect to grace
periods. Based on the comments and other information discussed herein,
however, the Agencies are concerned that a separate rule may be needed
that specifically addresses harms other than loss of the grace period
when institutions do not provide a reasonable amount of time for
consumers to make payment. This harm includes late fees and rate
increases as a penalty for late payment. The Agencies' proposal does not
affect the requirements of TILA § 163(a).

[Legal Analysis]{.underline}

Treating 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
appears to be an unfair act or practice under 15 U.S.C. 45(n) and the
standards articulated by the FTC.

[Substantial consumer injury]{.underline}. An institution's failure to
provide consumers a reasonable amount of time to make payment appears to
cause substantial monetary and other injury. 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.

[Injury is not reasonably avoidable]{.underline}. It appears that
consumers cannot reasonably avoid this injury unless they have been
provided a reasonable amount of time to pay. Although what constitutes a
reasonable amount of time may vary based on the circumstances, it may be
unreasonable to expect consumers to make payment if they are not given a
reasonable amount of time to do so after receiving a periodic statement.
TILA and Regulation Z provide consumers with the right to dispute
transactions or other items that appear on their periodic statements. In
order to exercise certain of these rights, consumers must have a
reasonable opportunity to review their statements. [See]{.underline} 15
U.S.C. 1666i; 12 CFR 226.12(c). Furthermore, in some cases, travel or
other circumstances may prevent the consumer from reviewing the
statement immediately upon receipt. Finally, as discussed above,
consumers cannot control when a mailed payment will be received by the
institution. Thus, a payment mailed well in advance of the due date may
nevertheless arrive after that date.

[Injury is not outweighed by countervailing benefits]{.underline}. The
injury does not appear to be outweighed by any countervailing benefits
to consumers or competition. The Agencies are not aware of any direct
benefit to consumers from receiving too little time to make their
payments. 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 are also aware that, as a result of
the proposed rule, some institutions may be required to incur costs to
alter their systems and will, directly or indirectly, pass those costs
on to consumers. It does not appear, however, that these costs would
outweigh the benefits to consumers of receiving a reasonable amount of
time to make payment.

[Proposal]{.underline}

Proposed § \_\_.22(a) prohibits 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. Proposed comment 22(a)-1 clarifies
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. Although the proposed rule
does not mandate a specific amount of time, the commentary to the
proposal states that reasonableness would be evaluated from the
perspective of the consumer, not the institution. [See]{.underline}
proposed comment 22(a)-2.

Proposed § \_\_.22(b) provides 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. 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. As noted above, some institutions already recommend
that consumers allow seven days for receipt of mailed payments. The
Agencies believe 21 days to be reasonable because it allows sufficient
time for even delayed mail to be delivered while also allowing most
consumers at least a week to review their bill and make payment.

In order to minimize burden and facilitate compliance, proposed comment

22(b)-1 clarifies 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. For example, if an institution had reasonable procedures in
place designed to the 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 ([i.e.]{.underline}, 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
clarifies that the payment due date is 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).

Finally, in order to avoid any potential conflict with section 163(a) of
TILA, proposed § \_\_.22(c) provides that proposed § \_\_.22(a) does 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 ([i.e.]{.underline}, a grace period).

[Request for Comment]{.underline}

The Agencies request comment on:

-   The percentages of consumers who receive periodic statements by mail
    and electronically.

-   The percentages of consumers who make payment by mail,
    electronically, by telephone, and through other methods.

-   The number of days after the closing date of the billing cycle that
    institutions typically mail or deliver periodic statements.

-   Whether the proposed 21-day safe harbor period between mailing or
    delivery of the periodic statement and the due date would give
    consumers sufficient time to review their statements and make
    payment and is otherwise a reasonable amount of time to make
    payment.

-   The cost to institutions of altering their systems to comply with
    the proposed rule and to mail or deliver periodic statements 21 days
    in advance of the payment due date.

-   Whether the Agencies should adopt a rule that prohibits 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.

-   Whether the Agencies should adopt a rule that requires 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
    ([e.g.]{.underline}, a receipt from the U.S. Postal Service or other
    common carrier) and what time frame would be appropriate
    ([e.g.]{.underline}, payment mailed at least five days before the
    due date, payment received no more than two business days late).

-   The impact of the proposed rule on the availability of credit.

**Section \_\_.23---Unfair acts or practices regarding allocation of
payments**

The Agencies are proposing to prohibit certain unfair acts or practices
regarding the allocation of payments on consumer credit card accounts
with multiple balances at different interest rates. In its June 2007
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 32982-83. 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 a different
allocation method. The Board was particularly concerned that, when the
consumer has responded to a promotional rate 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 if the
consumer uses the card for other transactions.

For example, assume that a consumer responds to an offer of 5% on
transferred balances for six months by opening an account and
transferring \$3,000. Then, during the same billing cycle, the consumer
uses the account for a \$300 cash advance (to which an interest rate of
20% applies) and a \$500 purchase (to which an interest rate of 15%
applies). If the consumer makes an \$800 payment, most creditors would
apply the entire payment to the promotional rate balance and the
consumer would incur interest on the more costly cash advance and
purchase balances. Under these circumstances, the consumer is
effectively denied the benefit of the 5% promotional rate for six months
if the card is used for transactions because the consumer must pay off
the entire transferred balance in order to avoid paying a higher rate on
the transactions. Indeed, the only way for the consumer to receive the
benefit of the 5% promotional rate is to not use the card for purchases,
which would effectively require the consumer to use an open-end credit
account as a closed-end installment loan.

Deferred interest plans raise the same basic concerns. Many creditors
offer deferred interest plans where consumers may avoid paying interest
on purchases if the balance is paid in full by the end of the deferred
interest period. If the balance is not paid in full when the deferred
interest period ends, these deferred interest plans often require the
consumer to pay interest that has accrued during the deferred interest
period. A consumer whose payments are applied to a balance on which
interest is deferred instead of a balance on which interest is not
deferred incurs additional finance charges and therefore does not
receive the benefit of the deferred interest plan.

In addition, creditors typically offer a grace period for purchases if a
consumer pays in full each month but do not typically offer a grace
period on balance transfers or cash advances. Because payments will be
allocated to the transferred balance first, a consumer 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 is to pay
off the entire balance, including the transferred balance or cash
advance balance subject to the promotional rate.

In preparing its June 2007 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 in 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 account in full
every month to take advantage of the grace period. The Board conducted
extensive consumer testing in an effort to develop disclosures that
would enable consumers to understand typical payment allocation
practices and make informed decisions regarding the use of credit cards.
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.
Nonetheless, testing showed that a significant percentage of
participants still did not fully understand how payment allocation can
affect their interest charges, even after reading the disclosures
tested. In the supplementary information accompanying the June 2007
Proposal, the Board indicated its plans to conduct further testing of
the disclosure to determine whether the disclosure could be improved to
more effectively communicate to consumers how payment allocation can
affect their interest charges. 72 FR at 33047, 33050.

In the June 2007 Proposal, the Board did, however, propose to add
§ 226.5a(b)(15) to require a creditor to explain payment allocation to
consumers. Specifically, the Board proposed that creditors explain how
payment allocation would affect consumers, 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 discounted initial 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 32948, 33047.

In response to the June 2007 Proposal, several commenters recommended
the Board test a simplified payment allocation disclosure that covers
situations other than low rate balance transfers offered with cards. One
credit card issuer, however, stated that, because creditors almost
uniformly apply payments to the balance with the lowest annual
percentage rate, consumers could not shop for a better payment
allocation method even if an effective disclosure could be developed.
Furthermore, comments from consumers and consumer groups 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 in March 2008, the Board
tested a revised payment allocation disclosure.[^42] Some 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. For those participants, however, that
did not know about payment allocation methods from earlier experience,
the disclosure tested was still not effective in communicating payment
allocation methods.

Accordingly, the Agencies propose to address the foregoing concerns
regarding payment allocation by prohibiting specific unfair acts or
practices under the FTC Act. To the extent the Agencies' proposals are
ultimately adopted, the Board would withdraw its proposal under
Regulation Z to require a creditor to explain payment allocation to
consumers.

[Legal Analysis]{.underline}

Proposed § \_\_.23 would prohibit three unfair acts or practices. First,
when different annual percentage rates apply to different balances on a
consumer credit card account, the Agencies would prohibit allocation
among the balances of any amount paid by the consumer in excess of the
required minimum periodic payment in a manner that is less beneficial to
consumers than one of three listed methods. Second, when a consumer
credit card account has one or more promotional rate balances or
balances on which interest is deferred, the Agencies would prohibit
allocation of amounts paid by the consumer in excess of the minimum
payment to such balances before other balances. Third, the Agencies
would prohibit institutions from requiring consumers to repay any
portion of a promotional rate balance or deferred interest balance in
order to receive any grace period offered for purchases. As discussed
below, these acts or practices appear to meet the definition of
unfairness under 15 U.S.C. 45(n) and the standards articulated by the
FTC.

[Substantial consumer injury]{.underline}. Each of the three practices
described above appear to cause substantial monetary injury to consumers
in the form of higher interest charges than would be incurred if
institutions did not engage in these practices. Specifically, as
discussed above, consumers who do not pay the balance in full and whose
payments in excess of the minimum payment are first applied to the
balance with the lowest annual percentage rate incur higher interest
charges than they would under other payment allocation methods, such as
division of the amount among the balances or application of the amount
to the balance with the highest rate first. Similarly, consumers who do
not receive a grace period offered on a purchase balance solely because
they also have a promotional rate balance or deferred interest balance
incur higher interest charges than they would if they received the grace
period.

[Injury is not reasonably avoidable]{.underline}. Several factors appear
to prevent consumers from reasonably avoiding these additional interest
charges. First, consumers generally have no control over the
institution's allocation of payments or provision of grace periods.
Second, the Board's consumer testing indicates that disclosures may not
enable consumers to understand sufficiently the effects of payment
allocation or the loss of the grace period. Even if disclosures were
effective, it appears that consumers still could not avoid the injury by
selecting a credit card account with more favorable terms because
institutions almost uniformly apply payments to the balance with the
lowest rate and do not provide a grace period when a consumer has a
promotional rate balance or deferred interest balance.[^43] 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. Similarly, it may be unreasonable to expect a
consumer to avoid the injury by, for example, taking a cash advance or
transferring a balance in response to a promotional rate offer and then
using a different account for purchases because this would effectively
require the consumer to use an open-end credit account as a closed-end
installment loan.

[Injury is not outweighed by countervailing benefits]{.underline}. The
prohibited practices do not appear to create benefits for consumers and
competition that outweigh the injury. The Agencies understand that, if
implemented, the proposal may reduce the revenue that institutions
receive from interest charges, which may in turn lead institutions to
increase rates generally or to offer higher promotional rates or fewer
deferred interest plans. As a result, consumers who, for example, do not
use an account for purchases after transferring a balance would lose the
benefit of the lower promotional rate. This effect should be muted,
however, because the Agencies' proposal prohibits only the practices
that are most harmful to consumers and leaves institutions with
considerable flexibility in the allocation of payments, particularly
with regard to the minimum payment. Furthermore, the Agencies believe
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. 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, it
appears that the Agencies' proposal should 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 that offer artificially reduced rates.

[Proposal]{.underline}

Proposed § \_\_.23(a) would establish a general rule governing payment
allocation on accounts that do not have a promotional rate balance or a
balance on which interest is deferred. Proposed § \_\_.23(b) would
establish special rules for accounts that do have a promotional rate
balance or a deferred interest balance.

Proposed § \_\_.23 does not limit or otherwise address the institution's
ability to determine the amount of the minimum payment or how that
payment is allocated. [See]{.underline} proposed comment 23-1.
Furthermore, an institution may adjust amounts to the nearest dollar
when allocating. [See]{.underline} proposed comment 23-2.

[\_\_.23(a) General rule for accounts within different annual percentage
rates on different balances]{.underline}

Proposed § \_\_.23(a) would require the institution 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. Although the proposed rule
does not prohibit institutions from using allocation methods other than
those listed, the method used must be no less beneficial to consumers
than one of the listed methods. A method is no less beneficial to
consumers if the method results in the assessment of the same or a
lesser amount of interest charges than would be assessed under the
listed method. For example, an institution may not reasonably allocate
the entire amount paid by the consumer in excess of the required minimum
periodic payment to the balance with the lowest annual percentage rate
because this method would result in higher interest charges than any of
the methods listed in proposed § \_\_.23(a). [See]{.underline} proposed
comment 23(a)-1. An example of an allocation method that is no less
beneficial to consumers than a listed method is provided in proposed
comment 23(a)-2.

Proposed § \_\_.23(a) lists three permissible payment allocation
methods. First, proposed §\_\_.23(a) would allow an institution to apply
the entire amount paid in excess of the minimum payment first to the
balance with the highest annual percentage rate and any remaining amount
to the balance with the next highest annual percentage rate and so
forth. Although this method could result in none of the amount being
applied to some balances, the Agencies believe that institutions should
be able to use this approach because it will generally minimize interest
charges. An example of this allocation method is provided in proposed
comment 23(a)(1)-1.

Second, proposed §\_\_.23(a) would allow an institution to allocate
equal portions of the amount paid in excess of the minimum payment to
each balance. Third, the proposal would allow an institution to allocate
the amount among the balances in the same proportion as each balance
bears to the total balance ([i.e.]{.underline}, pro rata). Examples of
these allocation methods are provided in proposed comments 23(a)(2)-1
and 23(a)(3)-1.

[\_\_.23(b) Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}

The Agencies believe that separate requirements may be warranted for
accounts with promotional rate balances or balances on which interest is
deferred because, in many cases, the consumer will have engaged in
transactions based on representations made by the institution regarding
a promotional rate or a deferred interest plan. Proposed § \_\_.23(b)
seeks to ensure that consumers receive the benefit of promotional rates
and deferred interest plans.

[\_\_.23(b)(1)(i) Rule regarding payment allocation]{.underline}

Proposed § \_\_.23(b)(1)(i) would ensure that consumers receive the
benefit of a promotional rate or deferred interest plan by requiring
that amounts paid in excess of the minimum payment would be allocated to
the promotional rate balance or the deferred interest balance only if
other balances have been fully paid. Specifically, the proposal would
require that amounts paid by the consumer in excess of the minimum
payment be allocated first among balances that are not promotional rate
balances or deferred interest balances, consistent with proposed §
\_\_.23(a). If there is any remaining amount, proposed §
\_\_.23(b)(1)(i) would require the institution to allocate the remaining
amount to each promotional rate balance or deferred interest balance,
consistent with proposed § \_\_.23(a). Proposed comment 23(b)(1)(i)-1
would provide illustrative examples of how payments must be allocated
under proposed § \_\_.23(b)(1)(i).

[\_\_.23(b)(1)(ii) Exception for balances on which interest is
deferred]{.underline}

Proposed §\_\_.23(b)(1)(ii) would create an exception to the payment
allocation rule in proposed §\_\_.23(b)(1)(i) during the last two
billing cycles of a deferred interest plan. The Agencies understand that
currently some institutions begin to apply consumers' payments to the
deferred interest balance during the last two billing cycles of a
deferred interest plan because doing so will reduce or eliminate that
balance and thereby reduce or eliminate the deferred interest that may
be charged when the deferred interest plan expires. Because this
practice appears to be beneficial to consumers, the Agencies propose to
permit institutions to utilize this practice, at their option. Proposed
comment 23(b)(1)(ii)-1 provides illustrative examples of how payments
may be allocated under this exception. As noted below, the Agencies
request comment on whether this exception is appropriate and, if so,
whether it should apply during the last two billing cycles of the
deferred interest plan or a different period of time.

[\_\_.23(b)(2) Rule regarding grace period]{.underline}

Proposed §\_\_.23(b)(2) would prohibit 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 any grace period on other balances.
Under the provision, a consumer would not be denied the benefits of a
grace period solely because the consumer carries a balance covered by a
promotional rate or deferred interest plan. Proposed comment 23(b)(2)-1
provides an example of when this prohibition would apply.

[Request for Comment]{.underline}

The Agencies request comment on:

-   Whether other methods of allocation should be listed in proposed
    §\_\_.23(a).

-   Whether proposed §\_\_.23(a) should permit institutions to apply
    amounts in excess of the minimum payment first to balances on which
    the institution is prohibited from increasing the rate (pursuant to
    proposed § \_\_.24).

-   Whether the requirement in proposed §\_\_.23(b)(1)(i) that amounts
    in excess of the minimum payment be applied to other balances before
    deferred interest balances may prevent consumers from paying the
    deferred interest balance in full by the end of the deferred
    interest period.

-   The need for the exception regarding deferred interest balances in
    proposed §\_\_.23(b)(1)(ii).

-   Whether the exception regarding deferred interest balances in
    proposed §\_\_.23(b)(1)(ii) should apply during the last two billing
    cycles of the deferred interest plan or during a different time
    period.

-   Whether consumers should be permitted to instruct the institution
    regarding allocation of amounts in excess of the required minimum
    periodic payment.

-   The cost to institutions of the proposed rule and the impact on the
    availability of credit.

**Section \_\_.24---Unfair acts and practices regarding application of
increased rates to outstanding balances**

The Agencies are proposing to prohibit the application of increased
rates to pre-existing balances, except in certain limited circumstances.
Currently, § 226.9(c) of Regulation Z requires 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 is not required if an
interest rate or other finance charge increases due to a consumer's
default or delinquency. [See]{.underline} 12 CFR 226.9(c)(1); comment
9(c)(1)--3. Furthermore, no change-in-terms notice is required if the
creditor set forth the specific change in the account-opening
disclosures. [See]{.underline} 12 CFR 226.9(c), comment 9(c)--1.

In its June 2007 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]{.underline} 72 FR at 33009-13.
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 a consumer's account for several months or longer.[^44]

Consumer testing conducted for the Board indicated that some consumers
do not understand what factors can trigger penalty pricing, such as the
fact that one late payment may constitute a "default." In addition, some
participants did not appear to understand that penalty rates can apply
to all of their balances, including existing balances. Some participants
also did not appear to understand how long a penalty rate could remain
in effect. The Board observed that account-opening disclosures may be
provided to the consumer too far in advance for the consumer to recall
the circumstances that may cause his or her 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 his
or her account.

The Board's June 2007 Proposal included revisions to Regulation Z 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 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. [See]{.underline} proposed 12 CFR 226.9(c), (g),
72 FR at 33056-58.[^45] 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.
[See]{.underline} proposed 12 CFR 226.7(b)(11)(i)(C), 72 FR at 33053.

When developing the June 2007 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.

In response to its June 2007 Proposal, the Board received comments from
individual consumers, consumer groups, another federal banking agency,
and a member of Congress stating that notice alone was not sufficient to
protect consumers from the harm caused by rate increases. These comments
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 comments argued that
creditors should be prohibited from increasing the rate on an existing
balance in all instances. Others argued that consumers should be given
the right to reject application of an increased rate to an existing
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 creditors. On the other
hand, comments from the majority of creditors stated that the 45-day
notice requirement would delay creditors from increasing rates to
reflect a consumer's increased risk of default, requiring creditors to
account for that risk by, for example, charging higher annual percentage
rates at the outset of the account relationship. These comments also
noted that, because creditors use rate increases to pass on the costs of
funds the creditors themselves pay, delays in the imposition of
increased rates could result in higher costs of credit or less available
credit.

The Agencies are concerned that disclosure alone may be insufficient to
protect consumers from the harm caused by the application of increased
rates to pre-existing balances. Accordingly, the Agencies are proposing
to prohibit this practice except in certain limited circumstances.

[Legal Analysis]{.underline}

The Agencies propose to prohibit institutions from increasing the annual
percentage rate applicable to the outstanding balance before the
effective date of the rate increase, except in certain circumstances. As
discussed below, this practice appears to meet the test for unfairness
under 15 U.S.C. 45(n) and the standards articulated by the FTC.

[Substantial consumer injury]{.underline}. Application of an increased
annual percentage rate to an outstanding balance appears to cause
substantial monetary injury by increasing the interest charges assessed
to a consumer's credit card account.

[Injury is not reasonably avoidable]{.underline}. Although the injury
resulting from increases in the annual percentage rate may be avoidable
by some consumers under certain circumstances, this injury does not
appear to be reasonably avoidable by consumers as a general matter. As
discussed above, the Board's consumer testing indicates that many
consumers are not aware of the circumstances under which their rates may
increase.[^46] Thus, when deciding whether to use a credit card for a
particular transaction or whether to pay off a credit card balance
versus some other obligation, the consumer is likely to consider only
the annual percentage rate in effect at that time. Although the
disclosures proposed by the Board under Regulation Z should, if
implemented, improve consumers' understanding, disclosures alone may not
be sufficient to enable consumers to avoid injury. Consumers may ignore
the disclosures because they overestimate their ability to avoid the
penalty triggers.[^47] Furthermore, although the Board's proposed 45
days advance notice of a rate increase would enable some consumers to
transfer the balance to another account with a comparable annual
percentage rate and terms, consumers who are not able to do so cannot
avoid the resulting injury. For these reasons, disclosures alone may not
enable consumers to avoid the injury caused by an increase in rate on an
existing balance.

Consumers also lack control over many of the circumstances under which
an institution increases an annual percentage rate. First, an
institution may increase a rate for reasons that are completely
unrelated to any individual consumer. For instance, an institution may
increase rates to increase revenues or in response to changes in the
cost to the institution of borrowing funds. Consumers lack any control
over these increases and therefore cannot reasonably avoid the resulting
injury. Furthermore, consumers cannot be reasonably expected to predict
when such repricing will occur because many institutions reserve the
right to change the terms of the consumer's account at any time for any
reason.

Second, an institution may increase an annual percentage rate based on
consumer behavior that is unrelated to the consumer's performance on the
credit card account with that institution. 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.[^48] As noted above, this type of
increase is sometimes referred to as "universal default." The consumer
may or may not have been aware of or able to control the factor that
caused the drop in the consumer's 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 may be unaware that
using a certain amount of the available credit on open-end credit
accounts can lead to a reduction in credit score. Furthermore, as
discussed below, a default may not be reasonably avoidable in some
instances. Nor can the consumer control how the institution uses credit
scores or other information to set interest rates.

Third, an institution may increase an annual percentage rate based on
consumer behavior that is related to the consumer's credit card account
with the institution 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 the minimum payment set by the institution for
several consecutive months.[^49] Although this type of activity may be
within the consumer's control, the consumer may not be able to
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, the
institution's provision of a specific credit limit or minimum payment,
for example, may be reasonably interpreted by the consumer as an
implicit representation that the consumer will not be penalized if the
credit limit is not exceeded or the minimum payment is made.

Fourth, an institution may increase an annual percentage rate based on
consumer behavior that violates the account terms. What violates the
account terms can vary from institution to institution and from account
to account. The Agencies understand that the most common violations of
the account terms that result in an increase in rate are exceeding the
credit limit, a payment that is returned for insufficient funds, and a
late payment.[^50] In some cases, it appears that individual consumers
may have been able to avoid these events by taking reasonable
precautions. In other cases, however, it appears that the event may not
be reasonably avoidable.

For example, consumers who carefully track their transactions may still
exceed the credit limit because of charges of which they were not aware
(such as the institution's 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 how holds will affect the availability of funds and when funds
from a deposit or a credit will be made available by the depository
institution.[^51] Finally, although the Agencies' proposed §\_\_.22
would, if implemented, ensure that consumers' payments will not be
treated as late for any reason (including for purposes of triggering an
increase in rate) unless they receive a reasonable amount of time to
make payment, there may be other reasons why consumers pay late or miss
a payment.[^52]

Accordingly, although the injury resulting from the application of
increased annual percentage rates to existing balances may be avoidable
in some individual cases, it appears that, as a general matter, this
injury is not reasonably avoidable. It does not appear, however, that
this reasoning extends to the application of increased rates to new
transactions. The Board's proposal under Regulation Z would, if
implemented require creditors to provide notice 45 days in advance of an
increase in the annual percentage rate. [See]{.underline} proposed 12
CFR 226.9(c), (g), 72 FR at 33056-58.[^53] In addition, as discussed
below, proposed § \_\_.24 would not permit the institution to increase
the rate on purchases made up to 14 days after provision of the 45-day
notice. These proposals would enable consumers to reasonably avoid any
injury caused by application of an increased rate to new transactions by
providing consumers sufficient time to receive and review the 45-day
notice and to decide whether to continue using the card. Finally, as
also discussed below, it does not appear that, when a consumer has
violated the account terms, application of an increased rate to an
existing balance is an unfair practice in all circumstances.

[Injury is not outweighed by countervailing benefits]{.underline}. It
appears that the proposal will result in a net benefit to consumers
because some consumers are likely to benefit substantially while the
adverse effects on others are likely to be small. The Agencies are aware
that some institutions may offer lower annual percentage rates to
consumers at the outset of an account relationship knowing that the rate
can be subsequently adjusted to compensate for an increase in the cost
of funds or in the risk of default. The Agencies are also aware that, if
institutions are prohibited from increasing rates on existing balances,
they may charge higher rates or set lower credit limits initially or
curtail credit availability to higher risk consumers. As discussed
below, however, the Agencies have crafted the proposal to protect
consumers from the substantial injury caused by rate increases on
existing balances while, to the extent possible, minimizing the impact
on institutions' ability to adjust to market conditions and price for
risk.

As an initial matter, because the prohibition on applying an increased
annual percentage rate to an existing balance does not extend to
variable rates, an institution can guard against increases in the cost
of funds by utilizing a variable rate that reflects market conditions.
Furthermore, the Agencies do not propose to prohibit institutions from
increasing the annual percentage rate on an existing balance if a
consumer becomes 30 days delinquent. Although the 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 30 days delinquent. A consumer is unlikely, for example,
to become 30 days delinquent due to a single returned item or the loss
of a payment in the mail. Thus, even when the delinquency was not
reasonably avoidable, it appears that the harm in such cases is
outweighed by the benefit to consumers as a whole (in the form of lower
annual percentage rates and broader access to credit) from allowing
institutions to reprice for risk once a consumer has become
significantly delinquent.[^54]

Accordingly, although the proposal could ultimately result in higher
upfront costs and less available credit for some consumers, it appears
that consumers and competition may benefit as a whole. Consumers will
not only be protected against unexpected increases in the cost of
transactions that have already been completed but will also be able to
more accurately assess the cost of using their credit card accounts at
the time they engage in new transactions. Furthermore, as discussed in
regard to payment allocation, 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. Similarly, competition
may be enhanced because institutions that offer annual percentage rates
that realistically reflect risk and market conditions will no longer be
forced to compete with institutions offering artificially reduced rates.

The Agencies considered the suggestion raised in some comments that
consumers be permitted to reject (or opt out of) the application of an
increased rate to an existing balance by closing the account. As
formulated in some of those comments, this proposal would not have
addressed the injury to consumers whose rates were increased due to an
unavoidable violation of the account terms. Even if consumers were given
a right to reject application of an increased rate to an existing
balance in all circumstances and were provided timely notice of that
right (for example, in the Board's proposed 45-day notice under
Regulation Z), it appears that the benefits to consumers of such a right
do not outweigh the injury caused by application of an increased rate to
an existing balance.

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. Accordingly, assuming consumers understand their right to
reject a rate increase, most would rationally exercise that right.[^55]
As a result, the costs associated with prohibiting application of an
increased rate to an existing balance and providing consumers with the
right to reject such application should be similar. However, providing
consumers with notice and a means to exercise an opt-out right
([e.g.]{.underline}, a toll-free telephone number) would create
additional costs and burdens for institutions and consumers.
Furthermore, a right to reject application of an increased rate to an
existing balance would provide fewer benefits to consumers as a whole
than the proposed rule because, no matter how well the right is
disclosed, a substantial number of consumers might inadvertently forfeit
that right by failing to read, understand, or act on the notice. In a
2006 report, the U.S. Government Accountability Office (GAO) noted that,
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.[^56] Thus, a right to reject
application of an increased rate to an existing balance could create
similar or greater costs while producing fewer benefits than the
proposed rule.

[Proposal]{.underline}

[\_\_.24(a) General rule]{.underline}

Proposed § \_\_.24(a)(1) prohibits 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 § \_\_.24(b). Proposed § \_\_.24(a)(2) defines "outstanding
balance" as meaning the amount owed on a consumer credit card account at
the end of the fourteenth day after the institution provides a notice
required by proposed 12 CFR 226.9(c) or (g) as set forth in the Board's
June 2007 Proposal.

As discussed above, the Board's June 2007 Proposal would require a
creditor to provide consumers with a written notice of a rate increase
at least 45 days before the effective date of that increase.
[See]{.underline} proposed 12 CFR 226.9(c) and (g), 72 FR at 33056,
33058. The definition of "outstanding balance" in proposed §
\_\_.24(a)(2) is intended to prevent the Board's 45-day notice
requirement from creating an extended period following receipt of that
notice during which new transactions can be made at the prior rate.
Although institutions could address this concern by denying additional
extensions of credit after sending the 45-day notice, that outcome may
not be beneficial to consumers who have received the notice and wish to
use the account for new transactions. Accordingly, under proposed §
\_\_.24(a), the balance to which an institution could not apply an
increased rate is the balance 14 days after the institution has provided
the 45-day notice. Consistent with the safe harbor in proposed §
\_\_.23(b), 14 days would allow seven days for the notice to reach the
consumer and seven days for the consumer to review that notice.

Proposed comment 24(a)-1 provides the following example of the
application of proposed § \_\_.24(a): Assume that on December 30 a
consumer credit card account has a balance of \$1,000 at an annual
percentage rate of 15%. On December 31, the institution mails or
delivers a notice required by proposed 12 CFR 226.9(c) informing the
consumer that the annual percentage rate will increase to 20% on
February 15. The consumer uses the account to make \$2,000 in purchases
on January 10 and \$1,000 in purchases on January 20. Assuming no other
transactions, the outstanding balance for purposes of proposed § \_\_.24
is the \$3,000 balance as of the end of the day on January 14.
Therefore, under proposed § \_\_.24(a), the institution cannot increase
the annual percentage rate applicable to that balance. The institution
can apply the 20% rate to the \$1,000 in purchases made on January 20
but, consistent with proposed 12 CFR 226.9(c), it cannot do so until
February 15.

Proposed comment 24(a)-2 clarifies that, consistent with the approach in
proposed § \_\_.22(b), an institution is not required to determine the
specific date on which a notice required by proposed 12 CFR 226.9(c)
or (g) was provided. For purposes of proposed § \_\_.24(a)(2), if the
institution has adopted reasonable procedures designed to ensure that
notices required by proposed 12 CFR 226.9(c) or (g) are provided to
consumers no later than, for example, three days after the event giving
rise to the notice, the outstanding balance is the balance at the end of
the seventeenth day after such event.

[\_\_.24(b) Exceptions]{.underline}

Proposed § \_\_.24(b) provides that an institution may apply an
increased annual percentage rate to an outstanding balance in three
circumstances. First, when the rate is increased due to the operation of
an index that is not under the institution's control and is available to
the general public, the increased rate may be applied to the outstanding
balance. This exception is similar to that in 12 CFR 226.5b(f)(1) and
would apply to variable rates. Proposed comment 24(b)(1)-1 clarifies
that an institution may not increase the rate on an outstanding balance
based on its own prime rate but may use a published prime rate, such as
that in the [Wall]{.underline} [Street]{.underline}
[Journal]{.underline}, even if the institution's prime rate is one of
several rates used to establish the published rate. This comment would
also clarify that an institution may not increase the rate on an
outstanding balance by changing the method used to determine the indexed
rate. Proposed comment 24(b)(1)-2 clarifies when a rate is considered
"publicly available."

Second, when a promotional rate expires or is lost for a reason
specified in the account agreement ([e.g.]{.underline}, late payment),
an increased rate may be applied to the outstanding balance, provided
that the institution increases the rate to the standard rate rather than
the penalty rate. For example, as set forth in proposed comment
24(b)(2)-1, assume that a consumer credit card account has a balance of
\$1,000 at a 5% promotional rate and that the institution also charges
an annual percentage rate of 15% for purchases and a penalty rate of
25%. If the consumer does not make payment by the due date and the
account agreement specifies that event as a trigger for applying the
penalty rate, the institution may increase the annual percentage rate on
the \$1,000 from the 5% promotional rate to the 15% annual percentage
rate for purchases. The institution may not, however, increase the rate
on the \$1,000 from the 5% promotional rate to the 25% penalty rate,
except as otherwise permitted under proposed § \_\_.24(b)(3).

Third, an institution may apply an increased rate to the outstanding
balance if the consumer's minimum payment has not been received within
30 days after the due date. An example is provided in proposed comment
24(b)(3)-1. As discussed above, a consumer will generally have notice
and an opportunity to cure the delinquency before becoming 30 days past
due.

[\_\_.24(c) Treatment of outstanding balances following a rate
increase]{.underline}

Proposed § \_\_.24(c) prohibits institutions that have increased the
annual percentage rate applicable to a category of transactions on a
consumer credit card account with an outstanding balance in that
category from requiring payment of that outstanding balance using a
method that is less beneficial to the consumer than one of two listed
methods and from assessing fees or charges solely on an outstanding
balance. Proposed comment 24(c)-1 clarifies that proposed § \_\_.24(c)
does not apply if the account does not have an outstanding balance or if
the rate on an outstanding balance is increased pursuant to proposed §
\_\_.24(b). Proposed comment 24(c)-2 clarifies that proposed
§ \_\_.24(c) does not apply to balances in categories of transactions
other than the category for which an institution has increased the
annual percentage rate. For example, if an institution increases the
annual percentage rate that applies to purchases but not the rate that
applies to cash advances, proposed § \_\_.24(c) applies to an
outstanding balance consisting of purchases but not an outstanding
balance consisting of cash advances.

Proposed §\_\_.24(c)(1) would address the amount of time provided the
consumer in which to pay off the outstanding balance. While there may be
circumstances in which institutions would accelerate repayment of the
outstanding balance to manage risk, proposed § \_\_.24(a) would provide
little effective protection if consumers did not receive a reasonable
amount of time to pay off the outstanding balance. Accordingly, proposed
§ \_\_.24(c)(1) would require institutions to provide consumers with a
method of paying the outstanding balance that is no less beneficial to
the consumer than the methods listed in proposed § \_\_.24(c)(1)(i) and
(ii). [See]{.underline} proposed comment 24(c)(1)-1. Proposed
§ \_\_.24(c)(1)(i) would also allow 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.[^57]
Proposed § \_\_.24(c)(1)(ii) would allow the percentage of the
outstanding balance that was included in the required minimum periodic
payment before the rate increase to be doubled. Proposed comment
24(c)(1)(ii)-1 clarifies that this provision does not limit or otherwise
address an institution's ability to determine the amount of the minimum
payment on other balances. Proposed comment 24(c)(1)(ii)-2 provides an
example of how an institution could adjust the minimum payment on the
outstanding balance.

The protections of proposed §\_\_.24(a) could 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 §\_\_.24(c)(2) would prohibit 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 prohibit, for example,
an institution from assessing a monthly maintenance fee on the
outstanding balance. The proposal would not, however, prohibit 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.

[Request for Comment]{.underline}

The Agencies request comment on:

-   The extent to which institutions raise rates on pre-existing card
    balances.

-   The extent to which credit cards are offered pursuant to agreements
    that do not permit institutions to raise rates on pre-existing card
    balances.

-   The extent to which credit cards are offered pursuant to agreements
    that permit consumers to reject application of increased rates to
    pre-existing balances and the extent to which consumers take
    advantage of this opportunity.

-   What consumer behavior with respect to an account institutions
    consider when determining whether to increase the rate on existing
    balances (other than late payment, returned payment for insufficient
    funds, or exceeding the credit limit).

-   The reasons institutions currently increase rates on existing
    balances and, for each reason, what percentage it represents of all
    rate increases.

-   What effect the restrictions in proposed § \_\_.24(a) would have on
    outstanding securitizations and institutions' ability to securitize
    credit card assets in the future.

