**FEDERAL RESERVE SYSTEM**

**12 CFR Part 227**

**\[Regulation AA; Docket No. R--1314\]**

**DEPARTMENT OF THE TREASURY**

**Office of Thrift Supervision**

**12 CFR Part 535**

**\[Docket ID. OTS--2008--0004\]**

**RIN 1550--AC17**

**NATIONAL CREDIT UNION ADMINISTRATION**

**12 CFR Part 706**

**RIN 3133--AD47**

**Unfair or Deceptive Acts or Practices**

**AGENCIES:** Board of Governors of the Federal Reserve System (Board);
Office of Thrift Supervision, Treasury (OTS); and National Credit Union
Administration (NCUA).

**ACTION:** Final rule.

**SUMMARY:** The Board, OTS, and NCUA (collectively, the Agencies) are
exercising their authority under section 5(a) of the Federal Trade
Commission Act to prohibit unfair or deceptive acts or practices. The
final rule prohibits institutions from engaging in certain acts or
practices in connection with consumer credit card accounts. The final
rule relates to other Board rules under the Truth in Lending Act, which
are published elsewhere in today's **Federal Register**. Because the
Board has proposed new rules regarding overdraft services for deposit
accounts under the Electronic Fund Transfer Act elsewhere in today's
**Federal Register**, the Agencies are not taking action on overdraft
services at this time. A secondary basis for OTS's rule is the Home
Owners' Loan Act.

**EFFECTIVE DATE:** The final rule is effective on July 1, 2010.

**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; 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 adopting several
new provisions intended to protect consumers against unfair acts or
practices with respect to consumer credit card accounts. These rules are
promulgated pursuant to section 18(f)(1) of the Federal Trade Commission
Act (FTC Act), which makes the Agencies responsible for prescribing
regulations that prevent unfair or deceptive acts or practices in or
affecting commerce within the meaning of section 5(a) of the FTC Act.
[See]{.underline} 15 U.S.C. 57a(f)(1), 45(a). A secondary basis for
OTS's rule is the Home Owners' Loan Act (HOLA), 12 U.S.C. 1461
[et]{.underline} [seq]{.underline}.

**I. Background**

[A. The Board's June 2007 Regulation Z Proposal on Open-End (Non-Home
Secured) Credit]{.underline}

On June 14, 2007, the Board requested public comment on proposed
amendments to the open-end credit (not home-secured) provisions of
Regulation Z, which implements the Truth in Lending Act (TILA), as well
as proposed amendments to the corresponding staff commentary to
Regulation Z. 72 FR 32948 (June 2007 Regulation Z Proposal). The purpose
of TILA is to promote the informed use of consumer 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. Although the testing assisted the Board in developing
improved disclosures, the testing also identified the limitations of
disclosure, in certain circumstances, as a means of enabling consumers
to make decisions effectively. [See]{.underline} 72 FR at
32948--32952.[^1]

In response to the June 2007 Regulation Z Proposal, the Board received
more than 2,500 comments, including approximately 2,100 comments from
individual consumers. Comments from consumers, consumer groups, a member
of Congress, other government agencies, and some creditors were
generally supportive of the proposed revisions to Regulation Z. A number
of commenters, however, urged the Board to take additional action with
respect to a variety of credit card practices, including late fees and
other penalties resulting from perceived reductions in the amount of
time consumers are given to make timely payments, allocation of payments
first to balances with the lowest annual percentage rate, application of
increased annual percentage rates to pre-existing balances, and the
so-called two-cycle method of computing interest.

[B. The OTS's August 2007 FTC Act Advance Notice of Proposed
Rulemaking]{.underline}

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 HOLA;

-   OTS's existing Credit Practices Rule;

-   Possible principles OTS could use to define unfair and deceptive
    acts or practices, including looking to standards the Federal Trade
    Commission (FTC) and states follow;

-   Practices that OTS, individually or on an interagency basis, has
    addressed through guidance;

-   Practices that other federal agencies have addressed through
    rulemaking;

-   Practices that states have addressed statutorily;

-   Acts or practices OTS might target involving products such as credit
    cards, residential mortgages, gift cards, and deposit accounts; and

-   OTS's existing Advertising Rule (12 CFR 563.27).

OTS received 29 comment letters on its ANPR. These comments were
summarized in the Agencies' May 2008 proposed rule. [See]{.underline} 73
FR 28904, 28905-28906 (May 19, 2008) (May 2008 Proposal). In brief,
financial industry commenters opposed OTS taking any further action
beyond issuing guidance along those lines. They argued that OTS must not
create an unlevel playing field for OTS-regulated institutions and that
uniformity among the federal banking agencies and the NCUA is essential.
They challenged the list of practices OTS had indicated it could
consider targeting, arguing that the practices listed were neither
unfair nor deceptive under the FTC standards.

In contrast, the consumer group commenters urged OTS to move ahead with
a rule that would combine the FTC's principles-based standards with
prohibitions on specific practices. They urged OTS to ban numerous
practices, including several practices addressed in the final rule (such
as "universal default" repricing, applying payments first to balances
with the lowest interest rate, and credit cards marketed at subprime
consumers that provide little available credit at account opening).

[C. Related Action by the Agencies Preceding This
Rulemaking]{.underline}

In addition to receiving information via comments, the Agencies have
conducted outreach regarding credit card practices, including meetings
and discussions with consumer group representatives, industry
representatives, other federal and state banking agencies, and the FTC.
On April 8, 2008, the Board hosted a forum on credit cards in which card
issuers and payment network operators, consumer advocates, counseling
agencies, and other regulatory agencies met to discuss relevant industry
trends and identify areas that may warrant action or further study. In
addition, the Agencies reviewed consumer complaints received by each of
the federal banking agencies and several studies of the credit card
industry.[^2] The Agencies' understanding of credit card practices and
consumer behavior was also informed by the results of consumer testing
conducted on behalf of the Board in connection with its June 2007
Regulation Z Proposal.