-   Whether the restrictions in proposed § \_\_.24(a) would limit an
    institution's ability to effectively manage risk if the default rate
    on credit cards is greater than anticipated in light of the
    exceptions in proposed § \_\_.24(b).

-   Whether the 14-day period in proposed § \_\_.24(a)(2) is an
    appropriate amount of time to enable consumers to receive and review
    notice of a rate increase.

-   Whether other means of protecting consumers from application of
    increased rates to existing balances ([e.g.]{.underline}, an
    opt-out) are more appropriate.

-   Whether the exceptions in proposed § \_\_.24(b) are appropriate or
    necessary and whether other exceptions would be appropriate. In
    particular, the Agencies seek comment on whether: (1) additional
    exceptions are needed to address safety and soundness concerns; (2)
    additional exceptions are needed for a consumer's failure to pay the
    account as agreed under the account terms, such as conduct that
    results in imposition of a penalty rate (including late payment,
    returned payment for insufficient funds, or exceeding the credit
    limit); and (3) 30 days is the appropriate measure of a serious
    delinquency.

-   Whether additional or different approaches to the repayment of
    outstanding balances should be considered.

-   Whether restrictions similar to those in proposed § \_\_.24(c)
    should apply when, rather than increasing the rate on future
    transactions, an institution declines to extend additional credit to
    the consumer. For example, the Agencies seek comment on whether, if
    an institution responds to an increased risk of default by declining
    to extend additional credit to a consumer, the consumer should
    receive the protections in proposed § \_\_.24(c) with respect to any
    balance on the account.

**Section \_\_.25---Unfair acts or practices regarding fees for
exceeding the credit limit caused by credit holds**

Although the Board's June 2007 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. The Agencies' proposal to prohibit the application of
increased rates to existing balances addresses consumer harm resulting
from rate increases imposed as a penalty for exceeding the credit limit.
The Agencies also have concerns, however, about the imposition of OCL
fees in connection with credit holds. This proposal is consistent with a
parallel proposal in Subpart D with respect to overdraft fees assessed
in connection with debit holds.

As further discussed below in Subpart D, 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 ([e.g.]{.underline}, room service).
Therefore, to cover against its risk of loss, 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 does not know the amount of
the transaction until the hotel submits the actual purchase amount for
settlement.

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 transaction occurred. During this time
between authorization and settlement, the hold remains in place on the
consumer's account. The Agencies are concerned that consumers unfamiliar
with credit hold practices may inadvertently exceed the credit limit and
incur an OCL fee because they assumed that only the actual purchase
amount of the transaction was unavailable for additional transactions.

[Legal Analysis]{.underline}

Assessing an OCL fee when the credit limit is exceeded as a result of a
credit hold appears to be an unfair act or practice under 15 U.S.C.
45(n) and the standards articulated by the FTC. First, an OCL fee
constitutes substantial monetary injury. Second, this injury does not
appear to be reasonably avoidable because consumers are generally
unaware that a hold has been placed on their account. The Agencies do
not believe that enhanced disclosures would enable consumers to avoid
the injury because, even if consumers were to receive notice of the
amount of the hold at point of sale, they could not know the length of
time the hold will remain in place. Third, there do not appear to be
countervailing benefits to consumers or competition. The proposal does
not prohibit the use of holds, only the assessment of an OCL fee caused
by a hold. The Agencies note that there is little risk to the
institution from an authorized transaction until the transaction is
presented for settlement by the merchant. At that point, the risk of
loss is not for the amount of the hold, but rather for the actual
purchase amount of the transaction. The Agencies do not, however,
propose to prohibit institutions from assessing an OCL fee if there is
insufficient available credit to cover the actual purchase amount.

[Proposal]{.underline}

Proposed §\_\_.25 would prohibit institutions from assessing an OCL fee
if the credit limit was exceeded due to a hold unless the actual amount
of the transaction for which the hold was placed would have resulted in
the consumer exceeding the credit limit. Proposed comments 25-2 and 25-3
provide examples of two situations in which this prohibition would
apply. The first is where the amount of the hold for an authorized
transaction exceeds the credit limit. Assume that a consumer has a
credit limit of \$2,000 and a balance of \$1,500 on a consumer credit
card account. The consumer uses the credit card to reserve a hotel room
for five days. When the consumer checks in, the hotel obtains
authorization from the institution for a \$750 "hold" on the account to
ensure there is adequate available credit to cover the total cost of the
anticipated stay. The consumer checks out of the hotel after three days,
and the total cost of the stay is \$450, which is charged to the
consumer's credit card account. Assuming that there is no other activity
on the account, § \_\_.25 prohibits the institution from assessing an
OCL fee with respect to the \$750 hold. If, however, the total cost of
the stay had been more than \$500, § \_\_.25 would not prohibit the
institution from assessing an OCL fee.

Another situation in which an institution would be prohibited from
assessing an OCL fee is when the hold for a transaction causes a
subsequent transaction to exceed the credit limit. Assume that a
consumer has a credit limit of \$2,000 and a balance of \$1,400 on a
consumer credit card account. The consumer uses the credit card to
reserve a hotel room for five days. When the consumer checks in, the
hotel obtains authorization from the institution for a \$750 hold on the
account to ensure there is adequate available credit to cover the total
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make \$150 purchase. The consumer
checks out of the hotel after three days, and the total cost of the stay
is \$450, which is charged to the consumer's credit card account.
Assuming that there is no other activity on the account, § \_\_.25 would
prohibit the institution from assessing an OCL fee with respect to
either the \$750 hold or the \$150 purchase. If, however, the total cost
of the stay had been more than \$450, § \_\_.25 would not prohibit the
institution from assessing an OCL fee.

Proposed comments 25-4 and 25-5 provide additional examples of the
operation of this rule.

[Request for Comment]{.underline}

The Agencies are concerned about other potentially unfair practices
regarding the assessment of fees for exceeding the credit limit. In
order to gather information for purposes of determining whether
additional prohibitions are warranted, the Agencies solicit comment on:

-   The extent to which institutions assess more than one fee per
    billing cycle for exceeding the credit limit and, if so, what
    factors determine whether a fee is assessed ([e.g.]{.underline}, one
    fee for each transaction while the account is over the credit
    limit).

-   The extent to which institutions tier or otherwise vary the fee for
    exceeding the credit limit based on the number or dollar amount of
    transactions while the account is over the credit limit.

-   The extent to which institutions assess fees for exceeding the
    credit limit when the transaction that exceeded the credit limit
    occurred in an earlier billing cycle and the consumer has not
    engaged in subsequent transactions.

**Section \_\_.26---Unfair balance computation method**

The Agencies propose to prohibit institutions, as an unfair act or
practice, from imposing finance charges on consumer credit card accounts
based on balances for days in billing cycles that precede the most
recent billing cycle. Currently, TILA requires creditors to explain as
part of the account-opening disclosures the method used to determine the
balance to which rates are applied. 15 U.S.C. 1637(a)(2). In its June
2007 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 32991-92. 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 favorable to consumers than others, it was
appropriate to highlight the method used, if not the technical
computation details.

In response to its proposal, the Board received comments from consumers,
consumer groups, and members of Congress urging the Board to prohibit
the balance computation method sometimes referred to as "two-cycle" or
"double-cycle." This 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 the
balance for 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 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.

The following example illustrates how the two-cycle method results in
higher costs for these consumers than other balance computation methods.
A consumer has a zero balance on a credit card account on January 1,
which is the start of the billing cycle. The consumer uses the credit
card for a \$500 purchase on January 15. The consumer makes no other
purchases and the billing cycle closes on January 31. The consumer pays
\$400 on the due date (February 25), leaving a \$100 balance. Under the
average daily balance computation method that is used by most credit
card issuers, because the consumer did not pay the balance in full on
February 25, the periodic statement showing February activity would
reflect interest charged on the \$500 purchase from the start of the
billing cycle (February 1) through February 24 and interest on the
remaining \$100 from February 25 through the end of the billing cycle
(February 28). Under the two-cycle method, however, interest would also
be charged on the \$500 purchase from the date of purchase (January 15)
to the end of the January billing cycle (January 31).

[Legal Analysis]{.underline}

Imposing finance charges on consumer credit card accounts based on
balances for days in billing cycles that precede the most recent billing
cycle appears to be an unfair act or practice under 15 U.S.C. 45(n) and
the standards articulated by the FTC.

First, as described above, computing finance charges based on balances
preceding the most recent billing cycle appears to cause substantial
consumer injury because consumers incur higher interest charges than
they would under a balance computation method that focuses only on the
most recent billing cycle. Second, it does not appear that consumers can
reasonably avoid this injury because, once they use the card, they have
no control over the methods used to calculate the finance charges on
their accounts. Furthermore, as noted above, the Board's consumer
testing indicates that disclosures are not successful in helping
consumers understand balance computation methods. Accordingly, a
disclosure will not enable the consumer to avoid that method when
comparing credit card accounts or to avoid its effects when using a
credit card.

Third, there do not appear to be any significant benefits to consumers
or competition from computing finance charges based on balances
preceding the most recent billing cycle. The Agencies understand that
many institutions no longer use the two-cycle computation method.
Although prohibition of the two-cycle computation 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 appears that this result would
nevertheless benefit consumers because it will result in more
transparent pricing.

> [Proposal]{.underline}

[\_\_.26(a) General rule]{.underline}

Proposed §\_\_.26(a) would prohibit 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 cites the two-cycle average daily balance
computation method as an example of balance computation methods that
would be prohibited by the proposed rule and tracks commentary under
Regulation Z. [See]{.underline} 12 CFR 226.5a cmt. 5a(g)-2. Proposed
comment 26(a)-2 provides an example of the application of the two-cycle
method.

[\_\_.26(b) Exceptions]{.underline}

Proposed §\_\_.26(b) would create two exceptions to the general
prohibition in proposed §\_\_.26(a). First, 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 be permitted
to charge the consumer for interest accrued during the period the plan
was in effect.

Second, institutions would not be 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 accordingly,
even if that requires computing finance charges based on balances in
billing cycles preceding the most recent billing cycle.

**Section \_\_.27 Unfair acts or practices regarding security deposits
and fees for the issuance or availability of credit**

The Agencies propose to prohibit 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. In addition, the proposal would prohibit
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. Finally, 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 first year, the institution would be required to spread
that amount equally over the eleven billing cycles following the first
billing cycle.

As the Board noted in its June 2007 Proposal, subprime credit cards
often have substantial fees related to the issuance or availability of
credit. [See]{.underline} 72 FR at 32980, 32983. 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
statement and substantially reduce the amount of credit that the
consumer has available to make purchases or other transactions on the
account. For example, after security deposits or fees have been billed
to accounts with a minimum credit line of \$250, the consumer may have
less than \$100 of available credit with which to make purchases or
other transactions unless the consumer pays the deposits or fees. In
addition, consumers will pay interest on security deposits and fees
until they are paid in full.

The federal banking agencies have received many complaints from
consumers with respect to cards of this type. Consumers often say that
they were not aware of how little available credit they would have after
the assessment of security deposits and fees. In an effort to address
these concerns, the Board's June 2007 Proposal included several proposed
amendments to Regulation Z's solicitation and application disclosures
for credit and charge cards.

Specifically, the Board proposed to require creditors to disclose both
the annualized and the periodic amount of the fee and how often the
periodic fee will be imposed. [See]{.underline} proposed 12 CFR
226.5a(b)(2), 72 FR at 33046; [see]{.underline} [also]{.underline} 72 FR
at 32980. The Board also proposed to require creditors to disclose the
impact of security deposits and fees for the issuance or availability of
credit on consumers' initial available credit. [See]{.underline}
proposed 12 CFR 226.5a(b)(16), 72 FR at 33047. Specifically, the Board
proposed that, if the total amount of any security deposit or required
fees for the issuance or availability of credit that will be charged
against the card at account opening equal 25 percent or more of the
minimum credit limit offered for the card, the creditor must disclose an
example of the amount of available credit a consumer would have
remaining, assuming that the consumer receives the minimum credit limit
offered on the account. For example, if the minimum credit limit on an
account is \$250 and security deposits and covered fees total \$150, the
creditor would be required to disclose that the consumer may receive
only \$100 in available credit.

Elsewhere in today's **Federal Register**, the Board is proposing to
clarify the circumstances in 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. Under
proposed 12 CFR 226.5(b)(1)(iv), the right to reject an open-end (not
home-secured) plan would apply when any fee (other than an application
fee that is charged to all applicants whether or not they receive the
credit) is charged or agreed to be paid before the consumer receives the
account-opening disclosures. Similarly, under proposed 12
CFR 226.6(b)(4)(vii), creditors that require substantial fees at account
opening and leave consumers with a limited amount of available credit
would be required to provide a notice of the consumer's right to reject
the plan and not pay fees (other than an application fee, as discussed
above) unless the consumer uses the account or pays the fees after
receiving a billing statement. As discussed below, however, the Agencies
are proposing additional, substantive protections.

[Legal Analysis]{.underline}

Charging to a consumer credit card account security deposits and fees
for the issuance or availability of the credit during the first year
that total a majority of credit limit appears to be an unfair act or
practice under 15 U.S.C. 45(n) and the standards articulated by the FTC.
Similarly, charging to the account in 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 also appears to be an unfair
act or practice under 15 U.S.C. 45(n) and the standards articulated by
the FTC.

[Substantial consumer injury]{.underline}. 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 may not be able to pay the charges in full during
that grace period. The potential injury from interest charges increases
when security deposits and fees for the issuance or availability of
credit are charged to the account in the first billing cycle rather than
over a longer period of time. In addition, when security deposits and
fees for the issuance or availability of credit are charged to the
consumer's account, they diminish the value of that account by reducing
the credit available to the consumer for purchases or other
transactions.[^58]

[Injury is not reasonably avoidable]{.underline}. It does not appear
that consumers are able to avoid the injury caused by the financing of
security deposits and fees for the issuance or availability of credit.
As an initial matter, disclosures may not be effective in allowing
consumers to avoid these charges, particularly where deceptive sales
practices mislead consumers about the amount of credit available.[^59]
For example, in one recent case, the court found 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."[^60] In these circumstances, consumers may lack the
information necessary to avoid harm.

Furthermore, because cards with high security deposits and fees are
typically targeted at subprime consumers whose credit histories or other
characteristics may prevent them from obtaining a credit card elsewhere,
those consumers may not be able to avoid financing the fees associated
with these cards because they lack the funds to pay the charges up
front.[^61] Furthermore, because the Board's proposals under Regulation
Z focus on amounts charged when the account is opened, those disclosures
could be evaded by subsequent charges, leaving consumers with less
available credit than they anticipated. Thus, consumers may not
reasonably be able to avoid the injury caused by the financing of
security deposits and fees for the issuance or availability of credit.

[Injury is not outweighed by countervailing benefits]{.underline}. The
Agencies understand that, in some cases, consumer credit card accounts
with financed security deposits and fees can provide benefits to
consumers who are unable to obtain a credit card without such charges
and who lack the available funds to pay the security deposit and fees at
or before account opening. Once, however, security deposits and fees for
the issuance or availability of credit consume a majority of the credit
limit, it appears that the benefit to consumers from access to available
credit is outweighed by the high cost of paying for that credit. The
Agencies have sought to narrowly tailor the proposal by allowing
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 no more than 25
percent of the credit limit during the first billing cycle. Security
deposits and fees paid from separate funds would not be affected by the
proposal.

Finally, although public policy does not serve a primary basis for the
Agencies' determination, the established public policy in favor of the
safety and soundness of financial institutions appears to support the
proposed limitations on the financing of security deposits and fees for
the issuance or availability of credit because that practice appears to
create a greater risk of default.[^62]

[Proposal]{.underline}

[\_\_.27(a) Annual rule]{.underline}

Proposed § \_\_.27(a) prohibits institutions from financing 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. Proposed § \_\_.27(a)
would not, however, apply to security deposits and fees for the issuance
or availability of credit that are not charged to the account. For
example, an institution would not be prohibited from providing a credit
card account that requires a consumer to pay a security deposit equal to
the amount of credit extended if that deposit is not charged to the
account. Proposed comment 27-1 clarifies that the "initial credit limit"
for purposes of this section is the limit in effect when the account is
opened. Proposed comment 27(a)-1 clarifies 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. For example, assume that a consumer
credit card account has an initial credit limit of \$500. Under proposed
§ \_\_.27(a), an institution may only charge to the account security
deposits and fees for the issuance or availability of credit totaling no
more than \$250 during the twelve months after the date on which the
account is opened (consistent with proposed § \_\_.27(b)).

[\_\_.27(b) Monthly rule]{.underline}.

Proposed § \_\_.27(b) prohibits 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. Any
additional security deposits and fees must be spread equally among the
eleven billing cycles following the first billing cycle. Proposed
comment 27(b)-1 clarifies that, when dividing amounts pursuant to
proposed § \_\_.27(b)(2), the institution may adjust amounts by one
dollar or less. For example, if an institution is dividing \$125 over
eleven billing cycles, it may charge \$12 for four months and \$11 for
the remaining seven months. Proposed comment 27(b)-2 provides the
following example of the application of proposed § \_\_.27(b): Assume
that a consumer credit card account opened on January 1 has an initial
credit limit of \$500 and that an institution charges to the account
security deposits and fees for the issuance or availability of credit
that total \$250 during the twelve months after the date on which the
account is opened. 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 proposed § \_\_.27(b), the institution may charge to the
account no more than \$250 in security deposits and fees for the
issuance or availability of credit. If it charges \$250, the institution
may charge as much as \$125 during the first billing cycle. If it
charges \$125 during the first billing cycle, it may then charge \$12 in
any four billing cycles and \$11 in any seven billing cycles during the
year.

[\_\_.27(c) Fees for the issuance or availability of
credit]{.underline}.

Proposed § \_\_.27(c) defines "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 proposed 12 CFR
226.5a(b)(2). [See]{.underline} 72 FR at 33046. This definition does not
include fees such as late fees, fees for exceeding the credit limit, or
fees for replacing a card. Proposed comments 27(c)-1, 2, and 3 are based
on similar commentary to proposed 12 CFR 226.5a(b)(2) and clarify the
meaning of "fees for the issuance or availability of credit."
[See]{.underline} 72 FR at 33108.

[Request for Comment]{.underline}

The Agencies seek comment on:

-   The dollar amount of security deposits and fees for the issuance or
    availability of credit typically charged to the account in the first
    billing cycle.

-   The percentage of the initial credit line that is typically made
    unavailable due to security deposits and fees charged to the account
    during the first billing cycle.

    -   The degree to which consumers (including consumers with limited
        or damaged credit histories) can secure credit cards without
        high fees for the issuance or availability of credit.

    -   Whether the proposal would inappropriately curtail consumers'
        access to credit.

    -   Whether the final rule should impose additional, specific
        restrictions on charges on credit card accounts that a creditor
        can impose without the consumer's advance authorization.

    -   Whether the twelve-month time period in the proposal is the
        appropriate time period to consider in determining how much of
        the credit limit is consumed by security deposits and fees.

    -   Whether disclosure of security deposits and fees enables
        consumers to understand the impact of those charges on the
        availability of credit.

    -   Whether alternatives to proposed § \_\_.24(b) are appropriate.

**Section \_\_.28 -- Deceptive acts or practices regarding firm offers
of credit**

Proposed § \_\_.28 applies when institutions make firm offers of credit
for consumer credit card accounts that contain a range of or multiple
annual percentage rates or credit limits. When the rate or credit limit
that a consumer responding to such an offer will receive depends on
specific criteria bearing on creditworthiness, § \_\_.28 requires that
the institution disclose the types of eligibility criteria in the
solicitation. The disclosure must be provided in a manner that is
reasonably understandable to consumers and designed to call attention to
the nature and significance of the eligibility criteria for the lowest
annual percentage rate or highest credit limit stated in the
solicitation. Under the proposal, an institution may use the following
disclosure to meet these requirements, if it is presented in a manner
that calls attention to the nature and significance of the eligibility
information, as applicable: "If you are approved for credit, your annual
percentage rate and/or credit limit will depend on your credit history,
income, and debts."

> [Legal Analysis]{.underline}

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.[^63] One of the permissible purposes set
forth in the FCRA relates to prescreened firm offers of credit or
insurance.[^64] 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 pre-established
criteria that will be reflected in the consumer reporting agency's
records, such as credit scores in a certain range. 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 credit worthiness
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 credit worthiness or does not furnish any required
collateral.[^65] The creditor may apply certain additional criteria to
evaluate applications from consumers that respond to the offer, such the
consumer's income or debt-to-income ratio.[^66] As discussed below, the
Agencies are concerned that consumers receiving firm offers of credit
may not understand that they are not necessarily eligible for the lowest
annual percentage rate and the highest credit limit stated in the offer.

It appears to be a deceptive act or practice under the standards
articulated by the FTC to make a firm offer of credit for a consumer
credit card account without disclosing

that consumers may not receive the lowest annual percentage rate and
highest credit limit offered.

[Likely to mislead consumers acting reasonably under the
circumstances]{.underline}. As discussed above, the FCRA requires that
firm offers of credit state that the consumer was selected for the offer
based on certain criteria for creditworthiness.[^67] Indeed, firm offers
of credit often state that consumers have been "pre-selected" for credit
or make similar statements. Thus, in the absence of an affirmative
statement to the contrary, consumers may reasonably believe that they
can receive the lowest annual percentage rate and highest credit limit
stated in the offer even though that is not the case.[^68] For example,
assume that an institution obtains from a consumer reporting agency a
list of consumers with credit scores of 650 or higher for purposes of
sending those consumers a solicitation for a firm offer of credit. The
solicitation sent by the institution states that the consumer has been
"pre-selected" for credit and advertises "rates from 8.99% to 19.99%"
and "credit limits from \$1,000 to \$10,000." But under the criteria
established by the institution before the selection of the consumers for
the offer, the institution will only provide an interest rate of 8.99%
and a credit limit of \$10,000 to those consumers responding to the
solicitation who are verified to have a credit score of 650 or higher,
who have a debt-to-income ratio below a certain amount, and who meet
other specific criteria bearing on creditworthiness. Because the
consumers receiving the offer are not informed of these requirements,
consumers who do not meet one or more of the requirements could
reasonably interpret the offer as stating that they may receive an
interest rate of 8.99% or a credit limit of \$10,000 when, in fact, they
will not.[^69]

As noted above, the FCRA requires that firm offers of credit state,
where applicable, that credit may not be extended if the consumer no
longer meets the criteria used to select the consumer for the offer or
does not meet any other applicable criteria bearing on credit
worthiness.[^70] This statement, however, only informs the consumer that
there may be circumstances in which the consumer will not be eligible to
receive [any]{.underline} credit. This statement does not enable
consumers to evaluate whether they will be eligible for the lowest
annual percentage rate and highest credit limit if they respond to the
firm offer.

[Materiality]{.underline}. Statements in firm offers of credit that the
consumer has been selected for the offer based on certain criteria for
creditworthiness or that the consumer has been "pre-selected" for credit
are material because they are likely to affect a consumer's decision
about whether to respond to the offer of credit. [^71] Furthermore,
statements in firm offers of credit regarding credit terms are
presumptively material because they relate to the cost of a product or
service.[^72]

[Proposal]{.underline}

[\_\_.28(a) Disclosure of criteria bearing on
creditworthiness]{.underline}

Proposed § \_\_.28(a) provides that, if an institution offers a range or
multiple annual percentage rates or credit limits when making a
solicitation for a firm offer of credit for a consumer credit card
account, and the annual percentage rate or credit limit that consumers
approved for credit will receive depends on specific criteria bearing on
creditworthiness, the institution must disclose the types of criteria in
the solicitation. The disclosure must be provided in a manner that is
reasonably understandable to consumers and designed to call attention to
the nature and significance of the information regarding the eligibility
criteria for the lowest annual percentage rate or highest credit limit
offered.

Under the proposal, an institution may use the following disclosure to
meet these requirements, if it is presented in a manner that calls
attention to the nature and significance of the eligibility information:
"If you are approved for credit, your annual percentage rate and credit
limit will depend on your credit history, income, and debts." Proposed
comment .28(a)(1)-1 explains that whether a disclosure has been provided
in a manner that is designed to call attention to the nature and
significance of required information depends on where the disclosure is
placed in the solicitation and how it is presented, including whether
the disclosure uses a typeface and type size that are easy to read and
uses boldface or italics. Placing the disclosure in a footnote would not
satisfy this requirement. Proposed comment 28(a)-2 clarifies that, to
the extent that disclosures required by proposed § \_\_.28(a) are
provided electronically, the institution must comply with the
requirements in 12 CFR 226.5a(a)(2)-8 and -9.

Proposed comment 28(a)-3 clarifies that a firm offer of credit
solicitation that states an annual percentage rate or credit limit for a
credit card feature and a different annual percentage rate or credit
limit for a different credit card feature does not offer multiple annual
percentage rates or credit limits. For example, if a firm offer of
credit solicitation offers a 15% annual percentage rate for purchases
and a 20% annual percentage rate for cash advances, the solicitation
does not offer multiple annual percentage rates for purposes of proposed
§ \_\_.28(a). Proposed comment 28(a)-4 provides an example of the
operation of proposed § \_\_.28(a).

Proposed comment 28(a)-5 clarifies that, when making a disclosure under
proposed § \_\_.28, an institution may only disclose the criteria it
uses in evaluating whether consumers who are approved for credit will
receive the lowest annual percentage rate or the highest credit limit.
For example, if an institution does not consider the consumer's debts
when determining whether the consumer should receive the lowest annual
percentage rate or highest credit limit, the disclosure must not refer
to "debts."

[\_\_.28(b) Firm offer of credit defined]{.underline}

Proposed § \_\_.28(c) provides that, for purposes of this section, for
purposes of this section, "firm offer of credit" has the same meaning as
that term has under the definition of "firm offer of credit or
insurance" in section 603(l) of the Fair Credit Reporting Act (15 U.S.C.
1681a(l)).

[Request for Comment]{.underline}

The Agencies are concerned that the disclosure in proposed § \_\_.28(a)
may not be effective unless it is provided in close proximity to the
annual percentage rate and/or credit limit in the firm offer of credit.
However, the Agencies also recognize that the annual percentage rate
and/or credit limit may be stated multiple times in the offer.
Accordingly, the Agencies request comment on whether proposed § \_\_.28
should contain a proximity requirement. If a proximity requirement were
to be adopted, the Agencies request comment on whether the disclosure
should be proximate to the first statement of the annual percentage rate
or credit limit or the most prominent statement of the annual percentage
rate or credit limit.

The Agencies also request comment on:

-   Whether consumers who receive firm offers of credit offering a range
    of or multiple annual percentage rates or credit limits understand
    that there may be no possibility that they will be eligible for the
    lowest annual percentage rate and the highest credit limit stated in
    the offer.

-   Whether the proposed disclosure would be effective in informing
    consumers that they may not receive the best terms advertised.

**Other Credit Card Practices**

The Agencies are also concerned about the potentially deceptive use of
the term "interest free" in connection with deferred interest plans for
credit cards. While consumers may benefit from making payments over a
period of time, the Agencies are concerned that some consumers may not
be adequately informed that accrued interest charges will be added to
the principal owed if they fail to make payment in full by the end of
the deferred interest term or otherwise default on the agreement.
Because the Board is addressing this concern in a separate proposal
under Regulation Z in today's **Federal Register**, the Agencies are not
proposing to address the issue in this rulemaking. Under the Board's
Regulation Z proposal, creditors that describe deferred interest plans
by using "no interest" or similar terms in regard to interest during the
deferred interest period would be required to disclose in close
proximity to the first listing of such terms: (1) a statement that
interest will be charged from the date of purchase if the balance is not
paid in full by the end of the deferred interest period; and (2) if
applicable, a statement that making only the minimum payment will not
pay off the balance or transaction in time to avoid interest charges.

**VI. Section-By-Section Analysis of Overdraft Services Subpart**

**Introduction**

Historically, if a consumer engaged in a transaction that overdrew his
or her account, depository institutions used their discretion on an ad
hoc basis to pay the overdraft, usually imposing a fee. The Board
recognized this longstanding practice when it initially adopted
Regulation Z in 1969 to implement TILA. The regulation provided that
these transactions are generally not covered under Regulation Z where
there is no written agreement between the consumer and institution to
pay an overdraft and impose a fee. [See]{.underline} 12 CFR §
226.4(c)(3). The treatment of overdrafts in Regulation Z was designed to
facilitate depository institutions' ability to accommodate consumers'
transactions on an ad hoc basis.

Over the years, most institutions have largely automated the overdraft
payment process, including setting specific criteria for determining
whether to honor overdrafts and limits on the amount of the coverage
provided. From the industry's perspective, the benefits of overdraft, or
bounced check, services include a reduction in the costs of manually
reviewing individual items, as well as the consistent treatment for all
customers with respect to overdraft payment decisions. Moreover,
industry representatives assert that overdraft services are valued by
consumers, particularly for check transactions, as they allow consumers
to avoid additional fees that would be charged by the merchant if the
item was returned unpaid, and other adverse consequences, such as the
furnishing of negative information to a consumer reporting agency.[^73]

In contrast, consumer advocates believe overdraft transactions are a
high-cost form of lending that traps low- and moderate-income consumers
(particularly students and the elderly) into paying high fees. They also
note that consumers are enrolled in overdraft services automatically,
often with no chance to opt out. In addition, consumer advocates believe
that by honoring check and other types of overdrafts, institutions
encourage consumers to rely on this service and thereby consumers incur
greater costs. Consumer advocates also express concerns about debit card
overdrafts where the dollar amount of the fee may far exceed the dollar
amount of the overdraft, and multiple fees may be assessed in a single
day for a series of small-dollar transactions.[^74]

According to a recent report from the GAO, the average cost of overdraft
and insufficient funds fees has increased roughly 11 percent between
2000 and 2007 to just over \$26 per item.[^75] The GAO also reported
that large institutions charged between \$4 and \$5 more for overdraft
and insufficient fund fees compared to smaller institutions. In
addition, the GAO Bank Fees Report noted that a small number of
institutions (primarily large banks) apply tiered fees to overdrafts,
charging higher fees as the number of overdrafts in the account
increases.[^76]

Overdraft services vary among institutions but typically share certain
characteristics. Coverage is "automatic" for consumers who meet the
institution's criteria ([e.g.]{.underline}, the account has been open a
certain number of days, the account is in "good standing," deposits are
made regularly). While institutions generally do not underwrite on an
individual account basis in determining whether to enroll the consumer
in the service initially, 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 overdraft program disclosures state that payment of an overdraft is
discretionary on the part of the institution, and disclaim any legal
obligation of the institution to pay any overdraft. Typically, the
service is extended to also cover non-check transactions, including
withdrawals at ATMs, automated clearinghouse (ACH) transactions, debit
card transactions at point-of-sale, pre-authorized automatic debits from
a consumer's account, telephone-initiated funds transfers, and on-line
banking transactions. A flat fee is charged each time an overdraft is
paid and, commonly, institutions charge the same amount for paying the
overdraft as they would if they returned the item unpaid. A daily fee
also may apply for each day the account remains overdrawn.

Where institutions vary most in their provision of overdraft services is
the extent to which institutions inform consumers about the existence of
the service or otherwise promote the use of the service. For those
institutions that choose to promote the existence and availability of
the service, they may also disclose to consumers, typically in a
brochure or welcome letter, the aggregate dollar limit of overdrafts
that may be paid under the service.

Notwithstanding the Agencies' issuance in February 2005 of guidance on
overdraft protection programs, the Board's May 2005 final rule under
Regulation DD, and NCUA's 2006 final rule under part 707,[^77] the
Agencies remain concerned about certain aspects of the marketing,
disclosure, and implementation of some overdraft services. For example,
many consumers may be automatically enrolled in their institution's
overdraft service, without being given an adequate opportunity to opt
out of the service and avoid the costs associated with the service.
While the February 2005 overdraft guidance recommended that consumers be
given an opportunity to opt out, this practice may not be uniform across
institutions and the opt-out right may not be adequately disclosed to
consumers. In addition, the Agencies remain concerned about the adequacy
of disclosures provided to consumers regarding the costs of overdraft
services.

Thus, pursuant to their authority under 15 U.S.C. 57a(f)(1), the
Agencies are proposing to adopt rules prohibiting specific unfair acts
or practices with respect to overdraft services. The Agencies would
locate these rules in a new Subpart D to their respective regulations
under the FTC Act. These proposals should not be construed as a
definitive conclusion by the Agencies that a particular act or practice
is unfair. The Board is also publishing a separate proposal addressing
overdraft services in today's **Federal Register** using its authority
under TISA and Regulation DD.

**Section \_\_.31 Definitions**

Proposed § \_\_.31 sets forth certain key definitions to clarify the
scope and intent of the provisions addressing unfair acts or practices
involving overdraft services.

[Account]{.underline}

The Agencies would limit the scope of the overdraft services provisions
to "accounts" as defined in TISA, Regulation DD, and part 707. Thus, the
proposal uses a definition of "account" that is limited to "a deposit
account at a depository institution that is held by or offered to a
consumer." [See]{.underline} proposed § \_\_.31(a); 12 CFR 230.2(a) and
707.2(a). Although the Agencies are aware that overdraft services are
sometimes provided for prepaid cards, such card products are beyond the
scope of this rulemaking.

[Consumer]{.underline}

The term "consumer" refers to a person who holds an account primarily
for personal, family, or household purposes.[^78] Thus, the proposal
would not cover overdraft services that are provided for business
accounts, including sole proprietorships. [See]{.underline} proposed
§ \_\_.31(b).

[Overdraft service]{.underline}

Proposed § \_\_.31(c) defines "overdraft service" to mean a service
under which an institution charges a fee for paying a transaction
(including a check, point-of-sale debit card transaction, ATM withdrawal
and other electronic transaction, such as a preauthorized electronic
fund transfer or an ACH debit) that overdraws an account. The term
covers circumstances when an institution pays an overdraft pursuant to a
promoted program or service or under an undisclosed policy or practice
and charges a fee for that service. The term does not, however, include
services in which an institution pays an overdraft pursuant to a line of
credit subject to the Board's Regulation Z, including transfers from a
credit card account, a home equity line of credit or an overdraft line
of credit. The term also excludes any overdrafts paid through a service
that transfers funds from another account of the consumer held at the
institution.

**Section \_\_.32 Unfair acts or practices regarding overdraft
services**

[\_\_.32(a) Consumer right to opt out]{.underline}

In the February 2005 overdraft guidance, the FDIC, Board, OCC, OTS, and
NCUA recommended as a best practice that institutions should obtain a
consumer's affirmative consent to receive overdraft protection.
Alternatively, where the consumer is automatically enrolled in overdraft
protection, these agencies stated that institutions should provide
consumers the opportunity to "opt out" of the overdraft program and
provide a clear consumer disclosure of this option. 70 FR at 9132; 70 FR
at 8431.

While many institutions voluntarily provide consumers the right to opt
out of overdraft services,[^79] this may not be a uniform practice
across all institutions. Moreover, institutions vary significantly in
the manner in which they provide notice of the opt-out, leading to the
Agencies' concern that the opt-out may not be adequately disclosed to
consumers. For instance, some institutions may disclose the opt-out in a
clause in their deposit agreement, which many consumers are unlikely to
read, or the clause may not be written in clearly understandable
language. Others may disclose a consumer's right to opt out in a welcome
letter or brochure that highlights the potential benefits of the
overdraft service, while minimizing or obscuring either the fees
associated with the service or that there may be less costly
alternatives to the service.

In addition, opt-out notices may not be provided to consumers at a time
when the consumer is most likely to act. For example, institutions may
provide notice of a consumer's right to opt out solely at account
opening or when the service is initially added to the consumer's
account. Subsequently, however, after experiencing an overdraft and
incurring the associated fees, the consumer will typically not receive
additional notice of the opt-out right, even though it may be the time
at which the consumer is most likely to focus on the merits and cost of
the service.

In light of these concerns, the Agencies are proposing to create a new
substantive right for consumers to opt out of an institution's overdraft
service to ensure that they have a meaningful opportunity to decline the
service.

[Legal Analysis]{.underline}

Assessing overdraft fees before the consumer has been provided with
notice and a reasonable opportunity to opt out of the institution's
overdraft service appears to be an unfair act or practice under 15
U.S.C. 45(n) and the standards articulated by the FTC.

[Substantial consumer injury]{.underline}. Consumers incur substantial
monetary injury due to the fees assessed in connection with the payment
of overdrafts. These fees may include per item fees as well as
additional fees that may be imposed for each day the account remains
overdrawn. As noted above, the GAO Bank Fees Report indicates that the
cost to consumers resulting from overdraft loans has grown over the past
few years to just over \$26 per item.[^80] While the payment of
overdrafts may allow consumers to avoid merchant fees for a returned
check or ACH transaction, there are no similar consumer benefits for ACH
withdrawals and point-of-sale debit card transactions. Moreover,
consumers relying on overdraft services may be more likely to overdraw
their accounts, thereby incurring more overdraft fees in the long run.

[Injury is not reasonably avoidable]{.underline}. It appears that
consumers cannot reasonably avoid this injury if they are automatically
enrolled in an institution's overdraft service without having an
opportunity to opt out. Although consumers can reduce the risk of
overdrawing their accounts by carefully tracking their credits and
debits, consumers often lack sufficient information about key aspects of
their account. For example, a consumer cannot know with any degree of
certainty when funds from a deposit or a credit for a returned purchase
will be made available.

[Injury is not outweighed by countervailing benefits]{.underline}. The
benefits to consumers and competition from not providing an opt-out do
not appear to outweigh the injury. This is particularly the case for ATM
withdrawals and POS debit card transactions where, but for the overdraft
service, the transaction would typically be denied and the consumer
would be given the opportunity to provide other forms of payment without
incurring any fees.[^81]

Moreover, for many POS debit card transactions, the amount of the fee
assessed may substantially exceed the amount of the overdraft loan.[^82]
This injury to consumers is further aggravated when multiple fees are
charged in a single day due to multiple small-dollar overdrafts. Even in
the case of check and ACH transactions, where payment of the check or
ACH overdraft may allow the consumer to avoid a second fee assessed by
the merchant for a returned item as well as possible negative reporting
consequences, consumers may prefer instead not to have the overdraft
paid to avoid additional daily fees. Furthermore, consumers who have
overdraft services may be more likely to rely on the existence of the
service and overdraw their accounts and thereby incur substantial
fees.[^83]

Thus, while many consumers may derive some benefit from having overdraft
transactions paid, the proposed rule would allow each consumer to decide
whether this benefit sufficiently compensates for the cost of the
overdraft fees that will be assessed against his or her account.

[Proposal]{.underline}

\_\_[.32(a)(1) General rule]{.underline}

Under § \_\_.32(a)(1), institutions would be prohibited 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 consumer's
right to opt out of an institution's overdraft service would apply to
all methods of payment, including check, ACH and other electronic
methods of payment, such as ATM withdrawals and POS debit card
transactions. Institutions would also be required to provide consumers
with the option of opting out only of overdrafts at ATMs and for POS
debit card transactions under proposed §\_\_.32(a)(2), discussed below.

The proposal would require notice of the opt-out to be provided both
before the institution's assessment of any fee or charge for paying an
overdraft to allow consumers to avoid overdraft fees altogether, and
subsequently at least once during or for each periodic statement cycle
in which any overdraft fee or charge is assessed to the consumer's
account. The subsequent notice requirement is intended to ensure that
consumers are given notice of their right to opt out at a time that may
be most relevant to them, that is, after they have been assessed fees or
other charges for the service. The institution would have flexibility
with respect to the means by which it provides notice of the consumer's
opt-out right following the payment of the overdraft.

For example, the consumer may be given notice on a periodic statement
that reflects the imposition of fees associated with payment of an
overdraft. Alternatively, the opt-out right may be disclosed on a notice
that the institution may send promptly after the payment of an overdraft
to alert the consumer of the overdraft, as is the practice of many
institutions. (Under the latter option, institutions need only provide
the opt-out notice once during a statement period, even if multiple fees
are charged in a single period.) The requirement to provide subsequent
notice of the opt-out would terminate if the consumer has exercised this
right. [See]{.underline} proposed § \_\_.32(a)(1). Of course, if the
consumer opts out after having incurred an overdraft fee, the opt-out
would apply only to subsequent transactions and the consumer would
remain responsible for the fee.

The Agencies are nevertheless aware that an opt-out will not provide a
meaningful consumer protection if the notice of the opt-out right is not
presented in a clear and conspicuous manner to a consumer, or if the
notice does not contain sufficient information for the consumer to make
an informed choice. Thus, in a separate proposal under TISA and
Regulation DD in today's **Federal Register**, the Board is proposing
additional amendments regarding the form, content and timing
requirements for the opt-out notice. [See]{.underline} proposed comment
32(a)(1)-1.[^84] As part of the rulemaking process, the Board intends to
conduct consumer testing on the proposed opt-out form to ensure that the
notice is presented effectively to consumers in a format they can easily
understand and use. The Agencies anticipate issuing any final rules
simultaneously after reviewing comments received on both proposals.

\_\_[.32(a)(2) Partial opt-out]{.underline}

Some consumers may want their institution to pay overdrafts by check and
ACH, but do not want overdrafts paid in other circumstances, such as for
ATM withdrawals and debit card transactions at a point-of-sale.[^85]
Thus, the proposed rule requires institutions to provide consumers with
the option of opting out only of the payment of overdrafts at ATMs and
for debit card transactions at the point-of-sale. [See]{.underline}
§ \_\_.32(a)(2). As previously stated, the Agencies note that a consumer
that opts out of an overdraft protection service typically also incurs a
cost when the check is returned and an insufficient funds fee is charged
by the institution (and possibly also by the merchant). Accordingly, the
partial opt-out requirement in § \_\_.32(a)(2) is intended to allow
consumers the ability to determine for themselves whether they prefer
that their institution deny the payment of all overdrafts, or to have
overdrafts paid for check and ACH transactions in order to avoid
potential merchant fees for returned items or other adverse
consequences. While the Agencies understand that some processors do not
currently have systems capable of paying overdrafts for some, but not
all, payment channels, it appears that the benefits of providing
consumers a choice regarding the transaction types for which they want
to have overdrafts paid outweighs the potential programming costs
associated with this requirement.

As further discussed below, in light of the potential benefits to
consumers if overdrafts for check and ACH transactions are paid, the
Agencies seek comment on whether the consumer's right to opt out should
be limited to overdrafts caused by ATM withdrawals and debit card
transactions at a point-of-sale. Under this alternative approach,
institutions would be permitted, but not required, to provide consumers
the option of opting out of the payment of overdrafts for check and ACH
transactions.

[\_\_.32(a)(3) Exceptions]{.underline}

In some cases, an institution may not be able to avoid paying a
transaction that overdraws an account. Under the proposal, if the
institution does pay an overdraft, the consumer's decision to opt out of
the institution's overdraft service would not prohibit institutions from
paying overdrafts in all cases. Rather, if the institution does pay an
overdraft, the consumer's decision to opt out would generally prohibit
the institution from assessing a fee for the service. The Agencies
recognize, however, that, in certain narrow circumstances, it may be
appropriate to allow institutions to assess a fee or charge for paying
an overdraft even where the consumer has elected to opt out.

Section \_\_.32(a)(3)(i) would permit an institution to charge an
overdraft fee for a debit card transaction if the purchase amount
presented at settlement by a merchant exceeds the amount that was
originally requested for pre-authorization.[^86] This exception is
intended to cover circumstances in which the settlement amount exceeds
the authorization amount because the precise transaction amount is not
known to the consumer at the time of the transaction. (This situation is
distinct from the circumstances discussed below with respect to the
proposed prohibition of assessing an overdraft fee in connection with
debit holds in which the authorization amount exceeds the actual
purchase amount presented at settlement.)

For example, for some fuel purchases, the consumer may swipe his or her
debit card and the merchant may seek a \$1 pre-authorization that is
primarily intended to verify whether the consumer's account is valid.
After the consumer has completed the fuel purchase, the merchant will
submit the actual amount of the purchase for settlement which may cause
the consumer to incur an overdraft. Similarly, for restaurant meals, the
settlement amount may not match the amount submitted for
pre-authorization if the consumer elects to add a tip to the amount of
the bill. Proposed comments 32(a)(3)(i)-1 and -2 illustrate this
exception for fuel purchases and restaurant transactions.

The second exception is intended to address circumstances in which a
merchant or other payee presents a debit card transaction for payment by
paper-based means, rather than electronically using a card terminal, and
in which the payee does not obtain authorization from the card issuer at
the time of the transaction. For example, the merchant may use a card
imprinter to take an imprint of the consumer's card and later submit the
sales slip with the imprint to its acquirer for payment. In this
circumstance, the card issuer does not learn about the transaction, and
thus cannot verify whether the consumer has sufficient funds, until it
receives the sales slip presenting the transaction for payment. Section
\_\_.32(a)(3)(ii) would permit an institution to assess an overdraft fee
or charge if the transaction causes the consumer to overdraw his or her
account, despite the consumer's election to opt out. Proposed comment
32(a)(3)(ii)-1 illustrates this exception.

The Agencies considered, but are not proposing, an exception that would
allow an institution to impose an overdraft fee despite a consumer's
opt-out election as long as the institution did not "knowingly"
authorize a transaction that resulted in an overdraft. The Agencies are
concerned, however, that given the difficulty in determining a
consumer's "real-time" account balance at any given time, such an
exception would undercut the protections provided by a consumer\'s
election to opt out. At the same time, the Agencies recognize that a
rule that generally prohibits institutions from imposing an overdraft
fee if the consumer has opted out could adversely impact small
institutions that use a daily batch balance method for authorizing
transactions. Because such institutions do not update the balance during
the day to reflect other authorizations or settlements for transactions
that occurred before the authorization request, their authorization
decisions would be based upon the same dollar amount throughout the day.
Accordingly, it would be infeasible for these institutions to determine
at any given point in time whether the consumer in fact has a sufficient
balance to cover the requested transaction. Similarly, institutions that
use a stand-in processor because, for example, the ATM network is
temporarily off-line, would also be unable to determine at the time of
the transaction whether the consumer's balance is sufficient to cover a
requested transaction. In both of these cases, a transaction could
result in an overdraft but the institution would not be able to assess a
fee for that service. Thus, as discussed below in the request for
comment, the Agencies seek comment on whether exceptions are necessary
to address these circumstances, and if so, how such exceptions may be
narrowly tailored so as not to undermine protections afforded by a
consumer's election to opt out. Comment is also requested on whether
there are additional circumstances in which an exception may be
appropriate to allow an institution to impose a fee in connection with
paying an overdraft, notwithstanding a consumer\'s election to opt out.

[\_\_.32(a)(4)-(6)]{.underline}

Section \_\_.32(a)(4) provides that institutions must comply with a
consumer's opt-out request as soon as reasonably practicable after the
institution receives it. Proposed § \_\_.32(a)(5) provides that a
consumer may opt out of an institution's overdraft service at any time
since consumers may decide later in the account relationship not to have
overdrafts paid. Once exercised, the consumer's opt-out remains in
effect unless subsequently revoked by the consumer in writing or, if the
consumer agrees, electronically. [See]{.underline} § \_\_.32(a)(6).

[Request for Comment]{.underline}

The Agencies request comment on:

-   Whether the scope of the consumer's opt-out right under
    §\_\_.32(a)(1) should be limited to ATM transactions and debit card
    transactions at the point-of-sale. Under this alternative approach,
    institutions would be permitted, but not required, to provide
    consumers the option of opting out of the payment of overdrafts for
    check and ACH transactions.

-   The potential costs and consumer benefits for implementing a partial
    opt-out that applies only to ATM transactions and debit card
    transactions at the point-of-sale.

-   Whether there are other circumstances in which an exception may be
    appropriate to allow an institution to impose a fee or charge for
    paying an overdraft even if the consumer has opted out of the
    institution's overdraft service, and if so how to narrowly craft
    such an exception so as not to undermine protections provided by a
    consumer's opt-out election.

[Debit holds]{.underline}

[\_\_.32(b) Debit Holds]{.underline}

Debit holds occur when a consumer uses a debit card for a transaction in
which the actual purchase amount is not known at the time the
transaction is authorized, causing the merchant (and in some cases the
card-issuing bank) to place a hold on the consumer's account for an
amount that may be in excess of the actual purchase amount in order to
protect against potential risk of loss. For example, this may occur at a
pay-at-the pump fuel dispenser, restaurant, or hotel. For example, for
fuel purchases, card network rules may allow the merchant to place a
pre-authorization hold of up to \$75 on the consumer's account in
certain types of debit card transactions.[^87] Similarly, a hotel may
place a hold on the consumer's account in an amount sufficient to cover
the length of the stay, plus an additional amount for incidentals, such
as anticipated room service charges.

While the merchant generally determines the hold amount based on limits
imposed by the card network, it is the card-issuing financial
institution that determines how long the hold remains in place, also
subject to any limits imposed by the card network rules. Typically, the
hold is kept in place until the transaction amount is presented to the
financial institution for payment and settled. While PIN-based debit
card transactions typically settle on the same day the card is used by
the consumer (assuming the transaction takes place before the processing
cut-off time that day), settlement for signature-based transactions may
take up to three days following authorization. During the time between
authorization and settlement, the hold remains in place on the
consumer's account. In some cases, where the merchant does not use the
same transaction number for both the authorization and the settlement,
both the authorization amount and the settlement amount are held on the
consumer's account until the institution is able to reconcile the
transactions.

The Agencies are concerned that consumers unfamiliar with debit hold
practices may inadvertently incur considerable overdraft fees on the
assumption that the available funds in their account will only be
reduced by the actual purchase amount of the transaction. For example, a
consumer who purchases \$20 worth of gas, but has a debit hold of \$75
placed on the funds in the consumer's account, may not realize that \$55
has been made unavailable to the consumer to use until the merchant
presents the transaction for payment. During that time, the consumer
engaging in a subsequent transaction in the belief that they have only
"spent" \$20, may inadvertently spend more than the available amount in
the consumer's account, incurring overdraft fees in the process.

[Legal Analysis]{.underline}

Assessing an overdraft fee when the overdraft would not have occurred
but for a hold placed on funds in the consumer's account that is in
excess of the actual purchase or transaction amount appears to be an
unfair act or practice under 15 U.S.C. 45(n) and the standards
articulated by the FTC.

[Substantial consumer injury]{.underline}. There is substantial injury
to consumers from incurring overdraft fees resulting from debit hold
amounts that exceed the amount of the transaction. The effect can be
compounded if the consumer conducts more than one transaction
overdrawing his or her account, as a fee is generally charged each time
the consumer overdraws the account.

[Injury is not reasonably avoidable]{.underline}. It appears that
consumers cannot reasonably avoid this injury as they are generally
unaware of the practice of debit holds. Even if the consumer were to
receive notice at point of sale that a hold, including the amount, will
be placed on the consumer's funds, the consumer cannot know the length
of time the hold will remain in place. As discussed above, the length of
a hold will vary depending on how fast the transaction is processed and
the procedures of the consumer's account-holding institution. A consumer
cannot reasonably be expected to verify whether a hold remains in place
before each and every subsequent transaction.

[Injury is not outweighed by countervailing benefits]{.underline}. The
benefits to consumers and competition from allowing fees for an
overdraft to be charged when the overdraft was caused by a debit hold
amount that exceeds the transaction amount do not appear to outweigh the
injury. The Agencies understand that financial institutions charge
overdraft fees in part to account for the potential risk the institution
may assume if the consumer does not have sufficient funds for a
requested transaction. Under card network rules generally, institutions
guarantee merchants payment for debit card transactions that were
properly authorized by the consumer. Accordingly, without the ability to
assess overdraft fees to protect against potential losses due to
non-payment, account-holding institutions may be reluctant to issue
debit cards to consumers.

The Agencies note, however, that the card issuing financial institution
is not required to send payment for an authorized transaction until the
transaction is presented for settlement by the merchant and is posted to
the consumer's account. At this time, any potential loss for the
financial institution is not for the amount of the debit hold, but
rather for the actual purchase amount for the transaction. The proposed
provision would not prohibit institutions from assessing an overdraft
fee if the consumer's account has insufficient funds to cover the actual
purchase amount when the transaction is presented for settlement (and
the consumer has not opted out). Thus, because the provision would allow
account-holding institutions to cover their risk of loss in the event
consumers overdraw their accounts for the purchase amount of the
transaction, it appears that the availability of debit cards for
consumers will not be adversely impacted even if this proposal is
adopted. The proposed provision, however, would allow consumers to avoid
the injury of unwarranted overdraft fees caused by debit holds that
exceed the purchase amount of the requested transaction.

[Proposal]{.underline}

As discussed above, proposed § \_\_.32(b) would provide that an
institution must not assess a fee or charge on the consumer's account in
connection with an overdraft service if an 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 Agencies believe
that a substantive ban on assessing fees to address problems with debit
holds is appropriate rather than disclosure of the existence of the hold
in light of concerns that such disclosures may be ineffective for the
reasons discussed above.

Comment 32(b)-1 as proposed clarifies that the prohibition against
assessing an overdraft fee in connection with a debit hold applies only
if the overdraft is caused [solely]{.underline} by the existence of the
hold. Thus, if there are other reasons or causes for the consumer's
overdraft, the institution may assess an overdraft fee or charge. These
reasons may include other transactions that may have been authorized but
not yet presented for settlement, a deposited check in the consumer's
account that is returned, or if the actual purchase or transaction
amount for the transaction for which the hold was placed would have
caused the consumer to overdraw his or her account.

Application of the rule is illustrated by four separate examples set
forth in proposed commentary provisions. [See]{.underline} comments
32(b)-2 through -5. The first example describes the circumstance where
the amount of the hold for an authorized transaction exceeds the
consumer's balance. For example, assume that a consumer with \$50 in his
deposited account purchases \$20 worth of fuel. In authorizing the
consumer to begin dispensing fuel after the consumer has swiped his or
her debit card at the pump, the gas station imposes a hold for \$75 on
the consumer's account. The proposal would prohibit the consumer's
financial institution from assessing an overdraft fee or charge because
the purchase amount for the fuel would not have caused the consumer to
overdraw his or her account. [See]{.underline} proposed comment 32(b)-2.
However, had the consumer purchased \$60 of fuel, the institution would
be permitted to assess an overdraft fee or charge (assuming the consumer
had not opted out of the overdraft service) because the transaction
exceeds the consumer's account balance.

The second example illustrates the prohibition when the hold is made in
connection with another transaction that has been authorized by the
institution but not yet been presented for settlement. To illustrate,
assume the same consumer as in the prior example has \$100 in his
deposit account, and uses his or her debit card to purchase fuel. The
gas station puts a hold for \$75 on the consumer's account. The consumer
purchases \$20 worth of fuel. Later that day, and assuming no other
transactions, the consumer withdraws \$75 at an ATM. Under this example,
the consumer's account-holding institution would be prohibited from
assessing an overdraft fee or charge in connection with the \$75
withdrawal because the overdraft would not have occurred but for the
\$75 hold. [See]{.underline} proposed comment 32(b)-3.

The third example illustrates the prohibition when both the
authorization amount and the settlement amount are held against the
consumer's account, because the merchant did not use the same
transaction code for both authorization and settlement, causing the
institution to later reconcile the transaction. To illustrate, assume a
consumer has \$100 in his deposit account, and uses his debit card to
purchase \$50 worth of fuel. At the time the consumer swipes his debit
card at the fuel pump, a hold of \$75 is placed on the consumer's
account. Because the merchant does not use the same transaction code for
both the pre-authorization and for settlement, the consumer's account is
temporarily overdrawn. Because the overdraft would not have occurred but
for the existence of the \$75 hold, the institution may not assess a fee
or charge for paying an overdraft. [See]{.underline} proposed comment
32(b)-4.

The fourth example illustrates a circumstance in which an institution
may charge an overdraft fee despite the existence of a hold on funds in
the consumer's account because there are other reasons for the
overdraft. Using the same facts as in the example in proposed comment
32(b)-3, the consumer makes a \$35 purchase of fuel, instead of \$20.
Under the third example, the institution could permissibly charge an
overdraft fee or charge for the subsequent \$75 ATM withdrawal because
the consumer would have incurred the overdraft even if the hold had been
for the actual amount of the fuel purchase. [See]{.underline} proposed
comment 32(b)-5.

[Request for comment]{.underline}

The Agencies seek comment on the operational issues and costs of
implementing the proposed prohibition on the imposition of overdraft
fees if the overdraft occurs solely because of the existence of a hold.

**Other Overdraft Practices**

[Balance disclosures]{.underline}

The Agencies are also concerned about balance disclosures that may be
deceptive to consumers if they represent that the consumer has more
funds in his or her account due to the inclusion of additional funds the
institution may provide to cover an overdraft. The Board is addressing
this issue in a Regulation DD proposal published contemporaneously with
today's proposed rule.

[Transaction clearing practices]{.underline}

The Agencies are also concerned 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 lists as a best practice
explaining the impact of transaction clearing policies to consumers,
including 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.[^88] 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.[^89]

While today's proposal does not address transaction clearing practices,
the Agencies solicit 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. Under such an approach, institutions could use an alternative
clearing order, provided that it discloses this option to the consumer
and the consumer affirmatively opts in. The Agencies solicit comment on
how such a rule would impact an institution's ability to process
transactions on a real-time basis.

**VII. Effective Date**

The Agencies solicit comment on when any final rules should be effective
and whether a one-year time period is appropriate or whether the period
should be longer or shorter.

**VIII. Regulatory Analysis**

**A. Regulatory Flexibility Act**

[Board]{.underline}: The Regulatory Flexibility Act (5 U.S.C. 601
[et]{.underline} [seq]{.underline}.) (RFA) generally requires an agency
to perform an assessment of the impact a rule is expected to have on
small entities.

However, 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. Based on its analysis and for the reasons stated below, the
Board believes that this proposed rule will not have a significant
economic impact on a substantial number of small entities. A final
regulatory flexibility analysis will be conducted after consideration of
comments received during the public comment period.

1\. [Statement of the need for, and objectives of, the proposed
rule]{.underline}. The Federal Trade Commission Act (15 U.S.C. 41
[et]{.underline} [seq]{.underline}.) (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 proposing regulations under the FTC Act to protect
consumers from specific unfair or deceptive acts or practices regarding
consumer credit card accounts and overdraft services. The Board's
proposed rule will revise Regulation AA.

[Proposals regarding consumer credit card accounts]{.underline}

The proposed requirements would provide several substantive protections
for consumers against unfair or deceptive acts or practices with respect
to consumer credit card accounts. First, proposed § 227.22 ensures that
consumers' credit card payments are not treated as late unless they have
been provided a reasonable amount of time to make payment. Second,
proposed § 227.23 would ensure that, when different annual percentage
rates apply to different balances on a credit card account, consumers'
payments in excess of the required minimum payment are allocated among
the balances, rather than exclusively to the balance with the lowest
annual percentage rate. Third, under proposed § 227.24, an increase in
the annual percentage rate could not be applied to the outstanding
balance on a credit card account, except in certain circumstances.
Fourth, proposed § 227.25 would protect consumers from being assessed a
fee if the credit limit is exceeded solely due to a hold placed on the
available credit. Fifth, proposed § 227.26 would prohibit institutions
from reaching back to days in earlier billing cycles when calculating
the amount of interest charged in the current cycle. Sixth, proposed
§ 227.27 would ensure that security deposits and fees for the issuance
or availability of credit (such as account-opening fees or membership
fees) do not consume the majority of the available credit on a credit
card account during the twelve months after the account is opened. In
addition, when such amounts exceed 25 percent of the credit limit, they
must be spread equally among the eleven billing cycles following the
first billing cycle. Seventh and last, proposed § 227.28 would require
institutions to disclose in a firm offer of credit the criteria that
will determine whether consumers receive the lowest annual percentage
rate and highest credit limit.

[Proposals regarding overdraft services]{.underline}

The proposed rule would also provide substantive protections against
unfair or deceptive acts or practices with respect to overdraft
services. Proposed § 227.32 is intended to ensure that consumers
understand overdraft services and have the choice to avoid the
associated costs where such services do not meet their needs. First,
consumers could not be assessed a fee or charge for paying an overdraft
unless the consumer is provided with the right to opt out of the payment
of overdrafts and a reasonable opportunity to exercise that right but
does not do so. Second, the proposal would protect consumers from being
assessed an overdraft fee if the overdraft is caused solely by a hold on
funds.

2\. [Small entities affected by the proposed rule]{.underline}. The
Board's proposed rule would apply to banks and their subsidiaries,
except savings associations as defined in 12 U.S.C. 1813(b). Based on
2007 call report data, there are approximately 2,159 banks with assets
of \$165 million or less that would be required to comply with the
Board's proposed rule.

3\. [Recordkeeping, reporting, and compliance requirements]{.underline}.
The proposed rule does not impose any new recordkeeping or reporting
requirements. The proposed rule would, however, impose new compliance
requirements.

[Proposals regarding consumer credit card accounts]{.underline}

Proposed § 227.22 may require some banks to extend the period of time
provided to consumers to make payments on consumer credit card accounts.
The Board notes, however, that some 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 proposed rule. Thus,
small entities following this practice would not be required to alter
their systems or procedures.

Proposed § 227.23 would require small entities that provide consumer
credit card accounts with multiple balances at different rates to
redesign their systems to allocate payments in excess of the minimum
payment among the balances, consistent with the proposed rule.
Compliance with this proposal may also reduce interest revenue for small
entities that currently allocate payments first to balances with the
lowest annual percentage rate. Similarly, compliance with proposed §
227.24 will also reduce interest revenue because such entities would be
prohibited from increasing the annual percentage rate on an outstanding
balance, except in certain circumstances. However, small entities are
likely to adjust other terms (such as increasing the annual percentage
rates offered to consumers when the account is opened) to compensate for
the loss of revenue. In addition, although proposed § 227.24 will limit
the ability of small entities to impose higher rates on pre-existing
balances, it would permit small entities to increase the rates
applicable to new transactions. Furthermore, the use of variable rates
that reflect market conditions could mitigate this effect because
proposed § 227.24 does not apply to variable rates. Finally, proposed §
227.24 would also permit small entities to apply an increased rate to an
outstanding balance when a promotional rate is lost or expires or when
the consumer's payment has not been received within 30 days after the
due date.

Proposed § 227.25 would require small entities that provide credit cards
to redesign their systems to prevent the assessment of fees for
exceeding the credit limit that are caused by holds on the available
credit. Similarly, proposed § 227.26 could require some small entities
that provide credit cards to change the way finance charges are
calculated, although the Board understands that few institutions still
use the prohibited method.

Proposed § 227.27 would require small entities that provide credit cards
to modify their systems in order to track security deposits and fees for
the issuance or availability of credit that are charged to the account
during the first year. This proposal could also reduce revenue derived
from security deposits and fees. These costs, however, would likely be
borne by the few entities offering cards with security deposits and fees
that consume a majority of the credit limit.

Proposed § 227.28 would require small entities to disclose that, if the
consumer is approved for credit, the annual percentage rate and the
credit limit the consumer will receive will depend on specific criteria
bearing on creditworthiness. Because similar disclosures are required by
the FCRA, this proposal should not result in substantial compliance
costs.

[Proposals regarding overdraft services]{.underline}

Proposed § 227.32 would convert current Board guidance regarding
provision of a notice and opportunity to opt out of overdraft services
into a rule. Thus, this proposal should not have a significant impact on
small entities if those entities are currently providing opt-out
notices. Proposed § 227.32 would also require small entities to redesign
their systems to prevent the assessment of overdraft fees that are
caused by holds on the available credit.

4\. [Other federal rules]{.underline}. The Board has not identified any
federal rules that duplicate, overlap, or conflict with the proposed
revisions to Regulation AA.

5\. [Significant alternatives to the proposed revisions]{.underline}.
One approach to minimizing the burden on small entities would be to
provide a specific exemption for small institutions. However, the FTC
Act's prohibition against unfair or deceptive acts or practices makes no
provision for exempting small institutions and the Board has no specific
authority under the FTC Act to grant an exception that would remove
small institutions. Further, in considering rulemaking under the Act,
the Board believes an act or practice that is unfair or deceptive
remains so despite the size of the institution engaging in such act or
practice and, thus, should not be exempt from this rule.

In addition, the Board believes the proposed rule, where appropriate,
provides for 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, thus, mitigate
any incremental burden that may be created by the proposed rule. For
instance, § 227.23, which addresses payment allocation, provides an
institution a choice of payment allocation methods.

The Board solicits comment on any significant alternatives that would
minimize the impact of the proposed rule on small entities.

[OTS:]{.underline} The Regulatory Flexibility Act (5 U.S.C. 601-612)
(RFA) requires an agency to either provide an Initial Regulatory
Flexibility Analysis with a proposed rule or certify that the proposed
rule will not have a significant economic impact on a substantial number
of small entities. For purposes of the RFA and OTS-regulated entities, a
"small entity" is a savings association with assets of \$165 million or
less (small savings association). Based on its analysis and for the
reason stated below, OTS certifies that this proposed rule will not have
a significant economic impact on a substantial number of small entities.

1\. [Reasons for Proposed Rule]{.underline}

This proposed rule is promulgated pursuant to section 18(f)(1) of the
FTC Act (15 U.S.C. 57a(f)(1)), which makes OTS responsible for
prescribing regulations that prevent savings associations from engaging
in unfair or deceptive acts or practices in or affecting commerce within
the meaning of section 5(a) of the FTC Act (15 U.S.C. 45(a)). OTS, the
Board, and the NCUA are jointly proposing this rule to protect consumers
against unfair or deceptive acts or practices with respect to consumer
credit card accounts and overdraft services for deposit accounts. The
Agencies have identified a number of business practices that present a
significant risk of harm to consumers of these products and services. As
discussed in the **Supplementary Information**, the Agencies have
acquired information about these practices from several sources,
including consumer complaints, supervisory observations, and comments
received on OTS's ANPR issued August 6, 2007 and the Board's Reg. Z
open-end proposal issued June 14, 2007.

2\. [Statement of Objectives and Legal Basis]{.underline}

The **Supplementary Information** above contains this information. The
legal basis for OTS's portion of the proposed rule is section 57(a) of
the FTC Act and HOLA.

3\. [Description and Estimate of Small Entities to Which the Rule
Applies]{.underline}

OTS's portion of the proposed rule would apply to savings associations
and their subsidiaries. There are 407 thrifts with \$165 million in
assets or less. There are 26 thrifts with \$165 million in assets or
less that offer credit cards. Many of the thrifts with \$165 million in
assets or less offer overdraft services.

4\. [Projected Recordkeeping, Reporting, and Other Compliance
Requirements]{.underline}

The proposed rule would not have a significant impact on a substantial
number of small entities. It imposes no new record keeping requirements
or new requirements to report information to the Agencies.

Some of the proposed requirements are not new. Section 535.13, which
involves providing disclosures to consumers so that consumers will know
their rights and responsibilities as cosigners on consumer loans, is
merely a recodification of a long-standing requirement currently
codified in section 535.3. Section 535.32, which would require
institutions to provide a notice and opportunity to consumers to opt out
of overdraft services on deposit accounts, would turn current OTS
guidance into a rule.  Thus, these provisions of the proposed rule would
not have a significant impact on small entities.

The proposal in section 535.28 is new, and would require savings
associations that make a solicitation for a firm offer of credit for a
consumer credit card account to include certain consumer disclosures in
the solicitations. Since savings associations will have developed this
information in preparing the firm offer, the burden would be limited to
placing an appropriate disclosure in the solicitation and, therefore,
would not have a significant impact on small entities

The professional skills necessary for preparation of the consumer
disclosures under sections 535.13 and 535.28 are the same skills needed
to prepare disclosures under many other consumer protection laws and
regulations, such as the Truth in Lending Act/Reg. Z (12 CFR part 226)
and the Truth in Savings Act/Reg. DD (12 CFR part 230). The professional
skills necessary for preparation of the notice and opt-out notice under
section 535.32 are the same skills needed to prepare opt-out notices
under a variety of consumer protection laws and regulations, such as the
Privacy Rule (12 CFR part 573) issued under the Gramm-Leach-Bliley Act
and the Fair Credit Reporting Act Rule (12 CFR part 571) . These
professional skills could include attorneys and compliance specialists,
as well as computer programmers.

In addition to disclosures and opt-out notices, the proposed rule would
impose some additional compliance requirements. Under section 535.22, a
savings association may need to extend the period of time it gives
consumers to make credit card account payments. Under section 535.23, a
savings association may need to change the way it allocates credit card
account payments among multiple account balances. Under section 535.24,
a savings association may need to change the circumstances in which it
can raise interest rates on outstanding credit card account balances.
Under section 535.25, a savings association may need to change the
circumstances in which it imposes over limit fees. Under section 535.26,
a savings association may need to change the way it computes finance
charges on outstanding credit card account balances. Under section
535.27, a savings association may need to change the way it collects
security deposits and fees for a credit card's issuance or availability
of credit. Each of these provisions could require some adjustments to a
savings association's operations and require some additional training of
staff as well as computer programming.

Many savings associations already employ the professionals that would be
needed to meet the requirements that would be imposed by the rule as
proposed rule, since they need these professionals to meet other
existing consumer protection requirements. The others have pre-existing
arrangements with third party service providers to perform the functions
that would be affected by this rulemaking.

In addition, as discussed in the Executive Order 12866 analysis, most of
the practices which the proposed provisions would impact are not common
among savings associations.

Accordingly, the proposed provisions would not have a significant impact
on small entities.

While OTS believes the proposed rule does not have a significant impact
on a substantial number of small entities, OTS, nevertheless, requests
comment and data on the size and incremental burden on small savings
associations that would be created by the proposed rule.

5\. [Identification of Duplicative, Overlapping, or Conflicting Federal
Rules]{.underline}

OTS has not identified any federal statutes or regulations that would
duplicate, overlap, or conflict with the proposed rule. As discussed in
the **Supplementary Information**, the laws of only three states have
been found by any of the Agencies to provide substantially equivalent
rights as the existing Credit Practices rule. OTS seeks comment
regarding any statutes or regulations, including state or local statutes
or regulations, which would duplicate, overlap, or conflict with the
proposed rule.

6\. [Discussion of Significant Alternatives]{.underline}

One approach to minimizing the burden on small entities would be to
provide a specific exemption for small institutions. However, the FTC
Act's prohibition against unfair or deceptive acts or practices makes no
provision for exempting small institutions and OTS has no specific
authority under the FTC Act to grant an exception that would remove
small institutions. Further, in contemplating rulemaking under the Act,
OTS believes an act or practice that is unfair or deceptive remains so
despite the size of the institution engaging in such act or practice
and, thus, should not be exempt from this rule.

In addition, OTS believes the proposed rule, where appropriate, provides
for sufficient flexibility and choice for institutions, including small
entities. As such, any savings association, regardless of size, may
tailor its operations to its individual needs and, thus, mitigate any
incremental burden that may be created by the proposed rule. For
instance, Section 535.23, unfair payment allocations, provides an
institution a choice of payment allocation methods.

OTS welcomes comments on any significant alternatives that would
minimize the impact of the proposed rule on small entities.

[NCUA:]{.underline} Under the Regulatory Flexibility Act, 5 U.S.C. 601
[et seq.]{.underline}, NCUA must publish an initial regulatory
flexibility analysis with its proposed rule, unless NCUA certifies the
rule will not have a significant economic impact on a substantial number
of small entities. For NCUA, these are federal credit unions with less
than \$10 million in assets. NCUA certifies this proposed rule would not
have a significant economic impact on a substantial number of small
entities.

1\. [Reasons for Proposed Rule]{.underline}

NCUA is exercising authority under section 18(f)(1) of the Federal Trade
Commission Act, 15 U.S.C. 57a(f)(1), and proposing to prohibit certain
unfair or deceptive acts or practices (UDAPs) that violate section 5(a)
of the Federal Trade Commission Act, 15 U.S.C. 45(a). The proposed rule
reorganizes and renames NCUA's longstanding Credit Practices Rule, 12
CFR part 706, and addresses UDAPs involving credit cards and overdraft
protection services. NCUA, the Board of Governors of the Federal Reserve
System, and the Office of Thrift Supervision are jointly proposing this
rule to protect consumers against unfair or deceptive acts or practices
with respect to consumer credit card accounts and overdraft services for
deposit accounts.

2\. [Statement of Objectives and Legal Basis]{.underline}

The **Supplementary Information** above contains this information. The
legal basis for the proposed rule is sections 45(a) and 57(a) of the FTC
Act.

> 3\. [Description and Estimate of Small Entities to Which the Rule
> Applies]{.underline}

NCUA's portion of the proposed rule would apply to all federal credit
unions. As of December 31, 2007, there are 5,036 federal credit unions,
of which 2,374 have total assets less than \$10 million. NCUA estimates
2,363 small credit unions offer loans to their members. NCUA does not
believe the disclosure requirements for co-signors will significantly
affect small credit unions because all credit unions have complied with
this requirement since 1987, when the credit practices rule was
initially promulgated. This proposed rule does not change the co-signor
disclosure requirements, but renumbers the applicable sections of the
rule.

The proposed rule contains new requirements regarding credit card
accounts and overdraft protection services. Approximately 2,461 federal
credit unions issue credit cards and have an aggregate portfolio of
\$18.92 billion. Of these, 425 small federal credit unions issue credit
cards and have an aggregate credit card portfolio of approximately
\$124.73 million. Approximately 2,094 federal credit unions offer
overdraft protection service, and 353 of these are small federal credit
unions.

4\. [Projected Recordkeeping, Reporting, and Other Compliance
Requirements]{.underline}

The proposed rule does not impose any new recordkeeping or reporting
requirements. The proposed rule would, however, impose new compliance
requirements.

Some of the proposed requirements are not new. Section 706.13, which
involves providing disclosures to cosigners on consumer loans, is a
recodification of a long-standing requirement currently in § 706.3.
Section 703.32, which would require institutions to provide a notice and
opportunity to consumers to opt out of overdraft services on deposit
accounts, would turn current interagency guidance into a rule.  Thus,
these provisions of the proposed rule would not have a significant
impact on small entities.

The proposal in § 706.28 is new, and would require federal credit unions
that make a solicitation for a firm offer of credit for a consumer
credit card account to include certain consumer disclosures in the
solicitations. Since federal credit unions will have developed this
information in preparing the firm offer, the burden would be limited to
placing an appropriate disclosure in the solicitation and, therefore,
would not have a significant impact on small entities

The professional skills necessary for preparation of the consumer
disclosures under §§ 706.13 and 706.28 are the same skills needed to
prepare disclosures under many other consumer protection laws and
regulations, such as the Truth in Lending Act, Regulation Z (12 CFR part
226), and the Truth in Savings Act and part 707 (12 CFR part 707). The
professional skills necessary for preparation of the notice and opt-out
notice under § 706.32 are the same skills needed to prepare opt-out
notices under a variety of consumer protection laws and regulations,
such as the Privacy Rule (12 CFR part 716) issued under the
Gramm-Leach-Bliley Act and the Fair Credit Reporting Act Rule (12 CFR
part 717) . These professional skills could include attorneys and
compliance specialists, as well as computer programmers.

In addition to disclosures and opt-out notices, the proposed rule would
impose some additional compliance requirements. Under § 706.22, a
federal credit union may need to extend the period of time it gives
consumers to make credit card account payments. Under § 706.23, a
federal credit union may need to change the way it allocates credit card
account payments among multiple account balances. Under § 706.24, a
federal credit union may need to change the circumstances in which it
can raise interest rates on outstanding credit card account balances.
Under § 706.25, a federal credit union may need to change the
circumstances in which it imposes over limit fees. Under § 706.26, a
federal credit union may need to change the way it computes finance
charges on outstanding credit card account balances. Under § 706.27, a
federal credit union may need to change the way it collects security
deposits and fees for a credit card's issuance or availability of
credit. Each of these provisions could require some adjustments to a
federal credit union's operations and require additional computer
programming and training of staff.

Many federal credit unions already employ the professionals that would
be needed to meet the requirements that would be imposed by the rule as
proposed rule, since they need these professionals to meet other
existing consumer protection requirements. The others have pre-existing
arrangements with third-party service providers to perform the functions
that would be affected by this rulemaking.

Additionally, most of the practices that the proposed provisions would
impact are not common among federal credit unions. Accordingly, the
proposed provisions would not have a significant impact on small
entities.

While NCUA believes the proposed rule does not have a significant impact
on a substantial number of small entities, it requests comments on the
size and incremental burden on small federal credit unions that would be
created by the proposed rule.

5\. [Identification of Duplicative, Overlapping, or Conflicting Federal
Rules]{.underline}

NCUA has not identified any federal statutes or regulations that would
duplicate, overlap, or conflict with the proposed rule. NCUA seeks
comment regarding any statutes or regulations, including state or local
statutes or regulations, which would duplicate, overlap, or conflict
with the proposed rule.

6\. [Discussion of Significant Alternatives]{.underline}

NCUA has not identified any significant alternatives to the prohibitions
and requirements in the proposed rule. The Agencies explored requiring
financial institutions provide disclosures regarding the credit card and
overdraft practices to consumers. NCUA does not believe federal credit
unions can provide clear or concise disclosures that members could
easily understand and use to make an informed decision regarding their
credit and saving needs.

Another approach to minimizing the burden on small entities would be to
provide a specific exemption to small federal credit unions. However,
the Federal Trade Commission Act's prohibition against unfair or
deceptive acts or practices makes no provision for exempting small
federal credit unions, and NCUA does not have authority to grant an
exception. Further, NCUA believes an act or practices that is unfair or
deceptive under the Federal Trade Commission Act remains unfair or
deceptive despite the size of a federal credit union and should not be
exempt from the proposed rule.

NCUA believes the proposed rule provides sufficient flexibility where
appropriate for all federal credit unions. NCUA welcomes comments on any
significant alternatives that would minimize the impact of the proposed
rule on small entities.

**B. Paperwork Reduction Act**

[Board]{.underline}:

In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C.
3506;

5 CFR 1320 Appendix A.1), the Board reviewed the 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 227.28.

This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 4301 [et]{.underline}
[seq]{.underline}.). The respondents/recordkeepers are for-profit
financial institutions, including small businesses.

Regulation AA establishes consumer complaint procedures and defines
unfair or deceptive acts or practices in extending credit to consumers.
As discussed above, the Federal Reserve is seeking comment on a proposed
rule that would prohibit institutions from engaging in certain acts or
practices in connection with consumer credit card accounts and overdraft
services for deposit accounts. This proposal evolved from the Board's
June 2007 Proposal and OTS's August 2007 ANPR. The proposed rule is
coordinated with the Board's proposals under the Truth in Lending Act
and the Truth in Savings Act published in separate notices in today's
**Federal Register**.

[Consumer credit card accounts]{.underline}

Under proposed § 227.28 (titled "Deceptive acts or practices regarding
firm offers of credit"), banks would be prohibited from certain
marketing practices in relation to prescreened firm offers for consumer
credit card accounts unless a disclaimer sufficiently explains the
limitations of the offers. The Board anticipates that banks would, with
no additional burden, incorporate the proposed disclosure requirement
under proposed § 227.28 with an existing disclosure requirement in
Regulation Z regarding credit and charge card applications and
solicitations. [See]{.underline} 12 CFR 226.5a. Thus, in order to avoid
double-counting, the Board will account for the burden associated with
proposed Regulation AA § 227.28 under Regulation Z (OMB No. 7100-0199) §
226.5a. Under Regulation AA § 227.14(b) (titled "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 these sections of Regulation AA.

[Overdraft services]{.underline}

The proposed rule would also provide substantive protections against
unfair and deceptive acts or practices with respect to overdraft
services. Proposed § 227.32 is intended to ensure that consumers
understand overdraft services and have the choice to avoid the
associated costs where such services do not meet their needs. Under this
proposal, consumers could not be assessed a fee or charge for paying an
overdraft unless the consumer is provided with the right to opt out of
the payment of overdrafts and a reasonable opportunity to exercise that
right but does not do so.

The burden associated with Regulation AA § 227.28 will be accounted for
under Regulation DD (OMB No. 7100-0271) §§ 230.10 (opt-out disclosures
for overdraft services), 230.11(a) (disclosure of total fees on periodic
statements), and 230.11(c) (disclosure of account balances). The title
of the Regulation DD information collection will be updated to account
for this section of Regulation AA.

Comments are invited on: (a) whether the proposed collection of
information is necessary for the proper performance of the Board's
functions, including whether the information has practical utility; (b)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (c) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (d) ways to minimize the burden of information collection
on respondents, including through the use of automated collection
techniques or other forms of information technology. Comments on the
collection of information should be sent to Michelle Shore, Federal
Reserve Board Clearance Officer, Division of Research and Statistics,
Mail Stop 151-A, Board of Governors of the Federal Reserve System,
Washington, DC 20551, with copies of such comments sent to the Office of
Management and Budget, Paperwork Reduction Project (Regulation AA),
Washington, DC 20503.

[OTS and NCUA:]{.underline}

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 collection requirements
contained in this joint notice of proposed rulemaking 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 later in this section along with
the Board's burden estimates. The proposed rule contains requirements
subject to the PRA. The requirements are found in 12 CFR \_\_\_.13, and
\_\_\_.32. Comments are invited on:

\(a\) Whether the collection of information is necessary for the proper
performance of the Agencies' functions, including whether the
information has practical utility;

\(b\) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;

\(c\) Ways to enhance the quality, utility, and clarity of the
information to be collected;

\(d\) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and

\(e\) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.

> All comments will become a matter of public record.\
> Comments should be addressed to:

[OTS]{.underline}: Information Collection Comments, Chief Counsel's
Office, Office of Thrift Supervision, 1700 G Street, NW, Washington, DC
20552; send a facsimile transmission to (202) 906-6518; or send an
e-mail to infocollection.comments@ots.treas.gov. OTS will post comments
and the related index on the OTS Internet site at
[http://www.ots.treas.gov]{.underline}. In addition, interested persons
may inspect the comments at the Public Reading Room, 1700 G Street, NW,
by appointment. To make an appointment, call (202) 906-5922, send an
e-mail to public.info@ots.treas.gov, or send a facsimile transmission to
(202) 906-7755.

[NCUA]{.underline}: Jeryl Fish, Paperwork Clearance Officer, National
Credit Union Administration, 1775 Duke Street, Alexandria, VA
22314-3428; send a facsimile to (703) 518-6319; or send an e-mail to
regcomments@ncua.gov. Please submit information collection comments by
one method. NCUA will post comments on its website at
<http://www.ncua.gov/RegulationsOpinionsLaws/proposedregs/proposedregs.html>.
Also, interested persons may inspect the comments at NCUA, 1775 Duke
Street, Alexandria, Virginia 22314, by appointment. To make an
appointment, call (703) 518-6540, send an e-mail to OGCmail@ncua.gov, or
send a facsimile transmission to (703) 518-6667.

> [OTS]{.underline}: Savings associations and their subsidiaries.

[NCUA:]{.underline} Federally-chartered credit unions.

[Abstract]{.underline}: 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 this proposed
rulemaking, the Agencies would incorporate their existing Credit
Practices Rules, which govern unfair or deceptive acts or practices
involving consumer credit, into new, more comprehensive rules that would
also address unfair or deceptive acts or practices involving credit
cards and overdraft protection services.

[Estimated Burden]{.underline}: The burden associated with this
collection of information may be summarized as follows.

#### 

#### [OTS:]{.underline} 

#### Estimated number of respondents: 826

Estimated time developing opt outs: 10 hours

Estimated time developing disclaimer: 10 hours

Estimated time for training: 4 hours

Total estimated time per respondent: 24 hours

Total estimated annual burden: 19,824 hours

[NCUA]{.underline}:

#### Estimated number of respondents: 5036

Estimated time developing opt outs: 10 hours

Estimated time developing disclaimer: 10 hours

Estimated time for training: 4 hours

Total estimated time per respondent: 24 hours

Total estimated annual burden: 120,864 hours

**C. OTS Executive Order 12866 Determination**

OTS has determined that its portion of the proposed rulemaking is not a
significant regulatory action under Executive Order 12866. However, OTS
solicits comment on the economic impact of the rule as proposed.

[Summary]{.underline}

The proposed rulemaking is not a significant regulatory action under
Executive Order 12866 for a number of reasons. First, the OTS proposal
applies only to savings associations and their subsidiaries. As
explained in more detail below, these OTS-supervised institutions
account for only a small portion of the affected market. Second, these
OTS-supervised institutions already refrain from engaging in many of the
proposed prohibited practices. 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.

The prohibitions that relate to annual percentage rate (APR) increases
on outstanding balances and payment allocation practices will, to some
extent, limit fees and interest income currently generated by these
practices. However, to the extent income to savings associations is
affected, the corresponding offset provided by the limitations is an
equally sized consumer benefit of lower fees and interest payments. As a
result, most economic effects of the proposed rulemaking would result in
small transfers from institutions to consumers, with an overall limited
net effect.

Moreover, if such fee and interest income is economically justified in a
competitive environment for the allocation of credit, then a likely
longer-term outcome would be that institutions would reflect such
economic factors in the initial terms of a credit card contract. If that
occurs, then consumers will have clearer initial information about
potential costs with which to compare credit card offerings than they do
currently. Consequently, any shorter term disruptions to institutions
caused by the proposed rulemaking will likely be addressed in the longer
term by changes in disclosed credit card account APRs and fees, thus
making consumer costs and benefits more easily considered and compared.

[In-depth analysis]{.underline}

1\. [Limited economic effect: limited scope of the proposal]{.underline}

OTS's portion of the proposed rulemaking would apply only to
OTS-supervised savings associations and their subsidiaries. OTS is the
primary federal regulator for 826 federally- and state-chartered savings
associations. The proposed rulemaking primarily addresses certain credit
card practices. Of the 826 savings associations, only 124 report any
credit card assets. Among those 124 savings associations, only 19 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. In sum, OTS-supervised institutions potentially engaged in
the practices prohibited by the proposed rulemaking are not
representative of the overall industry that OTS supervises. Most
provisions of the proposed rulemaking would have little economic effect
on the vast majority of the institutions under OTS jurisdiction.

The Board of Governors of the Federal Reserve System and the National
Credit Union Administration are simultaneously proposing a similar set
of rules governing credit card practices for other types of federally
insured financial institutions. As a consequence, the rulemaking should
have little or no intra-industry competitive effects.

2.  [Limited economic effect: most affected practices are not
    common]{.underline}

Most 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
OTS-supervised institutions do not currently engage in these practices,
the costs of complying with the provisions of the proposed rule are
likely to be minimal.

[§ 535.22 Unfair time to make payments .]{.underline} This section would
prohibit 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. The proposed rule would create a safe harbor
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.
Based on our supervisory observations and experience, OTS-supervised
institutions, in general, mail or deliver periodic statements to their
customers at least 21 days before the due date. Therefore, a rule that
requires institutions to provide a reasonable amount of time to make
payment, such as by mailing or delivering periodic statements to
customers at least 21 days in advance of the payment due date, would
have insignificant or no economic impact.

[§ 535.25 Unfair fees for exceeding the credit limit due to credit
holds.]{.underline} This section would prohibit assessing a fee for
exceeding the credit limit on a consumer credit card account if the
credit limit would not have been exceeded but for a hold on any portion
of the available credit on the account that is in excess of the actual
purchase or transaction amount. Based on our supervisory observations
and experience, OTS-supervised institutions do not, in general, charge
overlimit fees in this manner. Therefore, prohibiting this practice
would have insignificant or no economic impact.

[§ 535.26 Unfair balance computation method.]{.underline} This section
would prohibit imposing finance charges on outstanding balances on a
consumer credit card account based on balances in billing cycles
preceding the most recent billing cycle, subject to certain exceptions.

Very few institutions compute balances using any method other than a
single-cycle method. This conclusion was reached by the GAO as part of
its recent credit card study.[^90] According to the GAO, of the six
largest card issuers, only two used the double-cycle billing method
between 2003 and 2005.[^91] GAO's finding conforms to OTS's own
supervisory observations with respect to the prevalence of use of
balance computation methods other than single-cycle methods by
institutions OTS supervises. Use of a balance computation method other
than a single-cycle method is the exception, rather than the norm, for
OTS-supervised institutions.

Moreover, the economic impact of this practice arises only in instances
where a card holder converts from a convenience user,
[i.e.]{.underline}, one who pays off his/her card balance in full at the
end of the billing cycle, to a revolver, [i.e.]{.underline}, one who
carries a balance beyond the end of the billing cycle. Accounts that
routinely stay in a "convenience" or nonrevolving status would not be
impacted by this prohibition. The same would be true of accounts that
routinely stay in a revolving status. Only when an account would convert
from a nonrevolving status to a revolving status would the prohibition
have an impact.

[§ 535.27 Unfair charging to the account of security deposits and fees
for the issuance or availability of credit]{.underline}. During the
period beginning with the date on which a consumer credit card account
is opened and ending 12 months from that date, this section would
prohibit institutions from charging the account security deposits or
fees for the issuance or availability of credit if the total amount of
such security deposits and fees constituted a majority of the initial
credit limit for the account. During this same period, this rule would
require institutions that charge security deposits or fees against the
account for the issuance or availability of credit constituting more
than 25 percent of the initial credit limit for the account, to apply
these charges in the following manner: during the first billing cycle,
an institution could charge no more than 25% of the initial credit limit
offered for the account; in each of 11 months following the first
billing cycle, an institution could charge no more than one eleventh of
the total security deposit or fees for the issuance of availability of
credit in excess of 25 percent of the initial credit limit for the
account.

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. Subprime credit cards represent just 5% of
all credit cards issued.[^92] Cards of this type are rare among
OTS-supervised institutions. Therefore, a rule prohibiting this practice
would have insignificant economic impact.

[§ 535.28 Deceptive firm offers of credit]{.underline}. This section
would prohibit the practice of offering a range of or multiple annual
percentage rates or credit limits in a solicitation for a firm offer of
credit for a consumer credit card unless it is disclosed to the consumer
that, if approved, the consumer's annual percentage rate and the credit
limit will depend on specific criteria bearing on creditworthiness.

While the rule would affect how institutions advertise credit, it would
not limit the terms of credit offered nor impact any underwriting
strategy. Once the rule became effective, institutions would likely
adjust their marketing so as not to be misleading under the rule.
Operational costs to do so should be minimal and the economic impact,
overall, insignificant.

[§ 535.32 Unfair overdraft service practices.]{.underline} This section
contains two main requirements. First, with certain exceptions, it would
prohibit assessing a fee or charge on a consumer's account in connection
with an overdraft service, unless an institution provides the consumer
with notice and reasonable opportunity to opt out of the payment of all
overdrafts and the consumer has not opted out. The consumer would also
have to be provided the more limited option of opting out only for the
payment of overdrafts for ATM and point-of-sale transactions initiated
by a debit card.

OTS Guidance on Overdraft Protection Programs suggests that, as a best
practice, institutions that have overdraft protection programs should
provide an election or opt-out of the service and obtain affirmative
consent from consumers to receive overdraft protection.[^93] Therefore,
some OTS-supervised institutions may already be carrying out the
requirements proposed in this rule. For those institutions, the effect
of the opt out provisions of this notice would be minimal. For the
institutions that do not currently offer an opt-out, the rule would
trigger some operational costs, but those costs are not likely to
materially reduce the revenue generated by overdraft fees. This is
because institutions often charge the same fee to pay an overdraft as
they do to return it.

Second, this section would prohibit assessing a fee or charge on a
consumer's account in connection with an overdraft service if the
overdraft would not have occurred but for a hold placed on funds in the
consumer's account that is in excess of the actual purchase or
transaction amount. Based on our supervisory observations and
experience, OTS-supervised institutions do not, in general, charge
overdraft fees in this manner. Therefore, prohibiting this practice
would have insignificant or no economic impact.

3\. [Limited economic effect: small transfers from institutions to
consumers]{.underline}

The proposed rulemaking contains two other sections. One affects the way
in which payments received by the institution are allocated among the
customer's outstanding balances. The other specifies the conditions
under which the institution could raise the APRs on outstanding
balances.

[§ 535.23 Unfair payment allocations.]{.underline} A consumer may have
multiple balances on a consumer credit card account. Currently, most
institutions allocate any payment received from a consumer by first
covering any fees and finance charges, then allocating any remaining
amounts from the lowest APR balance to the highest. This section of the
proposed rulemaking would require allocation in a manner that is no less
beneficial to the consumer than one of the following methods: (1)
applying the entire amount first to the balance with the highest annual
percentage rate, (2) splitting the amount equally among balances, or (3)
allocating pro rata among the balances. Any allocation method that would
be less beneficial to the consumer than these three methods would be
impermissible. For instance, applying the entire amount first to the
balance with the lowest annual percentage rate is an example of an
allocation method that would be less beneficial to the consumer. The
rule leaves open the door to the possibility of other reasonable payment
allocation methods.

The costs of the proposed rule are mitigated to some extent by providing
institutions with operational flexibility as to which of the allocation
methods they choose. To the extent there are economic costs imposed by
the payment allocation restrictions included in the proposal,
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.

[§ 535.24 Unfair annual percentage rate increases on outstanding
balances]{.underline}. This section would generally prohibit
institutions from increasing the annual percentage rate on an
outstanding balance. This prohibition would not apply, however, where a
variable rate increases due to the operation of an index that is not
under the institution's control and is available to the general public,
where a promotional rate has expired or is lost (provided the APR is not
increased to a rate greater than the APR that would have applied after
expiration of the promotional rate), or where the minimum payment has
not been received within 30 days after the due date.

The proposed rulemaking would not permit the institution to increase the
APR on the outstanding balances simply because the consumer pays late or
defaults on other debt obligations. This practice is sometimes referred
to as "universal default." However, the section would permit APR
increases on new purchases or transactions.

Based on our supervisory observations and experience, most larger
OTS-supervised institutions do not practice universal default. However,
some institutions do raise APR on outstanding balances based on external
factors such as a decline in a consumer's credit score. Institutions
that make use of this approach would likely adjust to the rule in the
longer term by adjusting their initial interest rate pricing schedule.

A potential small negative effect might be that the prohibition on APR
increases on outstanding balances would result in higher initial average
APRs across all consumers, if the increases on outstanding balances
acted as an effective screen for initially weaker credits. However, the
fact that most institutions do not use a universal default trigger to
increase APRs suggests that this effect may be limited.

**D. OTS Executive Order 13132 Determination**

OTS has determined that its portion of the proposed rulemaking does not
have any federalism implications for purposes of Executive Order 13132.

**E. NCUA Executive Order 13132 Determination**

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on State and local interests. In
adherence to fundamental federalism principles, the NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5) voluntarily complies
with the Executive Order. The proposed rule apply only to federally
chartered credit unions and would not have substantial direct effects on
the States, on the connection between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. The NCUA has determined that the proposed
rule does not constitute a policy that has federalism implications for
purposes of the Executive Order.

**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 in any one year. 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
proposed rule will not result in expenditures by State, local, and
tribal governments, or by the private sector, of \$100 million or more.
Accordingly, OTS has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered.

**G. NCUA: The Treasury and General Government Appropriations Act, 1999-
Assessment of Federal Regulations and Policies on Families**

The NCUA has determined that this proposed rule would 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. Solicitation of Comments on Use of Plain Language**

Section 722 of the Gramm-Leach-Bliley 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 regulatory burdens.
Therefore, the Agencies specifically invite your comments on how to make
this proposal easier to understand. For example:

-   Have we organized the material to suit your needs? If not, how could
    this material be better organized?

-   Are the requirements in the proposed regulations clearly stated? If
    not, how could the regulations be more clearly stated?

-   Do the proposed regulations contain language or jargon that is not
    clear? If so, which language requires clarification?

-   Would a different format (grouping and order of sections, use of
    headings, paragraphing) make the regulations easier to understand?
    If so, what changes to the format would make them easier to
    understand?

-   What else could we do to make the regulations easier to understand?

**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,
Overdrafts, Unfairness

**12 CFR Part 706**

Credit, Credit unions, Deception, Intergovernmental relations,
Overdrafts, Trade practices, Unfairness

**Board of Governors of the Federal Reserve System**

12 CFR Chapter II

**Text of Proposed Revisions**

Certain conventions have been used to highlight the proposed revisions.
New language is shown inside arrows while language that would be deleted
is set off with brackets.

**Authority and Issuance**

For the reasons discussed in the joint preamble, the Board proposes to
amend 12 CFR part 227 as set forth below:

**PART 227 -- UNFAIR OR DECEPTIVE ACTS OR PRACTICES (REGULATION AA)**

1\. The authority citation for part 227 continues to read as follows:

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

2\. The heading for Subpart A is revised to read as follows:

**Subpart A -- GENERAL PROVISIONS**

3\. Section 227.1 is removed and § 227.11 is designated as § 227.1 and
revised to read as follows:

**§ 227.1 Authority, Purpose, and Scope.**

\(a\) [Authority]{.underline}. This \[subpart\] ►part◄ is issued by the
Board under section 18(f) of the Federal Trade Commission Act, 15
\[USC\] ►U.S.C.◄ 57a(f) (§ 202(a) of the Magnuson-Moss
Warranty---Federal Trade Commission Improvement Act, Pub. L. 93-637).

\(b\) [Purpose]{.underline}. ►The purpose of this part is to prohibit
unfair◄ \[Unfair\] or deceptive acts or practices ►in violation of◄ \[in
or affecting commerce are unlawful under\] section 5(a)(1) of the
Federal Trade Commission Act, 15 \[USC\] ►U.S.C.◄ 45(a)(1). \[This
subpart defines\] ►Subparts B, C, and D define and contain requirements
prescribed for the purpose of preventing specific◄ unfair or deceptive
acts or practices of banks \[in connection with extensions of credit to
consumers\]. ►The prohibitions in subparts B, C, and D do not limit the
Board's authority to enforce the FTC Act with respect to any other
unfair or deceptive acts or practices.◄

\(c\) [Scope]{.underline}. \[This subpart applies\] ►Subparts B, C, and
D apply◄ to all banks and their subsidiaries, except \[Federal savings
banks\] ►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\[,
banks operating under the code of laws for the District of Columbia,\]
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.

\(d\) ►Unless otherwise noted,◄ \[T\]►t◄he 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 \[USC\]
►U.S.C.◄ 1813(s)) shall have the meaning given to them in section 1(b)
of the International Banking Act of 1978 (12 \[USC\] ►U.S.C.◄ 3101).

4\. Section 227.2 is revised by redesignating paragraphs (a) through (c)
as paragraphs (b) through (d), respectively, and adding a new paragraph
(a) to read as follows:

**§ 227.2 Consumer-Complaint Procedure.**

**►**(a) [Definitions]{.underline}. For purposes of this section, unless
the context indicates otherwise, the following definitions apply:

\(1\) "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.

\(3\) "State member bank" means a bank that is chartered by a State and
is a member of the Federal Reserve System.

\(4\) Unless the context indicates otherwise, "bank" shall be construed
to mean a "State member bank," and "complaint" to mean a "consumer
complaint."◄

\(b\) [Submission of complaints]{.underline}*.* (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 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.

\(c\) [Response to complaints]{.underline}*.* 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]{.underline}*.* 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.

5\. In Subpart B, Section 227.11 is removed and reserved.

6\. A new Subpart C is added to part 227 to read as follows:

**SUBPART C -- CONSUMER CREDIT CARD ACCOUNT PRACTICES RULE**

Section

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 application of increased
annual percentage rates to outstanding balances.

227.25 Unfair acts or practices regarding fees for exceeding the credit
limit caused by credit holds.

227.26 Unfair balance computation method.

227.27 Unfair acts or practices regarding security deposits and fees for
the issuance or availability of credit.

227.28 Deceptive acts or practices regarding firm offers of credit.

**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
open-end 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
check-guarantee cards or by debit cards;

\(3\) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and

\(4\) Lines of credit accessed solely by account numbers.

\(d\) "Promotional rate" means:

\(1\) Any annual percentage rate applicable to one or more balances or
transactions on a consumer credit card account for a specified period of
time that is lower than the annual percentage rate that will be in
effect at the end of that period; or

\(2\) Any annual percentage rate applicable to one or more transactions
on a consumer credit card account that is lower than the annual
percentage rate that applies to other transactions of the same type.

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

\(a\) [General rule]{.underline}. 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.

\(b\) [Safe harbor]{.underline}. A bank satisfies the requirements of
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]{.underline}. 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.**

\(a\) [General rule for accounts with different annual percentage rates
on different balances]{.underline}. Except as provided in paragraph (b)
of this section, 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 in a manner that is no less
beneficial to the consumer than one of the following methods:

\(1\) The amount 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;

\(2\) Equal portions of the amount are allocated to each balance; or

\(3\) The amount is allocated among the balances in the same proportion
as each balance bears to the total balance.

\(b\) [Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}.

\(1\) [Rule regarding payment allocation]{.underline}.

\(i\) [In general]{.underline}. When a consumer credit card account has
one or more balances at a promotional rate or balances on which interest
is deferred, the bank must allocate any amount paid by the consumer in
excess of the required minimum periodic payment among the other balances
on the account consistent with paragraph (a) of this section. If any
amount remains after such allocation, the bank must allocate that amount
among the promotional rate balances or the deferred interest balances
consistent with paragraph (a) of this section.

\(ii\) [Exception for deferred interest balances]{.underline}.
Notwithstanding paragraph (b)(1)(i) of this section, the bank may
allocate the entire amount paid by the consumer in excess of the
required minimum periodic payment to a balance on which interest is
deferred during the two billing cycles immediately preceding expiration
of the period during which interest is deferred.

\(2\) [Rule regarding grace periods]{.underline}. A bank must not
require a consumer to repay any portion of a promotional rate balance or
deferred interest balance on a consumer credit card account in order to
receive any time period offered by the bank in which to repay other
credit extended without incurring finance charges, provided that the
consumer is otherwise eligible for such a time period.

**§ 227.24 Unfair acts or practices regarding application of increased
annual percentage rates to outstanding balances.**

\(a\) [Prohibition on increasing annual percentage rates on outstanding
balances]{.underline}.

\(1\) [General rule]{.underline}. Except as provided in paragraph (b) of
this section, a bank must not increase the annual percentage rate
applicable to any outstanding balance on a consumer credit card account.

\(2\) [Outstanding balance]{.underline}. For purposes of this section,
"outstanding balance" means the amount owed on a consumer credit card
account at the end of the fourteenth day after the bank provides a
notice required by 12 CFR 226.9(c) or (g).

\(b\) [Exceptions]{.underline}. Paragraph (a) of this section does not
apply where the annual percentage rate is increased due to:

\(1\) The operation of an index that is not under the bank's control and
is available to the general public;

\(2\) The expiration or loss of a promotional rate, provided that, if a
promotional rate is lost, the bank does not increase the annual
percentage rate to a rate that is greater than the annual percentage
rate that would have applied after expiration of the promotional rate;
or

\(3\) The bank not receiving the consumer's required minimum periodic
payment within 30 days after the due date for that payment.

\(c\) [Treatment of outstanding balances following rate
increase]{.underline}.

\(1\) [Payment of outstanding balances]{.underline}. When a bank
increases the annual percentage rate applicable to a category of
transactions on a consumer credit card account and the bank is
prohibited by this section from applying the increased rate to
outstanding balances in that category, the bank must provide the
consumer with a method of paying that outstanding balance that is no
less beneficial to the consumer than one of the following methods:

\(i\) An amortization period for the outstanding balance of no less than
five years, starting from the date on which the increased annual
percentage rate went into effect; or

\(ii\) A required minimum periodic payment on the outstanding balance
that includes a percentage of that balance that is no more than twice
the percentage included before the date on which the increased annual
percentage rate went into effect.

\(2\) [Fees and charges on outstanding balance]{.underline}. When a bank
increases the annual percentage rate applicable to a category of
transactions on a consumer credit card account and the bank is
prohibited by this section from applying the increased rate to
outstanding balances in that category, the bank must not assess any fee
or charge based solely on the outstanding balance.

**§ 227.25 Unfair acts or practices regarding fees for exceeding the
credit limit caused by credit holds.**

A bank must not assess 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.

**§ 227.26 Unfair balance computation method.**

\(a\) [General rule]{.underline}. Except as provided in paragraph (b) of
this section, a bank 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.

\(b\) [Exceptions]{.underline}. Paragraph (a) of this section does not
apply to:

\(1\) The assessment of deferred interest; or

\(2\) Adjustments to finance charges following the resolution of a
billing error dispute under 12 CFR 226.12(b) or 12 CFR 226.13.

**§ 227.27 Unfair acts or practices regarding security deposits and fees
for the issuance or availability of credit.**

\(a\) [Annual rule]{.underline}. During the period beginning with the
date on which a consumer credit card account is opened and ending twelve
months from that date, a bank must not charge to the account security
deposits or fees for the issuance or availability of credit if the total
amount of such security deposits and fees constitutes a majority of the
initial credit limit for the account.

\(b\) [Monthly rule]{.underline}. If the total amount of security
deposits and fees for the issuance or availability of credit charged to
a consumer credit card account during the period beginning with the date
on which a consumer credit card account is opened and ending twelve
months from that date constitutes more than 25 percent of the initial
credit limit for the account:

\(1\) During the first billing cycle after the account is opened, the
bank must not charge to the account security deposits and fees for the
issuance or availability of credit that total more than 25 percent of
the initial credit limit for the account; and

\(2\) In each of the eleven billing cycles following the first billing
cycle, the bank must not charge to the account more than one eleventh of
the total amount of any security deposits and fees for the issuance or
availability of credit in excess of 25 percent of the initial credit
limit for the account.

\(c\) [Fees for the issuance or availability of credit]{.underline}. For
purposes of paragraphs (a) and (b) of this section, fees for the
issuance or availability of credit include:

\(1\) 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

\(2\) Any non-periodic fee that relates to opening an account.

**§ 227.28 Deceptive acts or practices regarding firm offers of
credit.**

\(a\) [Disclosure of criteria bearing on creditworthiness]{.underline}.
If a bank offers a range or multiple annual percentage rates or credit
limits when making a solicitation for a firm offer of credit for a
consumer credit card account, and the annual percentage rate or credit
limit that consumers approved for credit will receive depends on
specific criteria bearing on creditworthiness, the bank must disclose
the types of criteria in the solicitation. The disclosure must be
provided in a manner that is reasonably understandable to consumers and
designed to call attention to the nature and significance of the
information regarding the eligibility criteria for the lowest annual
percentage rate or highest credit limit stated in the solicitation. If
presented in a manner that calls attention to the nature and
significance of the information, the following disclosure may be used to
satisfy the requirements of this section (as applicable): "If you are
approved for credit, your annual percentage rate and/or credit limit
will depend on your credit history, income, and debts."

\(b\) [Firm offer of credit defined]{.underline}. For purposes of this
section, "firm offer of credit" has the same meaning as that term has
under the definition of "firm offer of credit or insurance" in
section 603(l) of the Fair Credit Reporting Act (15 U.S.C. 1681a(l)).

7\. A new Subpart D is added to part 227 to read as follows:

**SUBPART D -- OVERDRAFT SERVICES RULE**

Section

227.31 Definitions.

227.32 Unfair acts or practices regarding overdraft services.

**Subpart D -- Overdraft Services Rule**

**§ 227.31 Definitions.**

For purposes of this subpart, the following definitions apply:

\(a\) "Account" means a deposit account at a bank that is held by or
offered to a consumer, and has the same meaning as in § 230.2(a) of the
Board's Regulation DD, Truth in Savings (12 CFR 230).

\(b\) "Consumer" means a person who holds an account primarily for
personal, family, or household purposes.

\(c\) "Overdraft service" means a service under which a bank charges a
fee for paying a transaction (including a check or other item) that
overdraws an account. The term "overdraft service" does not include any
payment of overdrafts pursuant to --

\(1\) A line of credit subject to the Federal Reserve Board's Regulation
Z (12 CFR part 226), including transfers from a credit card account,
home equity line of credit or overdraft line of credit; or

\(2\) A service that transfers funds from another account of the
consumer.

**§ 227.32 Unfair acts or practices regarding overdraft services.**

\(a\) [Opt-out requirement]{.underline}.

\(1\) [General rule]{.underline}. A bank must not assess a fee or charge
on a consumer's account in connection with an overdraft service, unless
the bank provides the consumer with the right to opt out of the bank's
payment of overdrafts and a reasonable opportunity to exercise that
opt-out and the consumer has not opted out. The consumer must be given
notice and an opportunity to opt out before the bank's assessment of any
fee or charge for an overdraft, and subsequently at least once during or
for any periodic statement cycle in which any fee or charge for paying
an overdraft is assessed. The notice requirements in paragraphs (a)(1)
and (a)(2) do not apply if the consumer has opted out, unless the
consumer subsequently revokes the opt-out.

\(2\) [Partial opt-out]{.underline}. A bank must provide a consumer the
option of opting out only for the payment of overdrafts at automated
teller machines and for point-of-sale transactions initiated by a debit
card, in addition to the choice of opting out of the payment of
overdrafts for all transactions.

\(3\) [Exceptions]{.underline}. Notwithstanding a consumer's election to
opt out under paragraphs (a)(1) or (a)(2) of this section, a bank may
assess a fee or charge on a consumer's account for paying a debit card
transaction that overdraws an account if:

\(i\) There were sufficient funds in the consumer's account at the time
the authorization request was received, but the actual purchase amount
for that transaction exceeds the amount that had been authorized; or

\(ii\) The transaction is presented for payment by paper-based means,
rather than electronically through a card terminal, and the bank has not
previously authorized the transaction.

\(4\) [Time to comply with opt-out]{.underline}. A bank must comply with
a consumer's opt-out request as soon as reasonably practicable after the
bank receives it.

\(5\) [Continuing right to opt-out]{.underline}. A consumer may opt out
of the bank's future payment of overdrafts at any time.

\(6\) [Duration of opt-out]{.underline}. A consumer's opt-out is
effective unless subsequently revoked by the consumer.

\(b\) [Debit holds]{.underline}. A bank must not assess a fee or charge
on a consumer's account for an overdraft service if the consumer's
overdraft would not have occurred but for a hold placed on funds in the
consumer's account that is in excess of the actual purchase or
transaction amount.

8\. 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]{.underline}

[1(c) Scope]{.underline}

1\. [Penalties for noncompliance]{.underline}. 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]{.underline}. 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 227.21 -- Definitions]{.underline}

[(d) Promotional rate]{.underline}

[Paragraph (d)(1)]{.underline}

1\. [Rate in effect at the end of the promotional period]{.underline}.
If the annual percentage rate that will be in effect at the end of the
specified period of time is a variable rate, the rate in effect at the
end of that period for purposes of § 227.21(d)(1) is the rate that would
otherwise apply if the promotional rate was not offered, consistent with
any applicable accuracy requirements under 12 CFR part 226.

[Paragraph (d)(2)]{.underline}

1\. [Example]{.underline}. A bank generally offers a 15% annual
percentage rate for purchases on a consumer credit card account. For
purchases made during a particular month, however, the creditor offers a
rate of 5% that will apply until the consumer pays those purchases in
full. Under § 227.21(d)(2), the 5% rate is a "promotional rate" because
it is lower than the 15% rate that applies to other purchases.

[Section 227.22 -- Unfair Acts or Practices Regarding Time to Make
Payment]{.underline}

[(a) General rule]{.underline}

1\. [Treating a payment as late for any purpose]{.underline}. 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]{.underline}. 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), 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.

[(b) Safe harbor]{.underline}

1\. [Reasonable procedures]{.underline}. 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, for example, three days after the closing date
of the billing cycle and the payment due date on the periodic statement
is no less than 24 days after the closing date of the billing cycle.

2\. [Payment due date]{.underline}. For purposes of § 227.22(b),
"payment due date" means the date by which the bank requires the
consumer to make payment to avoid being treated as late for any purpose,
except as provided in § 227.22(c).

[Section 227.23 Unfair Acts or Practices Regarding Allocation of
Payments]{.underline}

1\. [Minimum periodic payment]{.underline}. This section addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the bank. This section does not limit or
otherwise address the bank's ability to determine the amount of the
minimum periodic payment or how that payment is allocated.

2\. [Adjustments of one dollar or less permitted]{.underline}. When
allocating payments, the bank may adjust amounts by one dollar or less.
For example, if a bank is allocating \$100 equally among three balances,
the bank may apply \$34 to one balance and \$33 to the others.
Similarly, if a bank is splitting \$100.50 between two balances, the
bank may apply \$50 to one balance and \$50.50 to another.

[(a) General rule for accounts with different annual percentage rates on
different balances]{.underline}

1\. [No less beneficial to the consumer]{.underline}. A bank may
allocate payments using a method that is different from the methods
listed in § 227.23(a) 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 than a listed method if it results in the
assessment of the same or a lesser amount of interest charges than would
be assessed under any of the listed methods. For example, a bank may not
allocate the entire amount paid by the consumer in excess of the
required minimum periodic payment to the balance with the lowest annual
percentage rate because this method would result in a higher assessment
of interest charges than any of the methods listed in § 227.23(a).

2\. [Example of payment allocation method that is no less beneficial to
consumers than a method listed in § 227.23(a)]{.underline}. 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 could allocate one-third of
this amount (\$185) to the cash advance balance and two-thirds (\$370)
to the purchase balance even though this is not a method listed in §
227.23(a) because the bank is applying more of the amount to the balance
with the highest annual percentage rate (with the result that the
consumer will be assessed less in interest charges) than would be the
case under the pro rata allocation method in § 227.23(a)(3).
[See]{.underline} comment 23(a)(3)-1.

[Paragraph (a)(1)]{.underline}

1\. [Examples of allocating first to the balance with the highest annual
percentage rate]{.underline}.

\(A\) 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. None of the
minimum periodic payment is allocated to the cash advance balance. 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.

\(B\) 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.

[Paragraph (a)(2)]{.underline}

1\. [Example of equal portion method]{.underline}. 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 \$278 to the cash advance balance and \$277 to the purchase
balance (or vice versa).

[Paragraph (a)(3)]{.underline}

1\. [Example of pro rata method]{.underline}. 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.

[(b) Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}

[Paragraph (b)(1)(i)]{.underline}

1\. [Examples of special rule regarding payment allocation for accounts
with promotional rate balances or deferred interest
balances]{.underline}.

\(A\) A consumer credit card account has a cash advance balance of \$500
at an annual percentage rate of 20%, a purchase balance of \$1,500 at an
annual percentage rate of 15%, and a transferred balance of \$3,000 at a
promotional rate of 5%. The consumer pays \$800 in excess of the
required minimum periodic payment. The bank must allocate the \$800
between the cash advance and purchase balances (consistent with §
227.23(a)) and apply nothing to the transferred balance.

\(B\) A consumer credit card account has a cash advance balance of \$500
at an annual percentage rate of 20%, a balance of \$1,500 on which
interest is deferred, and a transferred balance of \$3,000 at a
promotional rate of 5%. The consumer pays \$800 in excess of the
required minimum periodic payment. None of the minimum periodic payment
is allocated to the cash advance balance. The bank must allocate \$500
to pay off the cash advance balance before allocating the remaining
\$300 between the deferred interest balance and the transferred balance
(consistent with § 227.23(a)).

[Paragraph (b)(1)(ii)]{.underline}

1\. [Examples of exception for deferred interest balances]{.underline}.
Assume that on January 1 a consumer uses a credit card to make a \$1,000
purchase on which interest is deferred until June 30. If this amount is
not paid in full by June 30, all interest accrued during the six-month
period will be charged to the account. The billing cycle for this credit
card begins on the first day of the month and ends on the last day of
the month. Each month from January through June the consumer uses the
credit card to make \$200 in purchases on which interest is not
deferred.

\(A\) The consumer pays \$300 in excess of the minimum periodic payment
each month from January through June. None of the minimum periodic
payment is applied to the deferred interest balance or the purchase
balance. For the January, February, March, and April billing cycles, the
bank must allocate \$200 to the purchase balance and \$100 to the
deferred interest balance. For the May and June billing cycles, however,
the bank has the option of allocating the entire \$300 to the deferred
interest balance, which will result in that balance being paid in full
before the deferred interest period expires on June 30. In this example,
the interest that accrued between January 1 and June 30 will not be
assessed to the consumer's account.

\(B\) The consumer pays \$200 in excess of the minimum periodic payment
each month from January through June. None of the minimum periodic
payment is applied to the deferred interest balance or the purchase
balance. For the January, February, March, and April billing cycles, the
bank must allocate the entire \$200 to the purchase balance. For the May
and June billing cycles, however, the bank has the option to allocate
the entire \$200 to the deferred interest balance, which will result in
that balance being reduced to \$600 before the deferred interest period
expires on June 30. In this example, the interest that accrued between
January 1 and June 30 will be assessed to the consumer's account.

[Paragraph (b)(2)]{.underline}

1\. [Example of special rule regarding grace periods for accounts with
promotional rate balances or deferred interest balances]{.underline}. A
bank offers a promotional rate on balance transfers and a higher rate on
purchases. The bank also offers a grace period under which consumers who
pay their balances in full by the due date are not charged interest on
purchases. A consumer who has paid the balance for the prior billing
cycle in full by the due date transfers a balance of \$2,000 and makes a
purchase of \$500. Because the bank offers a grace period, it must
provide a grace period on the \$500 purchase if the consumer pays that
amount in full by the due date, even though the \$2,000 balance at the
promotional rate remains outstanding.

[Section 227.24 Unfair Acts or Practices Regarding Application of
Increased Annual Percentage Rates to Outstanding Balances]{.underline}

[(a) Prohibition against increasing annual percentage rates on
outstanding balances]{.underline}

1\. [Example]{.underline}. Assume that on December 30 a consumer credit
card account has a balance of \$1,000 at an annual percentage rate of
15%. On December 31, the bank mails or delivers a notice required by 12
CFR 226.9(c) informing the consumer that the annual percentage rate will
increase to 20% on February 15. The consumer uses the account to make
\$2,000 in purchases on January 10 and \$1,000 in purchases on January
20. Assuming no other transactions, the outstanding balance for purposes
of § 227.24 is the \$3,000 balance as of the end of the day on January
14. Therefore, under § 227.24(a), the bank cannot increase the annual
percentage rate applicable to that balance. The bank can apply the 20%
rate to the \$1,000 in purchases made on January 20 but, consistent with
12 CFR 226.9(c), the bank cannot do so until February 15.

2\. [Reasonable procedures]{.underline}. A bank is not required to
determine the specific date on which a notice required by 12 CFR
226.9(c) or (g) was provided. For purposes of § 227.24(a)(2), if the
bank has adopted reasonable procedures designed to ensure that notices
required by 12 CFR 226.9(c) or (g) are provided to consumers no later
than, for example, three days after the event giving rise to the notice,
the outstanding balance is the balance at the end of the seventeenth day
after such event.

[(b) Exceptions]{.underline}

[Paragraph (b)(1)]{.underline}

1\. [External index]{.underline}. A bank may increase the annual
percentage rate on an outstanding balance if the increase is based on an
index outside the bank's control. A bank may not increase the rate on an
outstanding balance based on its own prime rate or cost of funds and may
not reserve a contractual right to change rates on outstanding balances
at its discretion. In addition, a bank may not increase the rate on an
outstanding balance by changing the method used to determine that rate.
A bank is permitted, however, to use a published prime rate, such as
that in the [Wall]{.underline} [Street]{.underline}
[Journal]{.underline}, even if the bank's own prime rate is one of
several rates used to establish the published rate.

2\. [Publicly available]{.underline}. The index 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.

[Paragraph (b)(2)]{.underline}

1\. [Example]{.underline}. Assume that a consumer credit card account
has a balance of \$1,000 at a 5% promotional rate and that the bank also
charges an annual percentage rate of 15% for purchases and a penalty
rate of 25%. If the consumer does not make payment by the due date and
the account agreement specifies that event as a trigger for applying the
penalty rate, the bank may increase the annual percentage rate on the
\$1,000 from the 5% promotional rate to the 15% annual percentage rate
for purchases. The bank may not, however, increase the rate on the
\$1,000 from the 5% promotional rate to the 25% penalty rate, except as
otherwise permitted under § 227.24(b)(3).

[Paragraph (b)(3)]{.underline}

1\. [Example]{.underline}. Assume that the annual percentage rate
applicable to purchases on a consumer credit card account is increased
from 15% to 20% and that the account has an outstanding balance of
\$1,000 at the 15% rate. The payment due date on the account is the
twenty-fifth of the month. If the bank has not received the required
minimum periodic payment due on March 15 on or before April 14, the bank
may increase the rate applicable to the \$1,000 balance once the bank
has complied with the notice requirements in 12 CFR 226.9(g).

[(c) Treatment of outstanding balances following rate
increase]{.underline}

1\. [Scope]{.underline}. This provision does not apply if the consumer
credit card account does not have an outstanding balance. This provision
also does not apply if a rate is increased pursuant to any of the
exceptions in § 227.24(b).

2\. [Category of transactions]{.underline}. This provision does not
apply to balances in categories of transactions other than the category
for which the bank has increased the annual percentage rate. For
example, if a bank increases the annual percentage rate that applies to
purchases but not the rate that applies to cash advances, § 227.24(c)(1)
and (2) apply to an outstanding balance consisting of purchases but not
an outstanding balance consisting of cash advances.

[Paragraph (c)(1)]{.underline}

1\. [No less beneficial to the consumer]{.underline}. A bank may provide
a method of paying the outstanding 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
outstanding balance in five years or longer [or]{.underline} 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 § 227.24(c)(1)(ii). For example, a bank could more than
double the percentage of amounts owed included in the minimum payment so
long as the minimum payment does not result in amortization of the
outstanding balance in less than five years. Alternatively, a bank could
require a consumer to make a minimum payment on the outstanding balance
that amortizes that balance in less than five years so long as the
payment does not include a percentage of the outstanding balance that is
more than twice the percentage included in the minimum payment before
the effective date of the increased rate.

[Paragraph (c)(1)(ii)]{.underline}

1\. [Required minimum periodic payment on other balances]{.underline}.
This paragraph addresses the required minimum periodic payment on the
outstanding balance. This paragraph does not limit or otherwise address
the bank's ability to determine the amount of the minimum periodic
payment for other balances.

2\. [Example]{.underline}. 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 bank increases the annual percentage rate
applicable to purchases on a consumer credit card account from 15% to
20% and that the account has an outstanding balance of \$1,000 at the
15% rate. Section 227.24(c)(1)(ii) would permit the bank to calculate
the required minimum periodic payment on the outstanding balance by
adding fees and interest charges to 2% of the outstanding balance.

[Paragraph (c)(2)]{.underline}

1\. [Fee or charge based solely on the outstanding balance]{.underline}.
A bank is prohibited from assessing a fee or charge based solely on an
outstanding balance. For example, a bank is prohibited from assessing a
maintenance or similar fee based on an outstanding 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 an outstanding balance.

[Section 227.25 -- Unfair Acts or Practices Regarding Fees for Exceeding
the Credit Limit Caused By Credit Holds]{.underline}

1\. [General]{.underline}. Under § 227.25, a bank may not assess a fee
for exceeding the credit limit if the credit limit would not have been
exceeded but for a hold placed on the available credit for a consumer
credit card account for a transaction that has been authorized but has
not yet been presented for settlement, if the amount of the hold is in
excess of the actual purchase or transaction amount when the transaction
is settled. Section 227.25 does not limit a bank from charging a fee for
exceeding the credit limit in connection with a particular transaction
if the consumer would have exceeded the credit limit due to other
reasons, such as other transactions that may have been authorized but
not yet presented for settlement, a payment that is returned, or if the
purchase or transaction amount for the transaction for which the hold
was placed would have also caused the consumer to exceed the credit
limit.

2\. [Example of prohibition in connection with hold placed for same
transaction]{.underline}. Assume that a consumer credit card account has
a credit limit of \$2,000 and a balance of \$1,500. The consumer uses
the credit card to check into a hotel for an anticipated stay of five
days. When the consumer checks in, the hotel obtains authorization from
the bank for a \$750 hold on the account to ensure there is adequate
available credit to cover the cost of the anticipated stay. The consumer
checks out of the hotel after three days, and the total cost of the stay
is \$450, which is charged to the consumer's credit card account.
Assuming that there is no other activity on the account, the bank is
prohibited from assessing a fee for exceeding the credit limit with
respect to the \$750 hold. If, however, the total cost of the stay
charged to the account had been more than \$500, the bank would not be
prohibited from assessing a fee for exceeding the credit limit.

3\. [Example of prohibition in connection with hold placed for another
transaction]{.underline}. Assume that a consumer credit card account has
a credit limit of \$2,000 and a balance of \$1,400. The consumer uses
the credit card to check into a hotel for an anticipated stay of five
days. When the consumer checks in, the hotel obtains authorization from
the bank for a \$750 hold on the account to ensure there is adequate
available credit to cover the cost of the anticipated stay. While the
hold remains in place, the consumer uses the credit card to make a \$150
purchase. The consumer checks out of the hotel after three days, and the
total cost of the stay is \$450, which is charged to the consumer's
credit card account. Assuming that there is no other activity on the
account, the bank is prohibited from assessing a fee for exceeding the
credit limit with respect to either the \$750 hold or the \$150
purchase. If, however, the total cost of the stay charged to the account
had been more than \$450, the bank would not be prohibited from
assessing a fee for exceeding the credit limit.

4\. [Example of prohibition when authorization and settlement amounts
are held for the same transaction]{.underline}. Assume that a consumer
credit card account has a credit limit of \$2,000 and a balance of
\$1,400. The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the hotel
obtains authorization from the bank for a \$750 hold on the account to
ensure there is adequate available credit to cover the cost of the
anticipated stay. The consumer checks out of the hotel after three days,
and the total cost of the stay is \$450, which is charged to the
consumer's credit card account. When the hotel presents the \$450
transaction for settlement, it uses a different transaction code to
identify the transaction than it had used for the pre-authorization,
causing both the \$750 hold and the \$450 purchase amount to be
temporarily posted to the consumer's account at the same time, and the
consumer's balance to exceed the credit limit. Under these
circumstances, and assuming no other transactions, the bank is
prohibited from assessing a fee for exceeding the credit limit because
the credit limit was exceeded solely due to the \$750 hold.

5\. [Example of permissible fee for exceeding the credit limit in
connection with a hold]{.underline}. Assume that a consumer has a credit
limit of \$2,000 and a balance of \$1,400 on a consumer credit card
account. The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the hotel
obtains authorization from the bank for a \$750 hold on the account to
ensure there is adequate available credit to cover the cost of the
anticipated stay. While the hold remains in place, the consumer uses the
credit card to make a \$650 purchase. The consumer checks out of the
hotel after three days, and the total cost of the stay is \$450, which
is charged to the consumer's credit card account. Notwithstanding the
existence of the hold and assuming that there is no other activity on
the account, the bank may charge the consumer a fee for exceeding the
credit limit with respect to the \$650 purchase because the consumer
would have exceeded the credit limit even if the hold had been for the
actual amount of the hotel transaction.

[Section 227.26 -- Unfair Balance Computation Method]{.underline}

[(a) General rule]{.underline}

1\. [Two-cycle method prohibited]{.underline}. A 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\. [Example]{.underline}. 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. A consumer has a zero balance on March 1. The
consumer uses the credit card to make a \$500 purchase on March 15. The
consumer makes no other purchases and pays \$400 on the due date (April
25), leaving a \$100 balance. The bank may charge interest on the \$500
purchase from the start of the 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).

[Section 227.27 -- Unfair Acts or Practices Regarding Security Deposits
and Fees for the Issuance or Availability of Credit]{.underline}

1\. [Initial credit limit for the account]{.underline}. For purposes of
this section, the initial credit limit is the limit in effect when the
account is opened.

[(a) Annual rule]{.underline}

1\. [Majority of the credit limit]{.underline}. 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
§ 227.27(a), a bank may only charge to the account security deposits and
fees for the issuance or availability of credit totaling no more than
\$250 during the twelve months after the date on which the account is
opened (consistent with § 227.27(b)).

[(b) Monthly rule]{.underline}

1\. [Adjustments of one dollar or less permitted]{.underline}. When
dividing amounts pursuant to § 227.27(b)(2), the bank may adjust amounts
by one dollar or less. For example, if a bank is dividing \$125 over
eleven billing cycles, the bank may charge \$12 for four months and \$11
for the remaining seven months.

2\. [Example]{.underline}. Assume that a consumer credit card account
opened on January 1 has an initial credit limit of \$500 and that a bank
charges to the account security deposits and fees for the issuance or
availability of credit that total \$250 during the twelve months after
the date on which the account is opened. 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 § 227.27(b), the bank may charge to the
account no more than \$250 in security deposits and fees for the
issuance or availability of credit. If it charges \$250, the bank may
charge as much as \$125 during the first billing cycle. If it charges
\$125 during the first billing cycle, it may then charge \$12 in any
four billing cycles and \$11 in any seven billing cycles during the
year.

[(c) Fees for the issuance or availability of credit]{.underline}

1\. [Membership fees]{.underline}. 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]{.underline}. Fees for optional services in addition
to basic membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) are not fees
for the issuance or availability of credit if the basic account may be
opened without paying such fees.

3\. [One-time fees]{.underline}. Only non-periodic fees related to
opening an account (such as one-time membership or participation fees)
are fees for the issuance or availability of credit. Fees for reissuing
a lost or stolen card and statement reproduction fees are examples of
fees that are not fees for the issuance or availability of credit.

[Section 227.28 -- Deceptive Acts or Practices Regarding Firm Offers of
Credit]{.underline}

[(a) Disclosure of criteria bearing on creditworthiness]{.underline}

1\. [Designed to call attention]{.underline}. Whether a disclosure has
been provided in a manner that is designed to call attention to the
nature and significance of required information depends on where the
disclosure is placed in the solicitation and how it is presented,
including whether the disclosure uses a typeface and type size that are
easy to read and uses boldface or italics. Placing the disclosure in a
footnote would not satisfy this requirement.

2\. [Form of electronic disclosures]{.underline}. Electronic disclosures
must be provided consistent with 12 CFR 226.5a(a)(2)-8 and -9.

3\. [Multiple annual percentage rates or credit limits]{.underline}. For
purposes of this section, a firm offer of credit solicitation that
states an annual percentage rate or credit limit for a credit card
feature and a different annual percentage rate or credit limit for a
different credit card feature does not offer multiple annual percentage
rates or credit limits. For example, if a firm offer of credit
solicitation offers a 15% annual percentage rate for purchases and a 20%
annual percentage rate for cash advances, the solicitation does not
offer multiple annual percentage rates for purposes of this section.

4\. [Example]{.underline}. Assume that a bank requests from a consumer
reporting agency a list of consumers with credit scores of 650 or higher
so that the bank can send those consumers a firm offer of credit
solicitation. The bank sends a solicitation to those consumers for a
consumer credit card account advertising "rates from 8.99% to 19.99%"
and "credit limits from \$1,000 to \$10,000." Before selection of the
consumers for the offer, however, the bank determines that it will
provide an interest rate of 8.99% and a credit limit of \$10,000 only to
those consumers responding to the solicitation who are verified to have
a credit score of 650 or higher, who have a debt-to-income ratio below a
certain amount, and who meet other specific criteria bearing on
creditworthiness. Under § 227.28, this solicitation is deceptive unless
the bank discloses, in a manner that is reasonably understandable to the
consumer and designed to call attention to the nature and significance
of the information, that, if the consumer is approved for credit, the
annual percentage rate and credit limit the consumer will receive will
depend on specific criteria bearing on the consumer's creditworthiness.
The bank may satisfy this requirement by using a typeface and type size
that are easy to read and stating in boldface in a manner that otherwise
calls attention to the nature and significance of the information: "**If
you are approved for credit, your annual percentage rate and/or credit
limit will depend on your credit history, income, and debts.**"

5\. [Applicability of criteria in disclosure]{.underline}. When making a
disclosure under this section, a bank may only disclose the criteria it
uses in evaluating whether consumers who are approved for credit will
receive the lowest annual percentage rate or the highest credit limit.
For example, if a bank does not consider the consumer's debts when
determining whether the consumer should receive the lowest annual
percentage rate or highest credit limit, the disclosure must not refer
to "debts."

SUBPART D -- OVERDRAFT SERVICES RULE

[Section 227.32 -- Unfair Acts or Practices Regarding Overdraft
Services]{.underline}

[(a) Opt-out requirement]{.underline}

[(a)(1) General rule]{.underline}

1\. [Form, content and timing of disclosure]{.underline}. The form,
content and timing of the opt-out notice required to be provided under
paragraph (a) of this section are addressed under § 230.10 of the
Board's Regulation DD, Truth in Savings (12 CFR 230).

[(a)(3) Exceptions]{.underline}

[Paragraph (a)(3)(i)]{.underline}

1\. [Example of transaction amount exceeding authorization amount (fuel
purchase)]{.underline}. A consumer has \$30 in a deposit account. The
consumer uses a debit card to purchase fuel. Before permitting the
consumer to use the fuel pump, the merchant verifies the validity of the
card by obtaining authorization from the bank for a \$1 transaction. The
consumer purchases \$50 of fuel. If the bank pays the transaction, it
would be permitted to assess a fee or charge for paying the overdraft,
even if the consumer has opted out of the payment of overdrafts.

2\. [Example of transaction amount exceeding authorization amount
(restaurant)]{.underline}. A consumer has \$50 in a deposit account. The
consumer pays for a \$45 meal at a restaurant using a debit card. While
the restaurant may obtain authorization for the \$45 cost of the meal,
the consumer may add \$10 for a tip. If the bank pays the \$55
transaction (including the tip amount), it would be permitted to assess
a fee or charge for paying the overdraft, even if the consumer has opted
out of the payment of overdrafts.

[Paragraph (a)(3)(ii)]{.underline}

1\. [Example of transaction presented by paper-based means]{.underline}.
A consumer has \$50 in a deposit account. The consumer makes a \$60
purchase and presents his or her debit card for payment. The merchant
takes an imprint of the card. Later that day, the merchant submits a
sales slip with the card imprint to its processor for payment. If the
consumer's bank pays the transaction, it would be permitted to assess a
fee or charge for paying the overdraft, even if the consumer has opted
out of the payment of overdrafts.

[(b) Debit holds]{.underline}

1\. [General]{.underline}. Under § 227.32(b), a bank may not assess an
overdraft fee if the overdraft would not have occurred but for a hold
placed on funds in the consumer's account for a transaction that has
been authorized but has not yet been presented for settlement, if the
amount of the hold is in excess of the actual purchase or transaction
amount when the transaction is settled. Section 227.32(b) does not limit
a bank from charging an overdraft fee in connection with a particular
transaction if the consumer would have incurred an overdraft due to
other reasons, such as other transactions that may have been authorized
but not yet presented for settlement, a deposited check that is
returned, or if the purchase or transaction amount for the transaction
for which the hold was placed would have also caused the consumer to
overdraw his or her account.

2\. [Example of prohibition in connection with hold placed for same
transaction]{.underline}. A consumer has \$50 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's bank for a \$75 "hold" on the account
which exceeds the consumer's funds. The consumer purchases \$20 of fuel.
Under these circumstances, § 227.32(b) prohibits the bank from assessing
a fee or charge in connection with the debit hold because the actual
amount of the fuel purchase did not exceed the funds in the consumer's
account. However, if the consumer had purchased \$60 of fuel, the bank
could assess a fee or charge for an overdraft because the transaction
exceeds the funds in the consumer's account, unless the consumer has
opted out of the payment of overdrafts under § 227.32(a).

3\. [Example of prohibition in connection with hold placed for another
transaction]{.underline}. A consumer has \$100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's bank for a \$75 "hold" on the account.
The consumer purchases \$20 of fuel, but the transaction is not
presented for settlement until the next day. Later on the first day, and
assuming no other transactions, the consumer withdraws \$75 at an ATM.
Under these circumstances, § 227.32(b) prohibits the bank from assessing
a fee or charge for paying an overdraft with respect to the \$75
withdrawal because the overdraft was caused solely by the \$75 hold.

4\. [Example of prohibition when authorization and settlement amounts
are held for the same transaction]{.underline}. A consumer has \$100 in
his deposit account, and uses his debit card to purchase \$50 worth of
fuel. Before permitting the consumer to use the fuel pump, the merchant
obtains authorization from the consumer's bank for a \$75 "hold" on the
account. The consumer purchases \$50 of fuel. When the merchant presents
the \$50 transaction for settlement, it uses a different transaction
code to identify the transaction than it had used for the
pre-authorization, causing both the \$75 hold and the \$50 purchase
amount to be temporarily posted to the consumer's account at the same
time, and the consumer's account to be overdrawn. Under these
circumstances, and assuming no other transactions, § 227.32(b) prohibits
the bank from assessing a fee or charge for paying an overdraft because
the overdraft was caused solely by the \$75 hold.

5\. [Example of permissible overdraft fees in connection with a
hold]{.underline}. A consumer has \$100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's bank for a \$75 "hold" on the account.
The consumer purchases \$35 of fuel, but the transaction is not
presented for settlement until the next day. Later on the first day, and
assuming no other transactions, the consumer withdraws \$75 at an ATM.
Notwithstanding the existence of the hold, and assuming the consumer has
not opted out of the payment of overdrafts under § 227.32(a), the
consumer's bank may charge the consumer an overdraft fee for the \$75
ATM withdrawal, because the consumer would have incurred the overdraft
even if the hold had been for the actual amount of the fuel purchase.

9\. The Federal Reserve System Board of Governors' Staff Guidelines on
the Credit Practices Rule, published August 3, 1988 at 51 FR 29225, is
amended as follows:

**Staff Guidelines on the Credit Practices Rule**\
Effective January 1, 1986; as amended effective \[August 1, 1988\]
►**Insert effective date of new amendments**◄

**Introduction**

\* \* \* \* \*

3\. [Scope]{.underline}; [enforcement]{.underline}. ►As stated in
subpart A of Regulation AA,◄ \[The Board's\]►this◄ rule applies to all
banks and their subsidiaries►, except savings associations as defined in
12 U.S.C. 1813(b).◄ \[Institutions that are members of the Federal Home
Loan Bank System and nonbank subsidiaries of bank holding companies are
covered by the rules of the Federal Home Loan Bank Board and the FTC,
respectively.\] 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 state-chartered
banks that are not members of the Federal Reserve System.

\* \* \* \* \*

\[[Section 227.11]{.underline} **Authority, purpose, and scope**

Q11(c)-1: [Penalties for noncompliance]{.underline}. 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 USC 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]{.underline}. 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.\]

\* \* \* \* \*

By order of the Board of Governors of the Federal Reserve System,

May 2, 2008

Jennifer J. Johnson

Secretary of the Board

BILLING CODE 6210-01-P

**\* \* \* \* \***

**Department of the Treasury**

**Office of Thrift Supervision**

12 CFR Chapter V

For the reasons discussed in the joint preamble, the Office of Thrift
Supervision proposes to amend chapter V of title 12 of the Code of
Federal Regulations by amending 12 CFR part 535 as follows:

**PART 535 -- UNFAIR OR DECEPTIVE ACTS OR PRACTICES**

> 1\. The authority citation for part 535 is revised to read as follows:

[Authority:]{.underline} 15 U.S.C. 57a; 12 U.S.C. 1462a, 1463, 1464.

2\. Revise the part heading for part 535 to read as shown above.

3\. Revise part 535 to read as follows:

**Subpart A--General Provisions**

Sec.

535.1 Authority, purpose, and scope.

**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.

535.15 State exemptions.

**Subpart C--Consumer Credit Card Account Practices**

535.21 Definitions.

535.22 Unfair time to make payment.

535.23 Unfair payment allocations.

535.24 Unfair annual percentage rate increases on outstanding balances.

535.25 Unfair fees for exceeding the credit limit due to credit holds.

535.26 Unfair balance computation method.

535.27 Unfair charging to the account of security deposits and fees for
the issuance or availability of credit.

535.28 Deceptive firm offers of credit.

**Subpart D--Overdraft Service Practices**

535.31 Definitions.

535.32 Unfair overdraft service practices.

APPENDIX TO PART 535 -- OFFICIAL STAFF COMMENTARY

**Subpart A--General Provisions**

**§ 535.1 Authority, purpose and scope.**

\(a\) [Authority]{.underline}. This part is issued by OTS under section
18(f) of the Federal Trade Commission Act, 15 U.S.C. 57a(f).

\(b\) [Purpose.]{.underline} 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). This part defines
and contains requirements prescribed for the purpose of preventing
specific unfair or deceptive acts or practices of savings associations.
The prohibitions in this part do not limit OTS's authority to enforce
the FTC Act with respect to any other unfair or deceptive acts or
practices.

\(c\) [Scope.]{.underline} This part applies to savings associations and
subsidiaries owned in whole or in part by a savings association.

**Subpart B--Consumer Credit Practices**

**§ 535.11 Definitions.**

For purposes of this subpart, the following definitions apply:

\(a\) [Consumer]{.underline} means a natural person 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.]{.underline}

\(b\) [Consumer credit]{.underline} 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 the savings association 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.

\(c\) [Earnings]{.underline} 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]{.underline} means an agreement between a consumer and
a creditor.

\(e\) [Person]{.underline} 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.]{.underline} 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.]{.underline} 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.]{.underline} 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.]{.underline} A
nonpossessory security interest in household goods other than a
purchase-money security interest. For purposes of this paragraph,
[household goods]{.underline}:

\(1\) 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.**

\(a\) [Prohibited deception.]{.underline} 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.]{.underline} 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.]{.underline} (1) [Disclosure
statement.]{.underline} 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]{.smallcaps}**
>
> 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.]{.underline} 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.]{.underline} 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.]{.underline},
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.]{.underline} (1) [Cosigner]{.underline} 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]{.underline} 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]{.underline}, whether or not the person is designated as such
on a credit obligation.

**§ 535.14 Unfair late charges.**

\(a\) [Prohibition.]{.underline} 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.]{.underline} [Collecting a
debt]{.underline} 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.

**§ 535.15 State exemptions.**

\(a\) [Applications.]{.underline} An appropriate state agency may apply
to OTS for a determination that:

\(1\) There is a state requirement or prohibition in effect that applies
to any transaction to which a provision of this subpart applies; and

\(2\) The state requirement or prohibition affords a level of protection
to consumers that is substantially equivalent to, or greater than, the
protection afforded by this subpart.

\(b\) [Determinations.]{.underline} If OTS makes a determination under
paragraph (a) of this section, then the provision of this subpart will
not be in effect in that state to the extent specified by OTS in its
determination, for as long as the state administers and enforces the
state requirement or prohibition effectively, as determined by OTS.

\(c\) [Delegated authority.]{.underline} The Managing Director,
Compliance and Consumer Protection in consultation with the Chief
Counsel has delegated authority to make such determinations as are
required under this subpart.

**Subpart C--Consumer Credit Card Account Practices**

**§ 535.21 Definitions.**

For purposes of this subpart, the following definitions apply:

\(a\) [Annual percentage rate]{.underline} 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]{.underline} has the same meaning as in § 226.2 of
this title.

\(b\) [Consumer]{.underline} 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]{.underline} 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 [open-end credit]{.underline}, [credit
card]{.underline}, and [charge card]{.underline} have the same meanings
as in § 226.2 of this title. The following are not consumer credit card
accounts for purposes of this subpart:

\(1\) Home equity plans subject to the requirements of § 226.5b of this
title that are accessible by a credit or charge card;

\(2\) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;

\(3\) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and

\(4\) Lines of credit accessed solely by account numbers.

\(d\) [Promotional rate]{.underline} means:

\(1\) Any annual percentage rate applicable to one or more balances or
transactions on a consumer credit card account for a specified period of
time that is lower than the annual percentage rate that will be in
effect at the end of that period; or

\(2\) Any annual percentage rate applicable to one or more transactions
on a consumer credit card account that is lower than the annual
percentage rate that applies to other transactions of the same type.

**§ 535.22 Unfair time to make payment.**

\(a\) [General rule]{.underline}. 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.

\(b\) [Safe harbor]{.underline}. You satisfy the requirements of
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.

\(c\) [Exception for grace periods]{.underline}. Paragraph (a) of this
section does not apply to any time period you provide within which the
consumer may repay any portion of the credit extended without incurring
an additional finance charge.

**§ 535.23 Unfair payment allocations.**

\(a\) [General rule for accounts with different annual percentage rates
on different balances.]{.underline} Except as provided in paragraph (b)
of this section, 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 in a manner that is no less
beneficial to the consumer than one of the following methods:

\(1\) You allocate the amount 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;

\(2\) You allocate equal portions of the amount to each balance; or

\(3\) You allocate the amount among the balances in the same proportion
as each balance bears to the total balance.

\(b\) [Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}.

\(1\) [Rule regarding payment allocation]{.underline}. (i) [In
general]{.underline}. When a consumer credit card account has one or
more balances at a promotional rate or balances on which interest is
deferred, you must allocate any amount paid by the consumer in excess of
the required minimum periodic payment among the other balances on the
account consistent with paragraph (a) of this section. If any amount
remains after such allocation, you must allocate that amount among the
promotional rate balances or the deferred interest balances consistent
with paragraph (a) of this section.

\(ii\) [Exception for deferred interest balances]{.underline}.
Notwithstanding paragraph (b)(1)(i) of this section, you may allocate
the entire amount paid by the consumer in excess of the required minimum
periodic payment to a balance on which interest is deferred during the
two billing cycles immediately preceding expiration of the period during
which interest is deferred.

\(2\) [Rule regarding grace period]{.underline}. You must not require a
consumer to repay any portion of a promotional rate balance or deferred
interest balance on a consumer credit card account in order to receive
any time period you offer in which to repay other credit extended
without incurring finance charges, provided that the consumer is
otherwise eligible for such a time period.

**§ 535.24 Unfair annual percentage rate increases on outstanding
balances.**

\(a\) [Prohibition against increasing annual percentage rates on
outstanding balances.]{.underline} (1) [General rule]{.underline}.
Except as provided in paragraph (b) of this section, you must not
increase the annual percentage rate applicable to any outstanding
balance on a consumer credit card account.

\(2\) [Outstanding balance defined]{.underline}. For purposes of this
section, [outstanding balance]{.underline} means the amount owed on a
consumer credit card account at the end of the fourteenth day after you
provide a notice required by §§ 226.9(c) or 226.9(g) of this title.

\(b\) [Exceptions]{.underline}. Paragraph (a) of this section does not
apply where the annual percentage rate is increased due to:

\(1\) The operation of an index that is not under your control and is
available to the general public;

\(2\) The expiration or loss of a promotional rate provided that, if a
promotional rate is lost, you do not increase the annual percentage rate
to a rate that is greater than the annual percentage rate that would
have applied after expiration of the promotional rate; or

\(3\) You not receiving the consumer's required minimum payment within
30 days after the due date for that payment.

\(c\) [Treatment of outstanding balances following rate
increase]{.underline}. (1) [Payment of outstanding
balances]{.underline}. When you increase the annual percentage rate
applicable to a category of transaction on a consumer credit card
account and this section prohibits you from applying the increased rate
to outstanding balances in that category, you must provide the consumer
with a method of paying that outstanding balance that is no less
beneficial to the consumer than one of the following methods:

\(i\) An amortization period for the outstanding balance of no less than
five years, starting from the date on which the increased annual
percentage rate went into effect; or

\(ii\) A required minimum periodic payment on the outstanding balance
that includes a percentage of that balance that is no more than twice
the percentage included before the date on which the increased annual
percentage rate went into effect.

\(2\) [Fees and charges on outstanding balance]{.underline}. When you
increase the annual percentage rate applicable to a category of
transactions on a consumer credit card account and this section
prohibits you from applying the increased rate to outstanding balances
in that category, you must not assess any fee or charge based solely on
the outstanding balance.

**§ 535.25 Unfair fees from for exceeding the credit limit due to credit
holds.**

You must not assess 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.

**§ 535.26 Unfair balance computation method.**

\(a\) [General rule.]{.underline} 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.

\(b\) [Exceptions.]{.underline} Paragraph (a) of this section does not
apply to:

\(1\) The assessment of deferred interest; or

\(2\) Adjustments to finance charges following the resolution of a
billing error dispute under §§ 226.12(b) or 226.13 of this title.

**§ 535.27 Unfair charging to the account of security deposits and fees
for the issuance or availability of credit.**

\(a\) [Annual rule]{.underline}. During the period beginning with the
date on which a consumer credit card account is opened and ending twelve
months from that date, you must not charge to the account security
deposits or fees for the issuance or availability of credit if the total
amount of such security deposits and fees constitutes a majority of the
initial credit limit for the account.

\(b\) [Monthly rule]{.underline}. If the total amount of security
deposits and fees for the issuance or availability of credit charged to
a consumer credit card account during the period beginning with the date
on which a consumer credit card account is opened and ending twelve
months from that date constitutes more than 25 percent of the initial
credit limit for the account:

\(1\) During the first billing cycle after the account is opened, you
must not charge to the account security deposits and fees for the
issuance or availability of credit that total more than 25 percent of
the initial credit limit for the account; and

\(2\) In each of the eleven billing cycles following the first billing
cycle, you must not charge to the account more than one eleventh of the
total amount of any security deposits and fees for the issuance or
availability of credit in excess of 25 percent of the initial credit
limit for the account.

\(c\) [Fees for the issuance or availability of credit]{.underline}. For
purposes of paragraphs (a) and (b) of this section, fees for the
issuance or availability of credit include:

\(1\) 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

\(2\) Any non-periodic fee that relates to opening an account.

**§ 535.28 Deceptive firm offers of credit.**

\(a\) [Disclosure of criteria bearing on creditworthiness.]{.underline}
If you offer a range or multiple annual percentage rates or credit
limits when you make a solicitation for a firm offer of credit for a
consumer credit card account, and the annual percentage rate or credit
limit that consumers approved for credit will receive depends on
specific criteria bearing on creditworthiness, you must disclose the
types of criteria in the solicitation. You must provide the disclosure
in a manner that is reasonably understandable to consumers and designed
to call attention to the nature and significance of the eligibility
criteria for the lowest annual percentage rate or highest credit limit
stated in the solicitation. If presented in a manner that calls
attention to the nature and significance of the information, the
following disclosure may be used to satisfy the requirements of this
section (as applicable): "If you are approved for credit, your annual
percentage rate and/or credit limit will depend on your credit history,
income, and debts."

\(b\) [Firm offer of credit defined]{.underline}. For purposes of this
section, [firm offer of credit]{.underline} has the same meaning as that
term has under the definition of [firm offer of credit or
insurance]{.underline} in section 603(l) of the Fair Credit Reporting
Act (15 U.S.C. 1681a(l)).

**Subpart D--Overdraft Service Practices**

**§ 535.31 Definitions.**

For purposes of this subpart, the following definitions apply:

\(a\) [Account]{.underline} means a deposit account at a ~~s~~avings
association that is held by or offered to a consumer. The term
[account]{.underline} has the same meaning as in § 230.2(a) of this
title.

\(b\) [Consumer]{.underline} means a person who holds an account
primarily for personal, family, or household purposes.

\(c\) [Overdraft service]{.underline} means a service under which a
savings association charges a fee for paying a transaction (including a
check or other item) that overdraws an account. The term [overdraft
service]{.underline} does not include any payment of overdrafts pursuant
to:

\(1\) A line of credit subject to part 226 of this title, including
transfers from a credit card account, home equity line of credit, or
overdraft line of credit; or

\(2\) A service that transfers funds from another account of the
consumer.

**§ 535.32 Unfair overdraft service practices.**

\(a\) [Opt-out requirement]{.underline}. (1) [General rule]{.underline}.
You must not assess a fee or charge on a consumer's account in
connection with an overdraft service, unless you provide the consumer
with the right to opt out of your payment of overdrafts and a reasonable
opportunity to exercise that opt out and the consumer has not opted out.
The consumer must be given notice and an opportunity to opt out before
you assess any fee or charge for an overdraft, and subsequently at least
once during or for any periodic statement cycle in which any fee or
charge for paying an overdraft is assessed. The notice requirements in
paragraphs (a)(1) and (a)(2) of this section do not apply if the
consumer has opted out, unless the consumer subsequently revokes the
opt-out.

\(2\) [Partial opt-out]{.underline}. You must provide a consumer the
option of opting out only for the payment of overdrafts at automated
teller machines and for point-of-sale transactions initiated by a debit
card, in addition to the choice of opting out of the payment of
overdrafts for all transactions.

\(3\) [Exceptions]{.underline}. Notwithstanding a consumer's election to
opt out under paragraphs (a)(1) or (a)(2) of this section, you may
assess a fee or charge on a consumer's account for paying a debit card
transaction that overdraws an account if:

\(i\) There were sufficient funds in the consumer's account at the time
the authorization request was received, but the actual purchase amount
for that transaction exceeds the amount that had been authorized; or

\(ii\) The transaction is presented for payment by paper-based means,
rather than electronically through a card terminal, and you have not
previously authorized the transaction.

\(4\) [Time to comply with opt-out]{.underline}. You must comply with a
consumer's opt-out request as soon as reasonably practicable after you
receive it.

\(5\) [Continuing right to opt-out]{.underline}. A consumer may opt out
of your future payment of overdrafts at any time.

\(6\) [Duration of opt-out]{.underline}. A consumer's opt-out is
effective unless the consumer subsequently revokes it.

\(b\) [Debit holds.]{.underline} You must not assess a fee or charge on
a consumer's account in for an overdraft service if the consumer's
overdraft would not have occurred but for a hold placed on funds in the
consumer's account that is in excess of the actual purchase or
transaction amount.

**APPENDIX TO PART 535 -- OFFICIAL STAFF COMMENTARY**

**Subpart A -- General Provisions**

[Section 535.1 -- Authority, purpose, and scope]{.underline}

[1(c) Scope]{.underline}

1\. [Penalties for noncompliance]{.underline}. 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 action be taken to
remedy violations and civil money penalties.

**Subpart C -- Consumer Credit Card Account Practices**

[Section 535.21 -- Definitions]{.underline}

[(d) Promotional rate]{.underline}

[Paragraph (d)(1)]{.underline}

1\. [Rate in effect at the end of the promotional period]{.underline}.
If the annual percentage rate that will be in effect at the end of the
specified period of time is a variable rate, the rate in effect at the
end of that period for purposes of § 535.21(d)(1) is the rate that would
otherwise apply if the promotional rate were not offered, consistent
with any applicable accuracy requirements under part 226 of this title.

[Paragraph (d)(2)]{.underline}

2\. [Example]{.underline}. A savings association generally offers a 15%
annual percentage rate for purchases on a consumer credit card account.
For purchases made during a particular month, however, the creditor
offers a rate of 5% that will apply until the consumer pays those
purchases in full. Under § 535.21(d)(2), the 5% rate is a "promotional
rate" because it is lower than the 15% rate that applies to other
purchases.

[Section 535.22 -- Unfair time to make payment]{.underline}

[(a) General rule]{.underline}

1\. [Treating a payment as late for any purpose]{.underline}. 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]{.underline}. 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), 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.

[(b) Safe harbor]{.underline}

1\. [Reasonable procedures]{.underline}. 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, for example, three days
after the closing date of the billing cycle and the payment due date on
the periodic statement is no less than 24 days after the closing date of
the billing cycle.

2\. [Payment due date]{.underline}. For purposes of § 535.22(b),
"payment due date" means the date by which the savings association
requires the consumer to make payment to avoid being treated as late for
any purpose, except as provided in § 535.22(c).

[Section 535.23 -- Unfair payment allocations]{.underline}

1\. [Minimum periodic payment]{.underline}. This section addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the savings association. This section does
not limit or otherwise address the savings association's ability to
determine the amount of the minimum periodic payment or how that payment
is allocated.

2\. [Adjustments of one dollar or less permitted]{.underline}. When
allocating payments, the savings association may adjust amounts by one
dollar or less. For example, if a savings association is allocating
\$100 equally among three balances, the savings association may apply
\$34 to one balance and \$33 to the others. Similarly, if a savings
association is splitting \$100.50 between two balances, the savings
association may apply \$50 to one balance and \$50.50 to another.

[(a) General rule for accounts with different annual percentage rates on
different balances]{.underline}

1\. [No less beneficial to the consumer]{.underline}. A savings
association may allocate payments using a method that is different from
the methods listed in § 535.23(a) 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 than a listed method if it results in
the assessment of the same or a lesser amount of interest charges than
would be assessed under any of the listed methods. For example, a
savings association may not allocate the entire amount paid by the
consumer in excess of the required minimum periodic payment to the
balance with the lowest annual percentage rate because this method would
result in a higher assessment of interest charges than any of the
methods listed in § 535.23(a).

2\. [Example of payment allocation method that is no less beneficial to
consumers than a method listed in § 535.23(a)]{.underline}. 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 could allocate
one-third of this amount (\$185) to the cash advance balance and
two-thirds (\$370) to the purchase balance even though this is not a
method listed in § 535.23(a) because the savings association is applying
more of the amount to the balance with the highest annual percentage
rate (with the result that the consumer will be assessed less in
interest charges) than would be the case under the pro rata allocation
method in § 535.23(a)(3). [See]{.underline} comment 23(a)(3)-1.

[Paragraph (a)(1)]{.underline}

1\. [Examples of allocating first to the balance with the highest annual
percentage rate]{.underline}.

\(A\) 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. None of the
minimum periodic payment is allocated to the cash advance balance. 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.

\(B\) 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.

[Paragraph (a)(2))]{.underline}

1\. [Example of equal portion method]{.underline}. 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 \$278 to the cash advance balance and \$277 to the
purchase balance (or vice versa).

[Paragraph (a)(3)]{.underline}

1\. [Example of pro rata method]{.underline}. 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.

[(b) Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}

[Paragraph (b)(1)(i)]{.underline}

1\. [Examples of special rule regarding payment allocation for accounts
with promotional rate balances or deferred interest
balances]{.underline}.

\(A\) A consumer credit card account has a cash advance balance of \$500
at an annual percentage rate of 20%, a purchase balance of \$1,500 at an
annual percentage rate of 15%, and a transferred balance of \$3,000 at a
promotional rate of 5%. The consumer pays \$800 in excess of the
required minimum periodic payment. The savings association must allocate
the \$800 between the cash advance and purchase balances (consistent
with § 535.23(a)) and apply nothing to the transferred balance.

\(B\) A consumer credit card account has a cash advance balance of \$500
at an annual percentage rate of 20%, a balance of \$1,500 on which
interest is deferred, and a transferred balance of \$3,000 at a
promotional rate of 5%. The consumer pays \$800 in excess of the
required minimum periodic payment. None of the minimum periodic payment
is allocated to the cash advance balance. The savings association must
allocate \$500 to pay off the cash advance balance before allocating the
remaining \$300 between the deferred interest balance and the
transferred balance (consistent with § 535.23(a)).

[Paragraph (b)(1)(ii)]{.underline}

1\. [Examples of exception for deferred interest balances]{.underline}.
Assume that on January 1 a consumer uses a credit card to make a \$1,000
purchase on which interest is deferred until June 30. If this amount is
not paid in full by June 30, all interest accrued during the six-month
period will be charged to the account. The billing cycle for this credit
card begins on the first day of the month and ends on the last day of
the month. Each month from January through June the consumer uses the
credit card to make \$200 in purchases on which interest is not
deferred.

\(A\) The consumer pays \$300 in excess of the minimum periodic payment
each month from January through June. None of the minimum periodic
payment is applied to the deferred interest balance or the purchase
balance. For the January, February, March, and April billing cycles, the
savings association must allocate \$200 to the purchase balance and
\$100 to the deferred interest balance. For the May and June billing
cycles, however, the savings association has the option of allocating
the entire \$300 to the deferred interest balance, which will result in
that balance being paid in full before the deferred interest period
expires on June 30. In this example, the interest that accrued between
January 1 and June 30 will not be assessed to the consumer's account.

\(B\) The consumer pays \$200 in excess of the minimum periodic payment
each month from January through June. None of the minimum periodic
payment is applied to the deferred interest balance or the purchase
balance. For the January, February, March, and April billing cycles, the
savings association must allocate the entire \$200 to the purchase
balance. For the May and June billing cycles, however, the savings
association has the option to allocate the entire \$200 to the deferred
interest balance, which will result in that balance being reduced to
\$600 before the deferred interest period expires on June 30. In this
example, the interest that accrued between January 1 and June 30 will be
assessed to the consumer's account.

[Paragraph (b)(2)]{.underline}

1\. [Example of special rule regarding grace periods for accounts with
promotional rate balances or deferred interest balances]{.underline}. A
savings association offers a promotional rate on balance transfers and a
higher rate on purchases. The savings association also offers a grace
period under which consumers who pay their balances in full by the due
date are not charged interest on purchases. A consumer who has paid the
balance for the prior billing cycle in full by the due date transfers a
balance of \$2,000 and makes a purchase of \$500. Because the savings
association offers a grace period, it must provide a grace period on the
\$500 purchase if the consumer pays that amount in full by the due date,
even though the \$2,000 balance at the promotional rate remains
outstanding.

[Section 535.24 -- Unfair annual percentage rate increases on
outstanding balances]{.underline}

[(a) Prohibition against increasing annual percentage rates on
outstanding balances]{.underline}

1\. [Example]{.underline}. Assume that on December 30 a consumer credit
card account has a balance of \$1,000 at an annual percentage rate of
15%. On December 31, the savings association mails or delivers a notice
required by § 226.9(c) of this title informing the consumer that the
annual percentage rate will increase to 20% on February 15. The consumer
uses the account to make \$2,000 in purchases on January 10 and \$1,000
in purchases on January 20. Assuming no other transactions, the
outstanding balance for purposes of § 535.24 is the \$3,000 balance as
of the end of the day on January 14. Therefore, under § 535.24(a), the
savings association cannot increase the annual percentage rate
applicable to that balance. The savings association can apply the 20%
rate to the \$1,000 in purchases made on January 20 but, consistent with
§ 226.9(c) of this title, the savings association cannot do so until
February 15.

2\. [Reasonable procedures]{.underline}. A savings association is not
required to determine the specific date on which a notice required by §§
226.9(c) or 226.9(g) of this title was provided. For purposes of
§ 535.24(a)(2), if the savings association has adopted reasonable
procedures designed to ensure that notices required by §§ 226.9(c)
or 229.9(g) of this title are provided to consumers no later than, for
example, three days after the event giving rise to the notice, the
outstanding balance is the balance at the end of the seventeenth day
after such event.

[(b) Exceptions]{.underline}

[Paragraph (b)(1)]{.underline}

1\. [External index]{.underline}. A savings association may increase the
annual percentage rate on an outstanding balance if the increase is
based on an index outside the savings association's control. A savings
association may not increase the rate on an outstanding balance based on
its own prime rate or cost of funds and may not reserve a contractual
right to change rates on outstanding balances at its discretion. In
addition, a savings association may not increase the rate on an
outstanding balance by changing the method used to determine that rate.
A savings association is permitted, however, to use a published prime
rate, such as that in the [Wall Street Journal]{.underline}, even if the
savings association's own prime rate is one of several rates used to
establish the published rate.

2\. [Publicly available]{.underline}. The index 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.

[Paragraph (b)(2)]{.underline}

1\. [Example]{.underline}. Assume that a consumer credit card account
has a balance of \$1,000 at a 5% promotional rate and that the savings
association also charges an annual percentage rate of 15% for purchases
and a penalty rate of 25%. If the consumer does not make payment by the
due date and the account agreement specifies that event as a trigger for
applying the penalty rate, the savings association may increase the
annual percentage rate on the \$1,000 from the 5% promotional rate to
the 15% annual percentage rate for purchases. The savings association
may not, however, increase the rate on the \$1,000 from the 5%
promotional rate to the 25% penalty rate, except as otherwise permitted
under § 535.24(b)(3).

[Paragraph (b)(3)]{.underline}

1\. [Example]{.underline}. Assume that the annual percentage rate
applicable to purchases on a consumer credit card account is increased
from 15% to 20% and that the account has an outstanding balance of
\$1,000 at the 15% rate. The payment due date on the account is the
twenty-fifth of the month. If the savings association has not received
the required minimum periodic payment due on March 15 on or before April
14, the savings association may increase the rate applicable to the
\$1,000 balance once the savings association has complied with the
notice requirements § 226.9(g) of this title.

[(c) Treatment of outstanding balances following rate
increase]{.underline}

1\. [Scope]{.underline}. This provision does not apply if the consumer
credit card account does not have an outstanding balance. This provision
also does not apply if a rate is increased pursuant to any of the
exceptions in § 535.24(b).

2\. [Category of transactions]{.underline}. This provision does not
apply to balances in categories of transactions other than the category
for which the savings association has increased the annual percentage
rate. For example, if a savings association increases the annual
percentage rate that applies to purchases but not the rate that applies
to cash advances, §§ 535.24(c)(1) and 535.(c)(2) apply to an outstanding
balance consisting of purchases but not an outstanding balance
consisting of cash advances.

[Paragraph (c)(1)]{.underline}

1\. [No less beneficial to the consumer]{.underline}. A savings
association may provide a method of paying the outstanding 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 outstanding balance in five years or longer
[or]{.underline} 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 § 535.24(c)(1)(ii). For
example, a savings association could more than double the percentage of
amounts owed included in the minimum payment so long as the minimum
payment does not result in amortization of the outstanding balance in
less than five years. Alternatively, a savings association could require
a consumer to make a minimum payment on the outstanding balance that
amortizes that balance in less than five years so long as the payment
does not include a percentage of the outstanding balance that is more
than twice the percentage included in the minimum payment before the
effective date of the increased rate.

[Paragraph (c)(1)(ii)]{.underline}

1\. [Required minimum periodic payment on other balances]{.underline}.
This paragraph addresses the required minimum periodic payment on the
outstanding balance. This paragraph does not limit or otherwise address
the savings association's ability to determine the amount of the minimum
periodic payment for other balances.

2\. [Example]{.underline}. 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 savings association
increases the annual percentage rate applicable to purchases on a
consumer credit card account from 15% to 20% and that the account has an
outstanding balance of \$1,000 at the 15% rate. Section 535.24(c)(1)(ii)
would permit the savings association to calculate the required minimum
periodic payment on the outstanding balance by adding fees and interest
charges to 2% of the outstanding balance.

[Paragraph (c)(2)]{.underline}

1\. [Fee or charge based solely on the outstanding balance]{.underline}.
You are prohibited from assessing a fee or charge based solely on an
outstanding balance. For example, a savings association is prohibited
from assessing a maintenance or similar fee based on an outstanding
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 an outstanding
balance.

[Section 535.25 -- Unfair fees for exceeding the credit limit due to
credit holds]{.underline}

1\. [General]{.underline}. Under § 535.25, a savings association may not
assess a fee for exceeding the credit limit if the credit limit would
not have been exceeded but for a hold placed on the available credit for
a consumer credit card account for a transaction that has been
authorized but has not yet been presented for settlement, if the amount
of the hold is in excess of the actual purchase or transaction amount
when the transaction is settled. Section 535.25 does not limit a savings
association from charging a fee for exceeding the credit limit in
connection with a particular transaction if the consumer would have
exceeded the credit limit due to other reasons, such as other
transactions that may have been authorized but not yet presented for
settlement, a payment that is returned, or if the purchase or
transaction amount for the transaction for which the hold was placed
would have also caused the consumer to exceed the credit limit.

2\. [Example of prohibition in connection with hold placed for same
transaction]{.underline}. Assume that a consumer credit card account has
a credit limit of \$2,000 and a balance of \$1,500. The consumer uses
the credit card to check into a hotel for an anticipated stay of five
days. When the consumer checks in, the hotel obtains authorization from
the savings association for a \$750 hold on the account to ensure there
is adequate available credit to cover the cost of the anticipated stay.
The consumer checks out of the hotel after three days, and the total
cost of the stay is \$450, which is charged to the consumer's credit
card account. Assuming that there is no other activity on the account,
the savings association is prohibited from assessing a fee for exceeding
the credit limit with respect to the \$750 hold. If, however, the total
cost of the stay charged to the account had been more than \$500, the
savings association would not be prohibited from assessing a fee for
exceeding the credit limit.

3\. [Example of prohibition in connection with hold placed for another
transaction]{.underline}. Assume that a consumer credit card account has
a credit limit of \$2,000 and a balance of \$1,400. The consumer uses
the credit card to check into a hotel for an anticipated stay of five
days. When the consumer checks in, the hotel obtains authorization from
the savings association for a \$750 hold on the account to ensure there
is adequate available credit to cover the cost of the anticipated stay.
While the hold remains in place, the consumer uses the credit card to
make a \$150 purchase. The consumer checks out of the hotel after three
days, and the total cost of the stay is \$450, which is charged to the
consumer's credit card account. Assuming that there is no other activity
on the account, the savings association is prohibited from assessing a
fee for exceeding the credit limit with respect to either the \$750 hold
or the \$150 purchase. If, however, the total cost of the stay charged
to the account had been more than \$450, the savings association would
not be prohibited from assessing a fee for exceeding the credit limit.

4\. [Example of prohibition when authorization and settlement amounts
are held for the same transaction]{.underline}. Assume that a consumer
credit card account has a credit limit of \$2,000 and a balance of
\$1,400. The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the hotel
obtains authorization from the savings association for a \$750 hold on
the account to ensure there is adequate available credit to cover the
cost of the anticipated stay. The consumer checks out of the hotel after
three days, and the total cost of the stay is \$450, which is charged to
the consumer's credit card account. When the hotel presents the \$450
transaction for settlement, it uses a different transaction code to
identify the transaction than it had used for the pre-authorization,
causing both the \$750 hold and the \$450 purchase amount to be
temporarily posted to the consumer's account at the same time, and the
consumer's balance to exceed the credit limit. Under these
circumstances, and assuming no other transactions, the savings
association is prohibited from assessing a fee for exceeding the credit
limit because the credit limit was exceeded solely due to the \$750
hold.

5\. [Example of permissible fee for exceeding the credit limit in
connection with a hold]{.underline}. Assume that a consumer has a credit
limit of \$2,000 and a balance of \$1,400 on a consumer credit card
account. The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the hotel
obtains authorization from the savings association for a \$750 hold on
the account to ensure there is adequate available credit to cover the
cost of the anticipated stay. While the hold remains in place, the
consumer uses the credit card to make a \$650 purchase. The consumer
checks out of the hotel after three days, and the total cost of the stay
is \$450, which is charged to the consumer's credit card account.
Notwithstanding the existence of the hold and assuming that there is no
other activity on the account, the savings association may charge the
consumer a fee for exceeding the credit limit with respect to the \$650
purchase because the consumer would have exceeded the credit limit even
if the hold had been for the actual amount of the hotel transaction.

[Section 535.26 -- Unfair balance computation method]{.underline}

[(a) General rule]{.underline}

1\. [Two-cycle method prohibited]{.underline}. A savings association 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\. [Example]{.underline}. 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. A consumer has a zero balance on March 1. The
consumer uses the credit card to make a \$500 purchase on March 15. The
consumer makes no other purchases and pays \$400 on the due date (April
25), leaving a \$100 balance. The savings association may charge
interest on the \$500 purchase from the start of the 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).

[Section 535.27 -- Unfair charging to the account of security deposits
and fees for the issuance or availability of credit]{.underline}

1\. [Initial credit limit for the account]{.underline}. For purposes of
this section, the initial credit limit is the limit in effect when the
account is opened.

[(a) Annual rule]{.underline}

1\. [Majority of the credit limit]{.underline}. 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
§ 535.27(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 twelve months after the date on which the
account is opened (consistent with § 535.27(b)).

[(b) Monthly rule]{.underline}

1\. [Adjustments of one dollar or less permitted]{.underline}. When
dividing amounts pursuant to § 535.27(b)(2), the savings association may
adjust amounts by one dollar or less. For example, if a savings
association is dividing \$125 over eleven billing cycles, the savings
association may charge \$12 for four months and \$11 for the remaining
seven months.

2\. [Example]{.underline}. Assume that a consumer credit card account
opened on January 1 has an initial credit limit of \$500 and that a
savings association charges to the account security deposits and fees
for the issuance or availability of credit that total \$250 during the
twelve months after the date on which the account is opened. 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 § 535.27(b), the
savings association may charge to the account no more than \$250 in
security deposits and fees for the issuance or availability of credit.
If it charges \$250, the savings association may charge as much as \$125
during the first billing cycle. If it charges \$125 during the first
billing cycle, it may then charge \$12 in any four billing cycles and
\$11 in any seven billing cycles during the year.

[(c) Fees for the issuance or availability of credit]{.underline}

1\. [Membership fees]{.underline}. 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]{.underline}. Fees for optional services in addition
to basic membership privileges in a credit or charge card account (for
example, travel insurance or card-registration services) are not fees
for the issuance or availability of credit if the basic account may be
opened without paying such fees.

3\. [One-time fees]{.underline}. Only non-periodic fees related to
opening an account (such as one-time membership or participation fees)
are fees for the issuance or availability of credit. Fees for reissuing
a lost or stolen card and statement reproduction fees are examples of
fees that are not fees for the issuance or availability of credit.

[Section 535.28 -- Deceptive firm offers of credit]{.underline}

[(a) Disclosure of criteria bearing on creditworthiness]{.underline}

1\. [Designed to call attention]{.underline}. Whether a disclosure has
been provided in a manner that is designed to call attention to the
nature and significance of required information depends on where the
disclosure is placed in the solicitation and how it is presented,
including whether the disclosure uses a typeface and type size that are
easy to read and uses boldface or italics. Placing the disclosure in a
footnote would not satisfy this requirement.

2\. [Form of electronic disclosures]{.underline}. Electronic disclosures
must be provided consistent with §§ 226.5a(a)(2)-8 and 226.5a(a)(2)-9 of
this title.

3\. [Multiple annual percentage rates or credit limits]{.underline}. For
purposes of this section, a firm offer of credit solicitation that
states an annual percentage rate or credit limit for a credit card
feature and a different annual percentage rate or credit limit for a
different credit card feature does not offer multiple annual percentage
rates or credit limits. For example, if a firm offer of credit
solicitation offers a 15% annual percentage rate for purchases and a 20%
annual percentage rate for cash advances, the solicitation does not
offer multiple annual percentage rates for purposes of this section.

4\. [Example]{.underline}. Assume that a savings association requests
from a consumer reporting agency a list of consumers with credit scores
of 650 or higher, so that the savings association can send those
consumers a firm offer of credit solicitation. The savings association
sends a solicitation to those consumers for a consumer credit card
account advertising "rates from 8.99% to 19.99%" and "credit limits from
\$1,000 to \$10,000." Before selection of the consumers for the offer,
however, the savings association determines that it will provide an
interest rate of 8.99% and a credit limit of \$10,000 only to those
consumers responding to the solicitation who are verified to have a
credit score of 650 or higher, who have a debt-to-income ratio below a
certain amount, and who meet other specific criteria bearing on
creditworthiness. Under § 535.28, this solicitation is deceptive unless
the savings association discloses, in a manner that is reasonably
understandable to the consumer and designed to call attention to the
nature and significance of the information, that, if the consumer is
approved for credit, the annual percentage rate and credit limit the
consumer will receive will depend on specific criteria bearing on the
consumer's creditworthiness. The savings association may satisfy this
requirement by using a typeface and type size that are easy to read and
stating in boldface in a manner that otherwise calls attention to the
nature and significance of the information: "**If you are approved for
credit, your annual percentage rate and/or credit limit will depend on
your credit history, income, and debts.**"

5\. [Applicability of criteria in disclosure]{.underline}. When making a
disclosure under this section, a savings association may only disclose
the criteria it uses in evaluating whether consumers who are approved
for credit will receive the lowest annual percentage rate or the highest
credit limit. For example, if a savings association does not consider
the consumer's debts when determining whether the consumer should
receive the lowest annual percentage rate or highest credit limit, the
disclosure must not refer to "debts."

**Subpart D -- Overdraft Service Practices**

[Section 535.32 -- Unfair overdraft service practices]{.underline}

[(a) Opt-out requirement]{.underline}

[(a)(1) General rule]{.underline}

1\. [Form, content and timing of disclosure]{.underline}. The form,
content and timing of the opt-out notice required to be provided under
paragraph (a) of this section are addressed under § 230.10 of this
title.

[(a)(3) Exceptions]{.underline}

[Paragraph (a)(3)(i)]{.underline}

1\. [Example of transaction amount exceeding authorization amount (fuel
purchase)]{.underline}. A consumer has \$30 in a deposit account. The
consumer uses a debit card to purchase fuel. Before permitting the
consumer to use the fuel pump, the merchant verifies the validity of the
card by obtaining authorization from the savings association for a \$1
transaction. The consumer purchases \$50 of fuel. If the savings
association pays the transaction, it would be permitted to assess a fee
or charge for paying the overdraft, even if the consumer has opted out
of the payment of overdrafts.

2\. [Example of transaction amount exceeding authorization amount
(restaurant)]{.underline}. A consumer has \$50 in a deposit account. The
consumer pays for a \$45 meal at a restaurant using a debit card. While
the restaurant may obtain authorization for the \$45 cost of the meal,
the consumer may add \$10 for a tip. If the savings association pays the
\$55 transaction (including the tip amount), it would be permitted to
assess a fee or charge for paying the overdraft, even if the consumer
has opted out of the payment of overdrafts.

[Paragraph (a)(3)(ii)]{.underline}

1\. [Example of transaction presented by paper-based means]{.underline}.
A consumer has \$50 in a deposit account. The consumer makes a \$60
purchase and presents his or her debit card for payment. The merchant
takes an imprint of the card. Later that day, the merchant submits a
sales slip with the card imprint to its processor for payment. If the
consumer's savings association pays the transaction, it would be
permitted to assess a fee or charge for paying the overdraft, even if
the consumer has opted out of the payment of overdrafts.

[(b) Debit holds]{.underline}

1\. [General]{.underline}. Under § 535.32(b), a savings association may
not assess an overdraft fee if the overdraft would not have occurred but
for a hold placed on funds in the consumer's account for a transaction
that has been authorized but has not yet been presented for settlement,
if the amount of the hold is in excess of the actual purchase or
transaction amount when the transaction is settled. Section 535.32(b)
does not limit a savings association from charging an overdraft fee in
connection with a particular transaction if the consumer would have
incurred an overdraft due to other reasons, such as other transactions
that may have been authorized but not yet presented for settlement, a
deposited check that is returned, or if the purchase or transaction
amount for the transaction for which the hold was placed would have also
caused the consumer to overdraw his or her account.

2\. [Example of prohibition in connection with hold placed for same
transaction]{.underline}. A consumer has \$50 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's savings association for a \$75 "hold"
on the account which exceeds the consumer's funds. The consumer
purchases \$20 of fuel. Under these circumstances, § 535.32(b) prohibits
the savings association from assessing a fee or charge in connection
with the debit hold because the actual amount of the fuel purchase did
not exceed the funds in the consumer's account. However, if the consumer
had purchased \$60 of fuel, the savings association could assess a fee
or charge for an overdraft because the transaction exceeds the funds in
the consumer's account, unless the consumer has opted out of the payment
of overdrafts under § 535.32(a).

3\. [Example of prohibition in connection with hold placed for another
transaction]{.underline}. A consumer has \$100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's savings association for a \$75 "hold"
on the account. The consumer purchases \$20 of fuel, but the transaction
is not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws \$75 at
an ATM. Under these circumstances, § 535.32(b) prohibits the savings
association from assessing a fee or charge for paying an overdraft with
respect to the \$75 withdrawal because the overdraft was caused solely
by the \$75 hold.

4\. [Example of prohibition when authorization and settlement amounts
are held for the same transaction]{.underline}. A consumer has \$100 in
his deposit account, and uses his debit card to purchase \$50 worth of
fuel. Before permitting the consumer to use the fuel pump, the merchant
obtains authorization from the consumer's savings association for a \$75
"hold" on the account. The consumer purchases \$50 of fuel. When the
merchant presents the \$50 transaction for settlement, it uses a
different transaction code to identify the transaction than it had used
for the pre-authorization, causing both the \$75 hold and the \$50
purchase amount to be temporarily posted to the consumer's account at
the same time, and the consumer's account to be overdrawn. Under these
circumstances, and assuming no other transactions, § 535.32(b) prohibits
the savings association from assessing a fee or charge for paying an
overdraft because the overdraft was caused solely by the \$75 hold.

5\. [Example of permissible overdraft fees in connection with a
hold]{.underline}. A consumer has \$100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's savings association for a \$75 "hold"
on the account. The consumer purchases \$35 of fuel, but the transaction
is not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws \$75 at
an ATM. Notwithstanding the existence of the hold, and assuming the
consumer has not opted out of the payment of overdrafts under
§ 535.32(a), the consumer's savings association may charge the consumer
an overdraft fee for the \$75 ATM withdrawal, because the consumer would
have incurred the overdraft even if the hold had been for the actual
amount of the fuel purchase.

\* \* \* \* \*

Dated: May 1, 2008.

By the Office of Thrift Supervision

**John M. Reich,**

*Director.*

BILLING CODE 6720-01-P

\* \* \* \* \*

**National Credit Union Administration**

12 CFR Part 706

For the reasons discussed in the joint preamble, the National Credit
Union Administration proposes to amend part 706 of title 12 of the Code
of Federal Regulations as follows:

**PART 706 -- UNFAIR OR DECEPTIVE ACTS OR PRACTICES**

1\. The authority citation for part 706 continues to read as follows:

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

2\. Revise the part heading for part 706 to read as shown above.

3\. Revise part 706 to read as follows:

**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 State exemptions.

706.16-703.20 \[Reserved\]

**Subpart C--Consumer Credit Card Account Practices**

706.21 Definitions.

706.22 Unfair time to make payments.

706.23 Unfair allocation of payments .

706.24 Unfair application of increased annual percentage rates to
outstanding balances.

706.25 Unfair fees for exceeding the credit limit caused by credit
holds.

706.26 Unfair balance computation method.

706.27 Unfair financing of security deposits and fees for the issuance
or availability of credit.

706.28 Deceptive firm offers of credit.

706.29-706.30 \[Reserved\]

**Subpart D--Overdraft Service Practices**

706.31 Definitions.

706.32 Unfair practices involving overdraft services.

APPENDIX TO PART 706 -- Official Staff Interpretations

**Subpart A--General Provisions**

**§ 706.1 Authority, purpose and scope.**

\(a\) [Authority]{.underline}. This part is issued by NCUA under section
18(f) of the Federal Trade Commission Act, 15 U.S.C. 57a(f).

\(b\) [Purpose.]{.underline} 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). This part defines
and contains requirements prescribed for the purpose of preventing
specific unfair or deceptive acts or practices of federal credit unions.
The prohibitions in this part do not limit NCUA's authority to enforce
the FTC Act with respect to any other unfair or deceptive acts or
practices.

\(c\) [Scope.]{.underline} This part applies to federal credit unions.

**§§ 706.2-706.10 \[Reserved\]**

**Subpart B--Consumer Credit Practices**

**§ 706.11 Definitions.**

For purposes of this subpart, the following definitions apply:

[Antique]{.underline} means any item over one hundred years of age,
including items that have been repaired or renovated without changing
their original form or character.

[Consumer]{.underline} 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.

[Cosigner]{.underline} means a natural person who renders himself or
herself liable for the obligation of another person without receiving
goods, services, or money in return for the credit obligation, or, in
the case of an open-end credit obligation, without receiving the
contractual right to obtain extensions of credit under the obligation.
The term 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 whose signature is required on a credit obligation
to perfect a security interest pursuant to state law. A person is a
cosigner within the meaning of this definition whether or not he or she
is designated as such on a credit obligation.

[Debt]{.underline} means money that is due or alleged to be due from one
person to another.

[Earnings]{.underline} mean compensation paid or payable to an
individual or for his or her account for personal services rendered or
to be rendered by him or her, whether denominated as wages, salary,
commission, bonus, or otherwise, including periodic payments pursuant to
a pension, retirement, or disability program.

[Household goods]{.underline} mean clothing, furniture, appliances, one
radio and one television, linens, china, crockery, kitchenware, and
personal effects, including wedding rings of the consumer and his or her
dependents, provided that the following are not included within the
scope of the term "household goods:"

> \(1\) Works of art;
>
> \(2\) Electronic entertainment equipment, except one television and
> one radio;
>
> \(3\) Items acquired as antiques; and
>
> \(4\) Jewelry, except wedding rings.

[Obligation]{.underline} means an agreement between a consumer and a
federal credit union.

[Person]{.underline} means an individual, corporation, or other business
organization.

**§ 706.12 Unfair credit contract provisions.**

In connection with the extension of credit to consumers, it is an unfair
act or practice for a federal credit union, directly or indirectly, to
take or receive from a consumer an obligation that:

\(a\) Constitutes or contains 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.

\(b\) Constitutes or contains 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.

\(c\) Constitutes or contains an assignment of wages or other earnings
unless:

\(1\) The assignment by its terms is revocable at the will of the
debtor, or

\(2\) 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.

\(d\) Constitutes or contains a nonpossessory security interest in
household goods other than a purchase money security interest.

**§ 706.13 Unfair or deceptive cosigner practices.**

\(a\) [Prohibited practices]{.underline}. In connection with the
extension of credit to consumers, it is:

\(1\) A deceptive act or practice for a federal credit union, directly
or indirectly, to misrepresent the nature or extent of cosigner
liability to any person.

\(2\) An unfair act or practice for a federal credit union, directly or
indirectly, to obligate a cosigner unless the cosigner is informed prior
to becoming obligated, which in the case of open-end credit means prior
to the time that the agreement creating the cosigner's liability for
future charges is executed, of the nature of his or her liability as
cosigner.

\(b\) [Disclosure requirement]{.underline}.

\(1\) To comply with the cosigner information requirement of paragraph
(a)(2), a clear and conspicuous disclosure statement shall be given in
writing to the cosigner prior to becoming obligated. The disclosure
statement must contain only the following statement, or one which is
substantially similar, and shall either be a separate document or
included in the documents evidencing the consumer credit obligation.

NOTICE TO 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.
>
> This notice is not the contract that makes you liable for the debt.

\(2\) If the notice to cosigner is a separate document, nothing other
than the following items may appear with the notice. Items (i) through
(v) may not be part of the narrative portion of the notice to cosigner.

> \(i\) The name and address of the federal credit union;
>
> \(ii\) An identification of the debt to be cosigned, e.g., a loan
> identification number;
>
> \(iii\) The amount of the loan;
>
> \(iv\) The date of the loan;
>
> \(v\) A signature line for a cosigner to acknowledge receipt of the
> notice; and
>
> \(vi\) To the extent permitted by state law, a cosigner notice
> required by state law may be included in the paragraph (b)(1) notice.

\(3\) To the extent the notice to cosigner specified in paragraph (b)(1)
refers to an action against a cosigner that is not permitted by state
law, the notice to cosigner may be modified.

**§ 706.14 Unfair Late charges.**

\(a\) 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, which payment is otherwise a full payment for the
applicable period and is paid on its due date or within an applicable
grace period, when the only delinquency is attributable to late fee(s)
or delinquency charge(s) assessed on earlier installment(s).

\(b\) For purposes of this section, "collecting a debt" means 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 a consumer
debt.

**§ 706.15 State exemptions.**

\(a\) If, upon application to the NCUA by an appropriate state agency,
the NCUA determines that:

\(1\) there is a state requirement or prohibition in effect that applies
to any transaction to which a provision of this rule applies; and

\(2\) the state requirement or prohibition affords a level of protection
to consumers that is substantially equivalent to, or greater than, the
protection afforded by this rule; then that provision of this rule will
not be in effect in the state to the extent specified by the NCUA in its
determination, for as long as the state administers and enforces the
state requirement or prohibition effectively.

\(b\) States that received an exemption from the Federal Trade
Commission's Credit Practices Rule prior to September 17, 1987, are not
required to reapply to NCUA for an exemption under subparagraph (a) of
this section provided that the state forwards a copy of its exemption
determination to the appropriate Regional Office. NCUA will honor the
exemption for as long as the state administers and enforces the state
requirement or prohibition effectively. Any state seeking a greater
exemption than that granted to it by the Federal Trade Commission must
apply to NCUA for the exemption.

**§§ 706.16-706.20 \[Reserved\]**

**Subpart C -- Consumer Credit Card Account Practices**

**§ 706.21 Definitions.**

For purposes of this subpart, the following definitions apply:

[Annual percentage rate]{.underline} 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.

[Consumer]{.underline} 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]{.underline} 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 "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
check-guarantee cards or by debit cards;

\(3\) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines; and

\(4\) Lines of credit accessed solely by account numbers.

[Promotional rate]{.underline} means:

\(1\) Any annual percentage rate applicable to one or more balances or
transactions on a consumer credit card account for a specified period of
time that is lower than the annual percentage rate that will be in
effect at the end of that period; or

\(2\) Any annual percentage rate applicable to one or more transactions
on a consumer credit card account that is lower than the annual
percentage rate that applies to other transactions of the same type.

**§ 706.22 Unfair time to make payments.**

\(a\) [General rule]{.underline}. 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.

\(b\) [Safe harbor]{.underline}. A federal credit union provides a
reasonable amount of time to make a payment if it has adopted reasonable
procedures to ensure that periodic statements specifying the payment due
date are mailed or delivered to consumers at least 21 days prior to the
payment due date.

\(c\) [Exception for grace periods]{.underline}. Paragraph (a) of this
section does not apply to any time period provided by the federal credit
union within which the consumer may repay any portion of the credit
extended without incurring an additional finance charge.

**§ 706.23 Unfair allocation of payments.**

\(a\) [General rule for accounts with different annual percentage rates
on different balances.]{.underline} Except as provided in paragraph (b)
of this section, when different annual percentage rates apply to
different balances on a consumer credit card account, the federal credit
union must 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 the consumer than one of the following methods:

\(1\) The amount 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;

\(2\) Equal portions of the amount are allocated to each balance; or

\(3\) The amount is allocated among the balances in the same proportion
as each balance bears to the total outstanding balance.

\(b\) [Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}.

\(1\) [Rule regarding payment allocation]{.underline}.

\(i\) In general, when a consumer credit card account has one or more
balances at a promotional rate or balances on which interest is
deferred, the federal credit union must allocate any amount paid by the
consumer in excess of the required minimum periodic payment among the
other balances on the account consistent with paragraph (a) of this
section. If any amount remains after such allocation, the federal credit
union must allocate that amount among the promotional rate balances or
the deferred interest balances consistent with paragraph (a) of this
section.

\(ii\) [Exception for deferred interest balances]{.underline}.
Notwithstanding paragraph (b)(1)(i) of this section, the federal credit
union may allocate the entire amount paid by the consumer in excess of
the required minimum periodic payment to a balance on which interest is
deferred during the two billing cycles immediately preceding expiration
of the period during which interest is deferred.

\(2\) [Rule regarding grace periods]{.underline}. A federal credit union
must not require a consumer to repay any portion of a promotional rate
balance or deferred interest balance on a consumer credit card account
in order to receive any time period offered by the federal credit union
in which to repay other credit extended without incurring finance
charges, provided that the consumer is otherwise eligible for such a
time period.

**§ 706.24 Unfair application of increased annual percentage rates to
outstanding balances.**

\(a\) [Prohibition on increasing annual percentage rates on outstanding
balances.]{.underline}

\(1\) [General rule]{.underline}. Except as provided in paragraph (b) of
this section, a federal credit union must not increase the annual
percentage rate applicable to any outstanding balance on a consumer
credit card account.

\(2\) [Outstanding balance]{.underline}. For purposes of this section,
"outstanding balance" means the amount owed on a consumer credit card
account at the end of the fourteenth day after the federal credit union
provides a notice required by 12 CFR 226.9(c) or (g).

\(b\) [Exceptions]{.underline}. Paragraph (a) of this section does not
apply where the annual percentage rate is increased due to:

\(1\) The operation of an index or formula that is not under the federal
credit union's control and is available to the general public;

\(2\) The expiration or loss of a promotional rate, provided that, if a
promotional rate is lost, the federal credit union does not increase the
annual percentage rate to a rate that is greater than the annual
percentage rate that would have applied after expiration of the
promotional rate; or

\(3\) The federal credit union not receiving the consumer's required
minimum periodic payment within 30 days after the due date for that
payment.

\(c\) [Treatment of outstanding balances following rate
increase]{.underline}.

\(1\) [Payment of outstanding balances]{.underline}. When a federal
credit union increases the annual percentage rate applicable to a
category of transactions on a consumer credit card account, and the
federal credit union is prohibited by this section from applying the
increased rate to outstanding balances in that category, the federal
credit union must provide the consumer with a method of paying the
outstanding balance that is no less beneficial to the consumer than one
of the following methods:

\(i\) An amortization period for the outstanding balance of no less than
five years, starting from the date on which the increased annual
percentage rate went into effect; or

\(ii\) A required minimum periodic payment on the outstanding balance
that includes a percentage of that balance that is no more than twice
the percentage included before the date on which the increased annual
percentage rate went into effect.

\(2\) [Fees and charges on outstanding balance]{.underline}. When a
federal credit union increases the annual percentage rate applicable to
a category of transactions on a consumer credit card account, and the
federal credit union is prohibited by this section from applying the
increased rate to outstanding balances in that category, the federal
credit union must not assess any fee or charge based solely on the
outstanding balance.

**§ 706.25 Unfair fees for exceeding the credit limit caused by credit
holds.**

A federal credit union must not assess 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 on any portion of the available
credit on the account that is in excess of the actual purchase or
transaction amount.

**§ 706.26 Unfair balance computation method.**

\(a\) [General rule]{.underline}. Except as provided in paragraph (b) of
this section, a federal credit union must not impose finance charges on
outstanding balances on a consumer credit card account based on balances
for days in billing cycles that precede the most recent billing cycle.

\(b\) [Exceptions]{.underline}. Paragraph (a) of this section does not
apply to:

\(1\) The assessment of deferred interest; or

\(2\) Adjustments to finance charges following the resolution of a
billing error dispute under 12 CFR 226.12(b) or 12 CFR 226.13.

**§ 706.27 Unfair financing of** **security deposits and fees for the
issuance or availability of credit.**

\(a\) [Annual rule.]{.underline} During the period beginning with the
date on which a consumer credit card account is opened and ending twelve
months from that date, a federal credit union must not charge to the
account security deposits or fees for the issuance or availability of
credit if the total amount of such security deposits and fees
constitutes a majority of the credit limit for the account.

\(b\) [Monthly rule.]{.underline} If the total amount of security
deposits and fees for the issuance or availability of credit charged to
a consumer credit card account during the period beginning with the date
on which a consumer credit card account is opened and ending twelve
months from that date constitutes more than 25 percent of the initial
credit limit for the account:

\(1\) During the first billing cycle after the account is opened, the
federal credit union must not charge security deposits and fees for the
issuance or availability of credit that total more than 25 percent of
the initial credit limit for the account; and

\(2\) In each of the eleven billing cycles following the first billing
cycle, the federal credit union must not charge to the account more than
one eleventh of the total amount of any additional security deposits and
fees for the issuance of availability of credit in excess of 25 percent
of the initial credit limit for the account.

\(c\) [Fees for the issuance or availability of credit]{.underline}. For
purposes of paragraphs (a) and (b) of this section, fees for the
issuance or availability of credit include:

\(1\) 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

\(2\) Any non-periodic fee that relates to opening an account.

**§ 706.28 Deceptive firm offers of credit.**

\(a\) [Disclosure of criteria bearing on creditworthiness]{.underline}.
If a federal credit union offers a range or multiple annual percentage
rates or credit limits when making a solicitation for a firm offer of
credit for a consumer credit card account, and the annual percentage
rate or credit limit that consumers approved for credit will receive
depends on specific criteria bearing on creditworthiness, the federal
credit union must disclose the types of criteria in the solicitation.
The disclosure must be provided in a manner that is reasonably
understandable to consumers and is designed to call attention to the
nature and significance of the information regarding the eligibility
criteria for the lowest annual percentage rate or highest credit limit
stated in the solicitation. If presented in a manner that calls
attention to the nature and significance of the information, the
following disclosure may be used to satisfy the requirements of this
section, as applicable: "If you are approved for credit , your annual
percentage rate and/or credit limit will depend on your credit history,
income, and debts."

\(b\) [Firm offer of credit defined]{.underline}. For purposes of this
section, "firm offer of credit" has the same meaning as "firm offer of
credit or insurance" in section 603(l) of the Fair Credit Reporting Act
(15 U.S.C. 1681a(l)).

**§§ 706.29-706.30 \[Reserved\]**

**Subpart D -- Overdraft Services**

**§ 706.31 Definitions.**

For purposes of this subpart, the following definitions apply:

[Account]{.underline} means a share account at a federal credit union
that is held by or offered to a consumer, and has the same meaning as in
§ 707.2(a) of this chapter.

[Consumer]{.underline} means a member who holds an account primarily for
personal, family, or household purposes.

[Overdraft service]{.underline} means a service under which a federal
credit union charges a fee for paying a transaction, including a check
or other item, that overdraws an account. The term "overdraft service"
does not include any payment of overdrafts pursuant to --

> \(1\) A line of credit subject to the Federal Reserve Board's
> Regulation Z, 12 CFR part 226, including transfers from a credit card
> account, home equity line of credit, or overdraft line of credit; or
>
> \(2\) A service that transfers funds from another account of the
> consumer.

**§ 706.32 Unfair practices involving overdraft services.**

\(a\) [Opt-out requirement]{.underline}.

\(1\) [General rule]{.underline}. A federal credit union must not assess
a fee or charge on a consumer's account in connection with an overdraft
service, unless the federal credit union provides the consumer the right
to opt out of the federal credit union's payment of overdrafts and a
reasonable opportunity to exercise that opt-out, and the consumer has
not opted out. The consumer must be given notice and an opportunity to
opt out before the federal credit union's assessment of any fee or
charge for an overdraft, and subsequently at least once during or for
any periodic statement cycle in which any fee or charge for paying an
overdraft is assessed. The notice requirements in this paragraph (a)(1)
and (a)(2) do not apply if the consumer has opted out, unless the
consumer subsequently revokes the opt-out.

\(2\) [Partial opt-out]{.underline}. A federal credit union must provide
a consumer the option of opting out only for the payment of overdrafts
at automated teller machines and for point-of-sale transactions
initiated by a debit card, in addition to the choice of opting out of
the payment of overdrafts for all transaction.

\(3\) [Exceptions]{.underline}. Notwithstanding a consumer's election to
opt out under paragraphs (a)(1) or (a)(2) of this section, a federal
credit union may assess a fee or charge on a consumer's account for
paying a debit card transaction that overdraws an account if:

\(i\) There were sufficient funds in the consumer's account at the time
the authorization request was received, but the actual purchase amount
for that transaction exceeds the amount that had been authorized; or

\(ii\) The transaction is presented for payment by paper-based means,
rather than electronically through a card terminal, and the federal
credit union has not previously authorized the transaction.

\(4\) [Time to comply with opt-out]{.underline}. A federal credit union
must comply with a consumer's opt-out request as soon as reasonably
practicable after the federal credit union receives it.

\(5\) [Continuing right to opt-out]{.underline}. A consumer may opt out
of the federal credit union's future payment of overdrafts at any time.

\(6\) [Duration of opt-out]{.underline}. A consumer's opt-out is
effective unless subsequently revoked by the consumer.

\(b\) [Debit holds]{.underline}. A federal credit union shall not assess
a fee or charge on a consumer's account for an overdraft service if the
consumer's overdraft would not have occurred but for a hold placed on
funds in the consumer's account that is in excess of the actual purchase
or transaction amount.

**APPENDIX TO PART 706 -- OFFICIAL STAFF INTERPRETATIONS**

SUBPART C -- CONSUMER CREDIT CARD ACCOUNT PRACTICES

[Section 706.21 -- Definitions]{.underline}

[(d) Promotional rate]{.underline}

[Paragraph (d)(1)]{.underline}

1\. [Rate in effect at the end of the promotional period]{.underline}.
If the annual percentage rate that will be in effect at the end of the
specified period of time is a variable rate, the rate in effect at the
end of that period for purposes of § 706.21(d)(1) is the rate that would
otherwise apply if the promotional rate was not offered, consistent with
any applicable accuracy requirements under 12 CFR part 226.

[Paragraph (d)(2)]{.underline}

1\. [Example]{.underline}. A federal credit union generally offers a 15%
annual percentage rate for purchases on a consumer credit card account.
For purchases made during a particular month, however, the creditor
offers a rate of 5% that will apply until the consumer pays those
purchases in full. Under § 706.21(d)(2), the 5% rate is a "promotional
rate" because it is lower than the 15% rate that applies to other
purchases.

[Section 706.22 -- Unfair Time to Make Payment]{.underline}

[(a) General rule]{.underline}

1\. [Treating a payment as late for any purpose]{.underline}. 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.

2\. [Reasonable amount of time to make payment]{.underline}. 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), 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 prior to the
payment due date.

[(b) Safe Harbor]{.underline}

1\. [Reasonable procedures]{.underline}. A federal credit union is not
required to determine the specific date on which periodic statements are
mailed or delivered to each individual consumer. A federal credit union
provides a reasonable amount of time to make a payment if the federal
credit union has adopted reasonable procedures designed to ensure that
periodic statements are mailed or delivered to consumers no later than,
for example, three days after the closing date of the billing cycle and
the payment due date on the periodic statement is no less than 24 days
after the closing date of the billing cycle.

2 [Payment due date]{.underline}. For purposes of § 706.22(b), "payment
due date" means the date by which the federal credit union requires the
consumer to make payment to avoid being treated as late for any purpose,
except as provided in § 706.22(c).

[Section 706.23 Unfair Allocation of Payments]{.underline}

1\. [Minimum periodic payment]{.underline}. This section addresses the
allocation of amounts paid by the consumer in excess of the minimum
periodic payment required by the federal credit union. This section does
not limit or otherwise address the federal credit union's ability to
determine the amount of the minimum periodic payment or how that payment
is allocated.

2\. [Adjustments of one dollar or less permitted]{.underline}. When
allocating payments, the federal credit union may adjust amounts by one
dollar or less. For example, if a federal credit union is allocating
\$100 equally among three balances, the federal credit union may apply
\$34 to one balance and \$33 to the others. Similarly, if a federal
credit union is splitting \$100.50 between two balances, the federal
credit union may apply \$50 to one balance and \$50.50 to another.

[(a) General rule for accounts with different annual percentage rates on
different balances]{.underline}

1\. [No less beneficial to the consumer]{.underline}. A federal credit
union may allocate payments using a method that is different from the
methods listed in § 706.23(a) 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 than a listed method if it results in
the assessment of the same or a lesser amount of interest charges than
would be assessed under any of the listed methods. For example, a
federal credit union may not allocate the entire amount paid by the
consumer in excess of the required minimum periodic payment to the
balance with the lowest annual percentage rate because this method would
result in a higher assessment of interest charges than any of the
methods listed in § 706.23(a).

2\. [Example of payment allocation method that is no less beneficial to
consumers than a method listed in § 706.23(a)]{.underline}. Assume that
a consumer's account has a cash advance balance of \$500 at annual
percentage rate of 15% and a purchase balance of \$1,500 at an annual
percentage rate of 10% and that the consumer pays \$555 in excess of the
required minimum periodic payment. A federal credit union could allocate
one-third of this amount (\$185) to the cash advance balance and
two-thirds (\$370) to the purchase balance even though this is not a
method listed in § 706.23(a) because the federal credit union is
applying more of the amount to the balance with the highest annual
percentage rate, with the result that the consumer will be assessed less
in interest charges, than would be the case under the pro rata
allocation method in § 706.23(a)(3). [See]{.underline} comment
23(a)(3)-1.

[Paragraph (a)(1)]{.underline}

1\. [Examples of allocating first to the balance with the highest annual
percentage rate]{.underline}.

\(A\) 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. None of the
minimum periodic payment is allocated to the cash advance balance. 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.

\(B\) 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.

[Paragraph (a)(2)]{.underline}

1\. [Example of equal portion method]{.underline}. 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 \$555 in excess of the
required minimum periodic payment. A federal credit union using this
method would allocate \$278 to the cash advance balance and \$277 to the
purchase balance, or vice versa.

[Paragraph (a)(3)]{.underline}

1\. [Example of pro rata method]{.underline}. 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 \$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.

[(b) Special rules for accounts with promotional rate balances or
deferred interest balances]{.underline}

[Paragraph (b)(1)(i)]{.underline}

1\. [Examples of special rule regarding payment allocation for accounts
with promotional rate balances or deferred interest
balances]{.underline}.

\(A\) A consumer credit card account has a cash advance balance of \$500
at an annual percentage rate of 15%, a purchase balance of \$1,500 at an
annual percentage rate of 10%, and a transferred balance of \$3,000 at a
promotional rate of 5%. The consumer pays \$800 in excess of the
required minimum periodic payment. The federal credit union must
allocate the \$800 between the cash advance and purchase balances,
consistent with § 706.23(a), and apply nothing to the transferred
balance.

\(B\) A consumer credit card account has a cash advance balance of \$500
at an annual percentage rate of 15%, a balance of \$1,500 on which
interest is deferred, and transferred balance of \$3,000 at a
promotional rate of 5%. The consumer pays \$800 in excess of the
required minimum periodic payment. None of the minimum periodic payment
is allocated to the cash advance balance. The federal credit union must
allocate \$500 to pay off the cash advance balance before allocating the
remaining \$300 among the balance on which interest is deferred and the
transferred balance, consistent with § 706.23(a).

[Paragraph (b)(1)(ii)]{.underline}

1\. [Examples of exception for deferred interest balances]{.underline}.
Assume that on January 1, a consumer uses a credit card to make a
\$1,000 purchase on which interest is deferred until June 30. If this
amount is not paid in full by June 30, all interest accrued during the
six-month period will be charged to the account. The billing cycle for
this credit card begins on the first day of the month and ends on the
last day of the month. Each month from January through June, the
consumer uses the credit card to make \$200 in purchases on which
interest is not deferred.

\(A\) The consumer pays \$300 in excess of the minimum periodic payment
each month from January through June. None of the minimum periodic
payment is applied to the deferred interest balance or the purchase
balance. For the January, February, March, and April billing cycles, the
federal credit union must allocate \$200 to the purchase balance and
\$100 to the deferred interest balance. For the May and June billing
cycles, however, the federal credit union has the option of allocating
the entire \$300 to the deferred interest balance, which will result in
that balance being paid in full before the deferred interest period
expires on June 30. In this example, the interest that accrued between
January 1 and June 30 will not be assessed to the consumer's account.

\(B\) The consumer pays \$200 in excess of the minimum periodic payment
each month from January through June. None of the minimum periodic
payment is applied to the deferred interest balance or the purchase
balance. For the January, February, March, and April billing cycles, the
federal credit union must allocate the entire \$200 to the purchase
balance. For the May and June billing cycles, however, the federal
credit union has the option to allocate the entire \$200 to the deferred
interest balance, which will result in that balance being reduced to
\$600 before the deferred interest period expires on June 30. In this
example, the interest that accrued between January 1 and June 30 will be
assessed to the consumer's account.

[Paragraph (b)(2)]{.underline}

1\. [Example of special rule regarding grace periods for accounts with
promotional rate balances or deferred interest balances]{.underline}. A
federal credit union offers a promotional rate on balance transfers and
a higher rate on purchases. The federal credit union also offers a grace
period under which consumers who pay their balances in full by the due
date are not charged interest on purchases. A consumer who has paid the
balance for the prior billing cycle in full by the due date transfers a
balance of \$2,000 and makes a purchase of \$500. Because the federal
credit union offers a grace period, the federal credit union must
provide a grace period on the \$500 purchase if the consumer pays that
amount in full by the due date, even though the \$2,000 balance at the
promotional rate remains outstanding.

[Section 706.24 Unfair Application of Increased Annual Percentage Rates
to Outstanding Balances]{.underline}

[(a) Prohibition against increasing annual percentage rates on
outstanding balances]{.underline}

1\. [Example]{.underline}. Assume that on December 30 a consumer credit
card account has a balance of \$1,000 at an annual percentage rate of
10%. On December 31, the federal credit union mails or delivers a notice
required by 12 CFR 226.9(c) informing the consumer that the annual
percentage rate will increase to 15% on February 15. The consumer uses
the account to make \$2,000 in purchases on January 10 and \$1,000 in
purchases on January 20. Assuming no other transactions, the outstanding
balance for purposes of § 706.24 is the \$3,000 balance as of the end of
the day on January 14. Therefore, under § 706.24(a), the federal credit
union cannot increase the annual percentage rate applicable to that
balance. The federal credit union can apply the 15% rate to the \$1,000
in purchases made on January 20 but, consistent with 12 CFR 226.9(c),
the federal credit union cannot do so until February 15.

2\. [Reasonable procedures]{.underline}. A federal credit union is not
required to determine the specific date on which a notice required by 12
CFR 226.9(c) or (g) was provided. For purposes of § 706.24(a)(2), if the
federal credit union has adopted reasonable procedures designed to
ensure that notices required by 12 CFR 226.9(c) or (g) are provided to
consumers no later than, for example, three days after the event giving
rise to the notice, the outstanding balance is the balance at the end of
the seventeenth day after such event.

[(b) Exceptions]{.underline}

[Paragraph (b)(1)]{.underline}

1\. [External index]{.underline}. A federal credit union may increase
the annual percentage rate on an outstanding balance if the increase is
based on an index outside the federal credit union's control. A federal
credit union may not increase the rate on an outstanding balance based
on its own prime rate or cost of funds and may not reserve a contractual
right to change rates on outstanding balances at its discretion. In
addition, a federal credit union may not increase the rate on an
outstanding balance by changing the method used to determine that rate.
A federal credit union is permitted, however, to use a published prime
rate, such as that in the [Wall]{.underline} [Street]{.underline}
[Journal]{.underline}, even if the federal credit union's own prime rate
is one of several rates used to establish the published rate.

2\. [Publicly available]{.underline}. The index 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.

[Paragraph (b)(2)]{.underline}

1\. [Example]{.underline}. Assume that a consumer credit card account
has a balance of \$1,000 at a 5% promotional rate and that the federal
credit union also charges an annual percentage rate of 15% for purchases
and a penalty rate of 25%. If the consumer does not make payment by the
due date and the account agreement specifies that event as a trigger for
applying the penalty rate, the federal credit union may increase the
annual percentage rate on the \$1,000 from the 5% promotional rate to
the 15% annual percentage rate for purchases. The federal credit union
may not, however, increase the rate on the \$1,000 from the 5%
promotional rate to the 25% penalty rate, except as otherwise permitted
under § 706.24(b)(3).

[Paragraph (b)(3)]{.underline}

1\. [Example]{.underline}. Assume that the annual percentage rate
applicable to purchases on a consumer credit card account is increased
from 10% to 15% and that the account has an outstanding balance of
\$1,000 at the 10% rate. The payment due date on the account is the
twenty-fifth of the month. If the federal credit union has not received
the required minimum periodic payment due on March 15 on or before April
14, the federal credit union may increase the rate applicable to the
\$1,000 balance once the federal credit union has complied with the
notice requirements in 12 CFR 226.9(g).

[(c) Treatment of outstanding balances following rate
increase]{.underline}

1\. [Scope]{.underline}. This provision does not apply if the consumer
credit card account does not have an outstanding balance. This provision
also does not apply if a rate is increased pursuant to any of the
exceptions in § 706.24(b).

2\. [Category of transactions]{.underline}. This provision does not
apply to balances in categories of transactions other than the category
for which the federal credit union has increased the annual percentage
rate. For example, if a federal credit union increases the annual
percentage rate that applies to purchases but not the rate that applies
to cash advances, § 706.24(c)(1) and (2) apply to an outstanding balance
consisting of purchases but not an outstanding balance consisting of
cash advances.

[Paragraph (c)(1)]{.underline}

1\. [No less beneficial to the consumer]{.underline}. A federal credit
union may provide a method of paying the outstanding 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 outstanding balance in five years or longer
[or]{.underline} 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 § 706.24(c)(1)(ii). For
example, a federal credit union could more than double the percentage of
amounts owed included in the minimum payment so long as the minimum
payment does not result in amortization of the outstanding balance in
less than five years. Alternatively, a federal credit union could
require a consumer to make a minimum payment on the outstanding balance
that amortizes that balance in less than five years so long as the
payment does not include a percentage of the outstanding balance that is
more than twice the percentage included in the minimum payment before
the effective date of the increased rate.

[Paragraph (c)(1)(ii)]{.underline}

1\. [Required minimum periodic payment on other balances]{.underline}.
This paragraph addresses the required minimum periodic payment on the
outstanding balance. This paragraph does not limit or otherwise address
the federal credit union's ability to determine the amount of the
minimum periodic payment for other balances.

2\. [Example]{.underline}. 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 federal credit union
increases the annual percentage rate applicable to purchases on a
consumer credit card account from 10% to 15% and that the account has an
outstanding balance of \$1,000 at the 10% rate. Section 706.24(c)(1)(ii)
would permit the federal credit union to calculate the required minimum
periodic payment on the outstanding balance by adding fees and interest
charges to 2% of the outstanding balance.

[Paragraph (c)(2)]{.underline}

1\. [Fee or charge based solely on the outstanding balance]{.underline}.
A federal credit union is prohibited from assessing a fee or charge
based solely on an outstanding balance. For example, a federal credit
union is prohibited from assessing a maintenance or similar fee based on
an outstanding 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 an
outstanding balance.

[Section 706.25 -- Unfair Fees for Exceeding the Credit Limit Caused By
Credit Holds]{.underline}

1\. [General]{.underline}. Under § 706.25, a federal credit union may
not assess a fee for exceeding the credit limit if the credit limit
would not have been exceeded but for a hold placed on the available
credit for a consumer credit card account for a transaction that has
been authorized but has not yet been presented for settlement, if the
amount of the hold is in excess of the actual purchase or transaction
amount when the transaction is settled. Section 706.25 does not limit a
federal credit union from charging a fee for exceeding the credit limit
in connection with a particular transaction if the consumer would have
exceeded the credit limit due to other reasons, such as other
transactions that may have been authorized but not yet presented for
settlement, a payment that is returned, or if the purchase or
transaction amount for the transaction for which the hold was placed
would have also caused the consumer to exceed the credit limit.

2\. [Example of prohibition in connection with hold placed for same
transaction]{.underline}. Assume that a consumer credit card account has
a credit limit of \$2,000 and a balance of \$1,500. The consumer uses
the credit card to check into a hotel for an anticipated stay of five
days. When the consumer checks in, the hotel obtains authorization from
the federal credit union for a \$750 hold on the account to ensure there
is adequate available credit to cover the cost of the anticipated stay.
The consumer checks out of the hotel after three days, and the total
cost of the stay is \$450, which is charged to the consumer's credit
card account. Assuming that there is no other activity on the account,
the federal credit union is prohibited from assessing a fee for
exceeding the credit limit with respect to the \$750 hold. If, however,
the total cost of the stay charged to the account had been more than
\$500, the federal credit union would not be prohibited from assessing a
fee for exceeding the credit limit.

3\. [Example of prohibition in connection with hold placed for another
transaction]{.underline}. Assume that a consumer credit card account has
a credit limit of \$2,000 and a balance of \$1,400. The consumer uses
the credit card to check into a hotel for an anticipated stay of five
days. When the consumer checks in, the hotel obtains authorization from
the federal credit union for a \$750 hold on the account to ensure there
is adequate available credit to cover the cost of the anticipated stay.
While the hold remains in place, the consumer uses the credit card to
make a \$150 purchase. The consumer checks out of the hotel after three
days, and the total cost of the stay is \$450, which is charged to the
consumer's credit card account. Assuming there is no other activity on
the account, the federal credit union is prohibited from assessing a fee
for exceeding the credit limit with respect to either the \$750 hold or
the \$150 purchase. If, however, the total cost of the stay charged to
the account had been more than \$450, the federal credit union would not
be prohibited from assessing a fee for exceeding the credit limit.

4\. [Example of prohibition when authorization and settlement amounts
are held for the same transaction]{.underline}. Assume that a consumer
credit card account has a credit limit of \$2,000 and a balance of
\$1,400. The consumer uses the credit card to check into a hotel for an
anticipated stay of five days. When the consumer checks in, the hotel
obtains authorization from the federal credit union for a \$750 hold on
the account to ensure there is adequate available credit to cover the
cost of the anticipated stay. The consumer checks out of the hotel after
three days, and the total cost of the stay is \$450, which is charged to
the consumer's credit card account. When the hotel presents the \$450
transaction for settlement, it uses a different transaction code to
identify the transaction than it had used for the pre-authorization,
causing both the \$750 hold and the \$450 purchase amount to be
temporarily posted to the consumer's account at the same time, and the
consumer's balance to exceed the credit limit. Under these
circumstances, and assuming no other transactions, the federal credit
union is prohibited from assessing a fee for exceeding the credit limit
because the credit limit was exceeded solely due to the \$750 hold.

5\. [Example of permissible fee for exceeding the credit limit in
connection with a hold]{.underline}. Assume that a consumer credit card
account has a credit limit of \$2,000 and a balance of \$1,400. The
consumer uses the credit card to check into a hotel for an anticipated
stay of five days. When the consumer checks in, the hotel obtains
authorization from the federal credit union for a \$750 hold on the
account to ensure there is adequate available credit to cover the cost
of the anticipated stay. While the hold remains in place, the consumer
uses the credit card to make a \$650 purchase. The consumer checks out
of the hotel after three days, and the total cost of the stay is \$450,
which is charged to the consumer's credit card account. Notwithstanding
the existence of the hold and assuming there is no other activity on the
account, the federal credit union may charge the consumer a fee for
exceeding the credit limit with respect to the \$650 purchase because
the consumer would have exceeded the credit limit even if the hold had
been for the actual amount of the hotel transaction.

[Section 706.26 -- Unfair Balance Computation Method]{.underline}

[(a) General Rule]{.underline}

1\. [Two-cycle method prohibited]{.underline}. A federal credit union 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 outstanding
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\. [Example]{.underline}. 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. A consumer has a zero balance on March 1. The
consumer uses the credit card to make a \$500 purchase on March 15. The
consumer makes no other purchases and pays \$400 on the due date, April
25, leaving a \$100 balance. The federal credit union may charge
interest on the \$500 purchase from the start of the 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.

[Section 706.27 -- Unfair Financing of Security Deposits and Fees for
the Issuance or Availability of Credit]{.underline}

1\. [Initial credit limit for the account]{.underline}. For purposes of
this section the credit limit is the limit in effect when the account is
opened.

[(a) Annual rule]{.underline}

1\. [Majority of the credit limit]{.underline}. The total amount of
security deposits and fees for the issuance or availability of credit
constitutes a majority of the credit limit if that total is greater than
half of the credit limit. For example, assume that a consumer credit
card account has a credit limit of \$500. Under § 706.27(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 twelve months after the date on which the account is opened,
consistent with § 706.27(b), but may not charge any more than that
amount.

[(b) Monthly rule]{.underline}

1\. [Adjustments of one dollar or less permitted]{.underline}. When
dividing amounts pursuant to § 706.27(b)(2), the federal credit union
may adjust amounts by one dollar or less. For example, if a federal
credit union is dividing \$125 over eleven billing cycles, the federal
credit union may charge \$12 for four months and \$11 for the remaining
seven months.

2\. [Example]{.underline}. Assume that a consumer credit card account
opened on January 1 has a credit limit of \$500 and that a federal
credit union charges to the account security deposits and fees for the
issuance or availability of credit that total \$250 during the twelve
months after the date on which the account is opened. 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 § 706.27(b), 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. If it
charges \$250, the federal credit union may charge as much as \$125
during the first billing cycle. If it charges \$125 during the first
billing cycle, it may then charge \$12 in any four billing cycles and
\$11 in any seven billing cycles during the year.

[(c) Fees for the issuance or availability of credit]{.underline}

1\. [Membership fees]{.underline}. 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]{.underline}. Fees for optional services in addition
to basic membership privileges in a credit or charge card account, for
example, travel insurance or card-registration services, are not fees
for the issuance or availability of credit if the basic account may be
opened without paying such fees.

3\. [One-time fees]{.underline}. Only non-periodic fees related to
opening an account, such as one-time membership or participation fees,
are fees for the issuance or availability of credit. Fees for reissuing
a lost or stolen card and statement reproduction fees are examples of
fees that are not fees for the issuance or availability of credit.

[Section 706.28 -- Deceptive firm offers of credit]{.underline}

[(a) Disclosure of criteria bearing on creditworthiness]{.underline}

1\. [Designed to call attention]{.underline}. Whether a disclosure has
been provided in a manner that is designed to call attention to the
nature and significance of required information depends on where the
disclosure is placed in the solicitation and how it is presented,
including whether the disclosure uses a typeface and type size that are
easy to read and uses boldface or italics. Placing the disclosure in a
footnote would not satisfy this requirement.

2\. [Form of electronic disclosures]{.underline}. Electronic disclosures
must be provided consistent with 12 CFR 226.5a(a)(2)-8 and -9.

3\. [Multiple annual percentage rates or credit limits]{.underline}. For
purposes of this section, a firm offer of credit solicitation that
states an annual percentage rate or credit limit for a credit card
feature and a different annual percentage rate or credit limit for a
different credit card feature does not offer multiple annual percentage
rates or credit limits. For example, if a firm offer of credit
solicitation offers a 10% annual percentage rate for purchases and a 15%
annual percentage rate for cash advances, the solicitation does not
offer multiple annual percentage rates for purposes of this section.

4\. [Example]{.underline}. Assume that a federal credit union requests
from a consumer reporting agency a list of consumers with credit scores
of 650 or higher so that the federal credit union can send those
consumers a firm offer of credit solicitation. The federal credit union
sends a solicitation to those consumers for a consumer credit card
account advertising "rates from 8.99% to 14.99%" and "credit limits from
\$1,000 to \$10,000." Before selection of the consumers for the offer,
however, the federal credit union determines that it will offer an
interest rate of 8.99% only to those consumers responding to the
solicitation who are verified to have a credit score of 650 or higher,
who have a debt-to-income ratio below a certain amount, and who meet
other specific criteria bearing on creditworthiness. Under § 706.28,
this solicitation is deceptive unless the federal credit union
discloses, in a manner that is reasonably understandable to the consumer
and designed to call attention to the nature and significance of the
information, that, if the consumer is approved for credit, the annual
percentage rate and credit limit the consumer will receive will depend
specific criteria bearing on the consumer's creditworthiness. The
federal credit union may satisfy this requirement by using a typeface
and type size that are easy to read and stating in boldface in a manner
that otherwise calls attention to the nature and significance of the
information: "**If you are approved for credit, your annual percentage
rate and/or credit limit will depend on your credit history,
debt-to-income ratio, and debts.**"

5\. [Applicability of criteria in disclosure]{.underline}. When making a
disclosure under this section, a federal credit union may only disclose
the criteria it uses in evaluating whether consumers who are approved
for credit will receive the lowest annual percentage rate or the highest
credit limit. For example, if a federal credit union does not consider
the consumer's debts when determining whether the consumer should
receive the lowest annual percentage rate or highest credit limit, the
disclosure must not refer to "debts."

SUBPART D -- OVERDRAFT SERVICES

[Section 706.32 -- Unfair Practices Involving Overdraft
Services]{.underline}

[(a) Opt-out Requirement]{.underline}

[(a)(1) General Rule]{.underline}

1\. [Form, content, and timing of disclosure]{.underline}. The form,
content, and timing of the opt-out notice required to be provided under
paragraph (a) of this section are addressed under § 707.10 of this
chapter.

[(a)(3) Exceptions]{.underline}

[Paragraph (a)(3)(i)]{.underline}

1\. [Example of transaction amount exceeding authorization amount (fuel
purchase)]{.underline}. A consumer has \$30 in a deposit account. The
consumer uses a debit card to purchase fuel. Before permitting the
consumer to use the fuel pump, the merchant verifies the validity of the
card by obtaining authorization from the federal credit union for a \$1
transaction. The consumer purchases \$50 of fuel. If the federal credit
union pays the transaction, it would be permitted to assess a fee or
charge for paying the overdraft, even if the consumer has opted out of
the payment of overdrafts.

2\. [Example of transaction amount exceeding authorization amount
(restaurant)]{.underline}. A consumer has \$50 in a deposit account. The
consumer pays for a \$45 meal at a restaurant using a debit card. While
the restaurant may obtain authorization for the \$45 cost of the meal,
the consumer may add \$10 for a tip. If the federal credit union pays
the \$55 transaction, including the tip amount, it would be permitted to
assess a fee or charge for paying the overdraft, even if the consumer
has opted out of the payment of overdrafts.

[Paragraph (a)(3)(ii)]{.underline}

1\. [Example of transaction presented by paper-based means]{.underline}.
A consumer has \$50 in a deposit account. The consumer makes a \$60
purchase and presents his or her debit card for payment. The merchant
takes an imprint of the card. Later that day, the merchant submits a
sales slip with the card imprint to its processor for payment. If the
consumer's federal credit union pays the transaction, it would be
permitted to assess a fee or charge for paying the overdraft, even if
the consumer has opted out of the payment of overdrafts.

[(b) Debit holds]{.underline}

1\. [General]{.underline}. Under § 706.32(b), a federal credit union may
not assess an overdraft fee if the overdraft would not have occurred but
for a hold placed on funds in the consumer's account for a transaction
that has been authorized but has not yet been presented for settlement,
if the amount of the hold is in excess of the actual purchase or
transaction amount when the transaction is settled. Section 706.32(b)
does not limit a federal credit union from charging an overdraft fee in
connection with a particular transaction if the consumer would have
incurred an overdraft due to other reasons, such as other transactions
that may have been authorized but not yet presented for settlement, a
deposited check that is returned, or if the purchase or transaction
amount for the transaction for which the hold was placed would have also
caused the consumer to overdraw his or her account.

2\. [Example of prohibition in connection with hold placed for same
transaction]{.underline}. A consumer has \$50 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's federal credit union for a \$75 "hold"
on the account which exceeds the consumer's funds. The consumer
purchases \$20 of fuel. Under these circumstances, § 706.32(b) prohibits
the federal credit union from assessing a fee or charge in connection
with the debit hold because the actual amount of the fuel purchase did
not exceed the funds in the consumer's account. However, if the consumer
had purchased \$60 of fuel, the federal credit union could assess a fee
or charge for an overdraft because the transaction exceeds the funds in
the consumer's account, unless the consumer has opted out of the payment
of overdrafts under § 706.32(a).

3\. [Example of prohibition in connection with hold placed for another
transaction]{.underline}. A consumer has \$100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's federal credit union for a \$75 "hold"
on the account. The consumer purchases \$20 of fuel, but the transaction
is not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws \$75 at
an ATM. Under these circumstances, § 706.32(b) prohibits the federal
credit union from assessing a fee or charge for paying an overdraft with
respect to the \$75 withdrawal because the overdraft was caused solely
by the \$75 hold.

4\. [Example of prohibition when authorization and settlement amounts
are held for the same transaction]{.underline}. A consumer has \$100 in
his deposit account, and uses his debit card to purchase \$50 worth of
fuel. Before permitting the consumer to use the fuel pump, the merchant
obtains authorization from the consumer's federal credit union for a
\$75 "hold" on the account. The consumer purchases \$50 of fuel. When
the merchant presents the \$50 transaction for settlement, it uses a
different transaction code to identify the transaction than it had used
for the pre-authorization, causing both the \$75 hold and the \$50
purchase amount to be temporarily posted to the consumer's account at
the same time, and the consumer's account to be overdrawn. Under these
circumstances, and assuming no other transactions, § 706.32(b) prohibits
the federal credit union from assessing a fee or charge for paying an
overdraft because the overdraft was caused solely by the \$75 hold.

5\. [Example of permissible overdraft fees in connection with a
hold]{.underline}. A consumer has \$100 in a deposit account. The
consumer makes a fuel purchase using his or her debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains
authorization from the consumer's federal credit union for a \$75 "hold"
on the account. The consumer purchases \$35 of fuel, but the transaction
is not presented for settlement until the next day. Later on the first
day, and assuming no other transactions, the consumer withdraws \$75 at
an ATM. Notwithstanding the existence of the hold, and assuming the
consumer has not opted out of the payment of overdrafts under
§ 706.32(a), the consumer's federal credit union may charge the consumer
an overdraft fee for the \$75 ATM withdrawal, because the consumer would
have incurred the overdraft even if the hold had been for the actual
amount of the fuel purchase.

\* \* \* \* \*

By the National Credit Union Administration Board, on May 2, 2008.

Mary F. Rupp\
Secretary of the Board

BILLING CODE 7535-01-U

[^1]: The Board issued its HOEPA proposal in January 2008.
    [See]{.underline} 73 FR 1672 (Jan. 9, 2008).

[^2]: [See]{.underline}, [e.g.]{.underline}, Am. Bankers Assoc., [Likely
    Impact of Proposed Credit Card Legislation]{.underline}: [Survey
    Results of Credit Card Issuers]{.underline} (Spring 2008); Darryl E.
    Getter, Cong. Research Srvc., [The Credit Card Market: Recent
    Trends, Funding Cost Issues, and Repricing Practices]{.underline}
    (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]{.underline} (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]{.underline} (Nov. 2007)
    (available at http://www.demos.org/pubs/borrowing.pdf); Nat'l
    Consumer Law Ctr., [Fee-Harvesters: Low-Credit, High-Cost Cards
    Bleed Consumers]{.underline} (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]{.underline} (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]{.underline} (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]{.underline} (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]{.underline} (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]{.underline} (Oct. 2005) (available
    at http://www.demos.org/pubs/PSN_low.pdf).

[^3]: [See]{.underline}, [e.g.]{.underline}, [The Credit Cardholders'
    Bill of Rights: Providing New Protections for Consumers: Hearing
    before the H. Subcomm. on Fin. Instits. & Consumer
    Credit]{.underline}, 110th Cong. (2007); [Credit Card Practices:
    Unfair Interest Rate Increases: Hearing before the S. Permanent
    Subcomm. on Investigations]{.underline}, 110th Cong. (2007); [Credit
    Card Practices: Current Consumer and Regulatory Issues: Hearing
    before H. Comm. on Fin. Servs.]{.underline}, 110th Cong. (2007);
    [Credit Card Practices: Fees, Interest Rates, and Grace Periods:
    Hearing before the S. Permanent Subcomm. on
    Investigations]{.underline}, 110th Cong. (2007).

[^4]: [See]{.underline}, [e.g.]{.underline}, The Credit Card Reform Act
    of 2008, S. 2753, 110th Cong. (Mar. 12, 2008); The Credit
    Cardholders' Bill of Rights Act of 2008, H.R. 5244, 110th Cong.
    (Feb. 7, 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).

[^5]: [See]{.underline} Interagency Guidance on Overdraft Protection
    Programs (Joint Guidance), 70 FR 9127 (Feb. 24, 2005) and OTS
    Guidance on Overdraft Protection Programs, 70 FR 8428 (Feb. 18,
    2005).

[^6]: The brochure, entitled "Protecting Yourself from Overdraft and
    Bounced-Check Fees," can be found at:
    http://www.federalreserve.gov/pubs/bounce/default.htm.

[^7]: 70 FR 29582 (May 24, 2005). A substantively similar rule applying
    to credit unions was issued separately by the NCUA. 71 FR 24568
    (Apr. 26, 2006). The NCUA issued an interim final rule in 2005. 70
    FR 72895 (Dec. 8, 2005).

[^8]: H.R. 946, "The Consumer Overdraft Protection Fair Practices Act".
    [See also]{.underline} [Overdraft Protection: Fair Practices for
    Consumers: Hearing Before the House Subcomm. on Financial
    Institutions and Consumer Credit]{.underline}, 110th Cong. (2007).

[^9]: 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 the Home Owners' Loan Act (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]{.underline}, [e.g.]{.underline}, 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.

[^10]: [See]{.underline} 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. Comm. on Commerce, Science & Transp. (Dec.
    17, 1980) (FTC Policy Statement on Unfairness) (available at
    http://www.ftc.gov/bcp/policystmt/ad-unfair.htm).

[^11]: [See]{.underline} 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]{.underline} 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]{.underline}. at 7743.

[^15]: [See]{.underline} [id]{.underline}.; FTC Policy Statement on
    Unfairness at 3.

[^16]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    at 7743 ("\[E\]xcept in aggravated cases where 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]{.underline} Statement for FTC Credit Practices Rules, 49 FR
    at 7743; FTC Policy Statement on Unfairness at 3 & n.12.

[^18]: [See]{.underline} FTC Policy Statement on Unfairness at 3.

[^19]: [See]{.underline} 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.

[^20]: [See]{.underline} 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.").

[^21]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    at 7744; FTC Policy Statement on Unfairness at 3; [see]{.underline}
    [also]{.underline} S. Rep. 103-130, at 13 (1994), [reprinted
    in]{.underline} 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 exercise of its
    unfairness authority, gathering and considering reasonably available
    evidence.").

[^22]: [See]{.underline} FTC Public Comment on OTS-2007-0015, at 6 (Dec.
    12, 2007) (available at http://www.ots.treas.gov/docs/9/963034.pdf).

[^23]: [See]{.underline} FTC Public Comment on OTS-2007-0015, at 8
    ([citing]{.underline} Preservation of Consumers' Claims and
    Defenses, Statement of Basis and Purpose, 40 FR 53506, 53523 (Nov.
    18, 1975) (codified at 16 CFR 433)); [see]{.underline}
    [also]{.underline} 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.").

[^24]: FTC Policy Statement on Deception.

[^25]: [Id]{.underline}. 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]{.underline}.

[^26]: [See]{.underline}, [e.g.]{.underline}, [FTC v.
    Tashman]{.underline}, 318 F.3d 1273, 1277 (11th Cir. 2003); [FTC v.
    Gill]{.underline}, 265 F.3d 944, 950 (9th Cir. 2001); [FTC v. QT,
    Inc.]{.underline}, 448 F. Supp. 2d 908, 957 (N.D. Ill. 2006); [FTC
    v. Think Achievement]{.underline}, 144 F. Supp. 2d 993, 1009 (N.D.
    Ind. 2000); [FTC v. Minuteman Press]{.underline}, 53 F. Supp. 2d
    248, 258 (E.D.N.Y. 1998).

[^27]: 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.

[^28]: [See]{.underline}, [e.g.]{.underline}, [FTC v.
    Cyberspace.com]{.underline}, 453 F.3d 1196, 1200 (9th Cir. 2006);
    [Gill]{.underline}, 265 F.3d at 956; [Removatron Int'l Corp. v.
    FTC]{.underline}, 884 F.2d 1489, 1497 (1st Cir. 1989).

[^29]: [See]{.underline} [FTC v. Kraft, Inc.]{.underline}, 970 F.2d 311,
    319 (7th Cir. 1992); [QT, Inc.]{.underline}, 448 F. Supp. 2d at 958.

[^30]: FTC Policy Statement on Deception at 3.

[^31]: [Id]{.underline}.

[^32]: [Id]{.underline}. at 2, 6-7.

[^33]: [See]{.underline} FTC Public Comment on OTS-2007-0015, at 21; FTC
    Policy Statement on Deception at 6; [see]{.underline}
    [also]{.underline} [FTC v. Pantron I Corp.]{.underline}, 33 F.3d
    1088, 1095-96 (9th Cir. 1994); [In re Peacock Buick]{.underline}, 86
    F.T.C. 1532, 1562 (1975), [aff'd]{.underline} 553 F.2d 97 (4th Cir.
    1977).

[^34]: [See]{.underline} [Am. Fin. Servs. Assoc. v. FTC]{.underline},
    767 F.2d 957, 988-89 (D.C. Cir. 1985) ([citing]{.underline} [Jacob
    Siegel Co. v. FTC]{.underline}, 327 U.S. 608, 612-13 (1946)).

[^35]: [See]{.underline} 42 FR 7740 (Mar. 1, 1984) (codified at 16 CFR
    part 444); [see]{.underline} [also]{.underline} 15 U.S.C.
    57a(a)(1)(B), 45(a)(1).

[^36]: [See]{.underline} 12 CFR part 227, subpart B (Board); 12 CFR 535
    (OTS); 12 CFR 706 (NCUA).

[^37]: The Board, OTS, and NCUA would place the proposed rules in,
    respectively, parts 227, 535, and 706 of title 12 of the Code of
    Federal Regulations. For each of reference, the discussion in this
    **Supplementary Information** uses the shared numerical suffix of
    each agency's rule. For example, proposed §\_\_.1 would be codified
    at 12 CFR 227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1
    by NCUA.

[^38]: 12 CFR part 559. OTS has substantially revised this rule since
    promulgating its Credit Practices Rule. [See]{.underline},
    [e.g.]{.underline}, Subsidiaries and Equity Investments: Final Rule,
    61 FR 66561 (Dec. 18, 1996).

[^39]: The provision of the FTC Act addressing exemptions applies only
    to the FTC. [See]{.underline} 12 U.S.C. 57a(g).

[^40]: 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). OTS has granted an exemption
    to Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has not granted
    any exemptions.

[^41]: [See]{.underline}, [e.g.]{.underline}, 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).

[^42]: This disclosure stated: "Payments may be applied to balances with
    lower APRs first. If you have balances at higher APRs, you may pay
    more in interest because these balances cannot be paid off until all
    lower-APR balances are paid in full (including balance transfers you
    make at the introductory rate)."

[^43]: [See]{.underline} 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)).

[^44]: [See]{.underline} [also]{.underline} 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").

[^45]: The Board has proposed additional revisions to these provisions
    elsewhere in today's **Federal Register**.

[^46]: [See]{.underline} [also]{.underline} GAO Credit Card Report at 6
    ("\[O\]ur interviews with 112 cardholders indicated that many failed
    to understand key terms or conditions that could affect their costs,
    including when they would be charged for late payments or what
    actions could cause issuers to raise rates.").

[^47]: [See]{.underline} 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."). This behavior is commonly referred to as
    "hyperbolic discounting." [See]{.underline}, [e.g.]{.underline},
    Angela Littwin, [Beyond Usury: A Study of Credit-Card Use and
    Preference Among Low-Income Consumers]{.underline}, 80 Tex. L. Rev.
    451, 467-478 (2008) (discussing consumers' tendency to underestimate
    their future credit card usage when they apply for a card and
    thereby failing to adequately anticipate the costs of the product);
    Shane Frederick, [et]{.underline} [al]{.underline}., [Time
    Discounting and Time Preference: A Critical Review]{.underline}, 40
    J. Econ. Literature 351, 366-67 (2002) (reviewing the literature on
    hyperbolic discounting); Ted O'Donoghue & Matthew Rabin, [Doing It
    Now or Later]{.underline}, 89 Am. Econ. Rev. 103, 103, 111 (1999)
    (explaining people's preference for delaying unpleasant activities
    and accepting immediate rewards despite their knowledge that the
    delay may lessen potential future rewards or increase potential
    adverse consequences).

[^48]: [See]{.underline}, [e.g.]{.underline}, Statement of Janet Hard
    before S. Perm. Subcomm. on Investigations, [Hearing on Credit Card
    Practices: Unfair Interest Rate Increases]{.underline} (Dec. 4,
    2007) (available at
    http://www.senate.gov/\~govt-aff/index.cfm?Fuseaction=Hearings.Detail&HearingID=509).

[^49]: [See]{.underline}, [e.g.]{.underline}, 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]{.underline} at 5 (Dec. 4, 2007)
    (available at
    http://hsgac.senate.gov/public/\_files/STMTHammondsBOA.pdf).

[^50]: [See]{.underline} GAO Credit Card Report at 25.

[^51]: [See]{.underline} discussion of overdrafts and debit holds in
    relation to proposed §\_\_.32 below.

[^52]: [See]{.underline}, [e.g.]{.underline}, 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]{.underline},
    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]{.underline}, 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/pressRelease/idUS94254+24-Mar-2008+BW20080324).

[^53]: The Board has proposed additional revisions to these provisions
    elsewhere in today's **Federal Register**.

[^54]: The Agencies also note that, although some consumers may not have
    been able to avoid fees for violating the account terms (for
    example, late payment fees or fees for exceeding the credit limit),
    this injury does not appear to outweigh the countervailing benefit
    to consumers or competition. The application of an increased rate to
    an existing balance increases consumers' costs until the balance is
    paid in full or is transferred to an account with more favorable
    terms. The assessment of a fee, however, is generally an isolated
    cost that will not be repeated unless the account terms are violated
    again.

[^55]: A consumer who cannot obtain a lower rate elsewhere may not
    reject application of an increased rate to an existing balance. This
    choice, however, may not enable the consumer to reasonably avoid
    injury.

[^56]: GAO Credit Card Report at 26-27.

[^57]: This amortization period is consistent with guidance issued by
    the Board, OCC, FDIC, and OTS, under the auspices of the Federal
    Financial Institutions Examination Council, noting that credit card
    workout programs should generally strive to have borrowers repay
    debt within 60 months. [See]{.underline}, [e.g.]{.underline}, 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).

[^58]: [See]{.underline} 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).

[^59]: [See]{.underline}, [e.g.]{.underline}, OCC Advisory Letter
    2004-4, at 2-3 (finding that "solicitations and other marketing
    materials used for \[subprime\] 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, disclosures problems associated with secured credit
    cards and related products have constituted [deceptive]{.underline}
    practices under the applicable standards of the FTC Act" (emphasis
    in original)); [In]{.underline} [re]{.underline} First Nat'l Bank in
    Brookings, No. 2003-1 (Dept. of the Treasury, OCC) (Jan. 17, 2003)
    (available at www.occ.treas.gov/ftp/eas/ea2003-1.pdf);
    [In]{.underline} [re]{.underline} First Nat'l Bank of Marin, No.
    2001-97 (Dept. of the Treasury, OCC Dec. 3, 2001) (available at
    www.occ.treas.gov/ftp/eas/ea2001-97.pdf).

[^60]: [People v. Applied Card Sys., Inc.]{.underline}, 805 N.Y.S.2d
    175, 178 (App. Div. 2005).

[^61]: [See]{.underline} 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)).

[^62]: [See]{.underline} 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.").

[^63]: [See]{.underline} 15 U.S.C. 1681b. Similarly, persons obtaining
    consumer reports may do so only with a permissible purpose.
    [See]{.underline} 15 U.S.C. 1681b(f).

[^64]: [See]{.underline} 15 U.S.C. 1681a(l) (defining "firm offer of
    credit or insurance").

[^65]: [See]{.underline} 15 U.S.C. 1681m(d)(1); [see]{.underline}
    [also]{.underline} 16 CFR 642.1-642.4 (Prescreen Opt-Out Notice
    Rule).

[^66]: [See]{.underline}, [e.g.]{.underline}, 15 U.S.C. 1681a(l).

[^67]: [See]{.underline} 15 U.S.C. 1681m(d)(1)(B).

[^68]: [See]{.underline} FTC Policy Statement on Deception at 3 ("To be
    considered reasonable, the interpretation or reaction does not have
    to be the only one. When a seller's representation conveys more than
    one meaning to reasonable consumers, one of which is false, the
    seller is liable for the misleading interpretation." (footnotes
    omitted)). In consumer testing conducted in relation to the Board's
    June 2007 Proposal, almost all participants understood that the
    credit limit for which they would qualify depended on their
    creditworthiness, such as credit history. [See]{.underline} 72 FR at
    32984. This testing did not, however, specifically focus on firm
    offers of credit, which, as discussed above, contain statements that
    the consumer has been selected for the offer.

[^69]: [See]{.underline} [FTC v. U.S. Sales Corp.]{.underline}, 785 F.
    Supp. 737, 751 (N.D. Ill. 1992) (concluding that express
    representations that consumers would not be turned down for a
    secured credit card were misleading because applicants could be
    denied a card if they had a poor credit history).

[^70]: [See]{.underline} 15 U.S.C. 1681m(d)(1)(C).

[^71]: FTC Policy Statement on Deception at 6-7 ("A 'material'
    misrepresentation or practice is one which is likely to affect a
    consumer's choice of or conduct regarding a product. In other words,
    it is information that is important to consumers." (footnotes
    omitted)).

[^72]: [See]{.underline} [id]{.underline}. at 6.

[^73]: [See]{.underline}, [e.g.,]{.underline} [Overdraft Protection:
    Fair Practices for Consumers: Hearing before the House Subcomm. on
    Financial Institutions and Consumer Credit, House Comm. on Financial
    Services]{.underline}, 110th Cong. (2007) ([Overdraft Protection
    Hearing]{.underline}) (available at
    http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml).

[^74]: [See]{.underline}, [e.g.]{.underline}, [Overdraft Protection
    Hearing]{.underline} at n.42; Jacqueline Duby, Eric Halperin & Lisa
    James, [High Cost and Hidden From View: The \$10 Billion Overdraft
    Loan Market]{.underline}, Ctr. for Responsible Lending (May 26,
    2005) (noting that the bulk of overdraft fees are incurred by repeat
    users) (available at www.responsiblelending.org).

[^75]: [See]{.underline} [Bank Fees: Federal Banking Regulators Could
    Better Insure That Consumers Have Required Disclosure Documents
    Prior to Opening Checking or Savings Accounts]{.underline}, GAO
    Report 08-281 (January 2008) (GAO Bank Fees Report);
    [see]{.underline} [also]{.underline} [Bankrate 2007 Checking Account
    Study]{.underline}, posted Sep. 26, 2007 (reporting an average
    overdraft fee of over \$28.00 per item) (available at:
    www.bankrate.com/brm/news/chk/chkstudy/20070924_bounced_check_fee_a1.asp?caret=2e).

[^76]: According to the GAO, of the financial institutions that applied
    up to three tiers of fees in 2006, the average overdraft fees were
    \$26.74, \$32.53 and \$34.74, respectively. [See]{.underline} GAO
    Bank Fees Report at 14.

[^77]: See **Background** section of the **Supplementary Information**
    for discussion of February 2005 Joint Guidance and OTS Guidance, the
    2005 final amendments under Regulation DD, and the 2006 final
    amendments to part 707.

[^78]: For purposes of this rulemaking, as it relates to federal credit
    unions, the term "consumer" refers to natural person members.

[^79]: [See]{.underline}, [e.g.]{.underline}, American Bankers
    Association, "Overdraft Protection: A Guide for Bankers" at 18.

[^80]: [See]{.underline} GAO Bank Fees Report at 13-14;
    [see]{.underline} [also]{.underline} Marc Fusaro, [Hidden Consumer
    Loans: An Analysis of Implicit Interest Rates on Bounced
    Checks]{.underline}, [J.]{.smallcaps} of Fam. & Econ. Issues
    (forthcoming June 2008) ([Hidden Consumer Loans]{.underline})
    (citing a Moebs \$ervices estimate that 60% of service charge income
    comes from insufficient funds fees) (available at:
    http://personal.ecu.edu/fusarom/fusarobpinterestrates.pdf); Eric
    Halperin and Peter Smith, [Out of Balance: Consumers Pay \$17.5
    Billion Per Year in Fees for Abusive Overdraft Loans]{.underline},
    Center for Responsible Lending (July 11, 2007) (available at:
    http://www.responsiblelending.org/pdfs/out-of-balance-report-7-10-final.pdf)
    (estimating that consumers paid over \$17 billion in fees for
    overdraft loans in 2006); Howard Mason, [The Criminal Risk of
    Actively-Marketed Bounce Protection Programs]{.underline}, Bernstein
    Research Call (Feb. 18, 2005) (suggesting that bounce protection
    programs account for 2/3 or more of industry NSF fees of an
    estimated \$12-14 billion); Howard Mason, [Impact of Regulatory Best
    Practices on Bounce Protection Services and NSF Fees]{.underline},
    Bernstein Research Call (Feb. 17, 2005) (estimating that overdraft
    and NSF fees make up approximately half of service charge income).

[^81]: According to one consumer group survey, most respondents
    preferred that their debit card be declined for insufficient funds
    at the checkout rather than having the overdraft paid and being
    assessed a fee. Eric Halperin, Lisa James and Peter Smith, [Debit
    Card Danger]{.underline}, Center for Responsible Lending at 9 (Jan.
    25, 2007) (available at:
    http://responsiblelending.org/pdfs/Debit-Card-Danger-report.pdf).

[^82]: [See]{.underline} Eric Halperin, [Testimony on Overdraft
    Protection: Fair Practices for Consumers Before the House Comm. on
    Financial Services, Subcomm. on Fin. Instits. & Consumer
    Credit]{.underline} at 6 (July 11, 2007) (stating that consumers pay
    \$1.94 in fees for every one dollar borrowed to cover a debit card
    POS overdraft) (available at:
    http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml).

[^83]: Some economic research suggests that when a bank pays overdrafts
    through an overdraft program, consumers overdraw their accounts more
    often. [See]{.underline} Fusaro, [Hidden Consumer Loans]{.underline}
    at 6. This finding is consistent with assertions by some third-party
    vendors of overdraft protection services that implementation of
    overdraft protection can result in a substantial increase in fee
    income from overdraft and insufficient funds fees.
    [See]{.underline}, [e.g.]{.underline},
    http://www.banccommercegroup.com/aarp.html ("guaranteeing" that use
    of overdraft protection can increase revenue from insufficient funds
    income by at least 50%) (visited Mar. 21, 2008);
    http://www.cetoandassociates.com/index.php?option=com_content&task=view&id=147&Itemid=102
    (representing that overdraft protection can increase insufficient
    funds revenue by 200%) (visited Mar. 21, 2008);
    http://www.jmfa.com/pageContent.aspx?id=126 (reporting an increase
    of 50-300% in insufficient funds revenue for clients) (visited Mar.
    21, 2008).

[^84]: While NCUA is not proposing amendments to its 12 CFR part 707 in
    today's **Federal Register**, TISA requires NCUA to promulgate
    regulations substantially similar to Regulation DD. Accordingly,
    NCUA will issue amendments to part 707 following the Board's
    adoption of final rules under Regulation DD.

[^85]: [See]{.underline} Halperin, [et]{.underline} [al]{.underline}.,
    [Debit Card Danger]{.underline} at 3 (concluding that debit card POS
    overdraft loans are more costly than overdraft loans from other
    sources, such as overdrafts by check).

[^86]: Pre-authorization describes the dollar amount of funds that are
    held on a consumer's account (or against a credit line) when a card
    is swiped to initiate a transaction. This typically occurs in
    connection with debit and credit card transactions in which the
    actual dollar amount of the transaction is not known until the end
    of the transaction.

[^87]: Other merchants may instead only place a pre-authorization hold
    of \$1 in order to verify that the consumer's account is valid.

[^88]: 70 FR at 8431; 70 FR at 9132.

[^89]: 70 FR at 8431.

[^90]: [See]{.underline} GAO Credit Card Report.

[^91]: GAO Credit Card Report at 28 ("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.").

[^92]: 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.

[^93]: [See]{.underline} 70 FR 8428 (Feb. 18, 2005).