Finally, the Agencies gathered information from a number of
Congressional hearings on consumer protection issues regarding credit
cards.[^3] In these hearings, members of Congress heard testimony from
individual consumers, representatives of consumer groups,
representatives of financial and credit card industry groups, and
others. Consumer and community group representatives generally testified
that certain credit card practices (including those discussed above)
unfairly increase the cost of credit after the consumer has committed to
a particular transaction. These witnesses further testified that these
practices should be prohibited because they lead consumers to
underestimate the costs of using credit cards and that disclosure of
these practices under Regulation Z is ineffective. Financial services
and credit card industry representatives agreed that consumers need
better disclosures of credit card terms but testified that substantive
restrictions on specific terms would lead to higher interest rates for
all borrowers as well as reduced access to credit for some.[^4]

[D. The Agencies' May 2008 Proposal]{.underline}

In May 2008, the Agencies proposed rules under the FTC Act addressing
unfair or deceptive acts or practices in connection with consumer credit
card accounts and overdraft services for deposit accounts.
[See]{.underline} 73 FR 28904 (May 2008 Proposal). These proposals were
accompanied by complementary proposals by the Board under Regulation Z
with respect to consumer credit card accounts and Regulation DD with
respect to deposit accounts. [See]{.underline} 73 FR 28866 (May 19,
2008) (May 2008 Regulation Z Proposal); 73 FR 28739 (May 19, 2008) (May
2008 Regulation DD Proposal).

In order to best ensure that all entities that offer consumer credit
card accounts and overdraft services on deposit accounts are treated in
a like manner, the Board, OTS, and NCUA joined together to issue the May
2008 Proposal. This interagency approach is consistent with section 303
of the Riegle Community Development and Regulatory Improvement Act of
1994. [See]{.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. Two federal banking agencies---the Board and
OTS---are primarily implementing the same statutory provision, section
18(f) of the FTC Act, as is the NCUA (although HOLA serves as a
secondary basis for OTS's rule). Accordingly, the Agencies endeavored to
propose rules that are as uniform as possible. Prior to issuing the
proposed rules, the Agencies also consulted with the two other federal
banking agencies, the Office of the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance Corporation (FDIC), as well as with
the FTC.

In an effort to achieve a level playing field, the May 2008 Proposal
focused on unfair and deceptive acts or practices involving credit cards
and overdraft services, which are generally provided only by depository
institutions such as banks, savings associations, and credit unions. The
Agencies recognized that state-chartered credit unions and any entities
providing consumer credit card accounts independent of a depository
institution fall within the FTC's jurisdiction and therefore would not
be subject to the proposed rules. The Agencies noted, however, that
FTC-regulated entities appear to represent a small percentage of the
market for consumer credit card accounts and overdraft services.[^5] For
OTS, addressing certain deceptive credit card practices in the May 2008
Proposal, rather than through an interpretation or expansion of its
Advertising Rule, also fosters consistency because the other Agencies do
not have comparable advertising regulations.

[Credit Practices Rule]{.underline}

The Agencies proposed to make non-substantive, organizational changes to
the Credit Practices Rule. Specifically, in order to avoid repetition,
the Agencies proposed to move the statement of authority, purpose, and
scope out of the Credit Practices Rule and revise it to apply not only
to the Credit Practices Rule but also to the proposed rules regarding
consumer credit card accounts and overdraft services. OTS and NCUA
proposed additional, non-substantive changes to the organization of
their versions of the Credit Practices Rule. OTS also solicited comment
on whether to retain the state exemption provision in its Credit
Practices Rule.

[Consumer Credit Card Accounts]{.underline}

The Agencies proposed seven provisions under the FTC Act regarding
consumer credit card accounts. These provisions were intended to ensure
that consumers have the ability to make informed decisions about the use
of credit card accounts without being subjected to unfair or deceptive
acts or practices.

First, institutions would have been prohibited from treating a payment
as late for any purpose unless consumers had been provided a reasonable
amount of time to make that payment. The proposed rule would have
created a safe harbor for institutions that adopt reasonable procedures
designed to ensure that periodic statements (which provide payment
information) are mailed or delivered at least 21 days before the payment
due date.

Second, when different annual percentage rates apply to different
balances, institutions would have been required to allocate amounts paid
in excess of the minimum payment using one of three specified methods or
a method that is no less beneficial to consumers. Furthermore, when an
account has a discounted promotional rate balance or a balance on which
interest is deferred, institutions would have been required to allocate
amounts in excess of the minimum payment first to balances on which the
rate is not discounted or interest is not deferred (except, in the case
of a deferred interest plan, for the last two billing cycles during
which interest is deferred). Institutions would also have been
prohibited from denying consumers a grace period on purchases (if one is
offered) solely because they have not paid off a balance at a
promotional rate or a balance on which interest is deferred.

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

Fourth, institutions would have been prohibited from assessing a fee if
a consumer exceeds the credit limit on an account solely due to a hold
placed on the available credit. If, however, the actual amount of the
transaction would have exceeded the credit limit, then a fee could have
been assessed.

Fifth, institutions would have been prohibited from imposing finance
charges based on balances for days in billing cycles that precede the
most recent billing cycle. The proposed rule would have prohibited
institutions from reaching back to earlier billing cycles when
calculating the amount of interest charged in the current cycle, a
practice that is sometimes referred to as two- or double-cycle billing.

Sixth, institutions would have been prohibited from financing security
deposits or fees for the issuance or availability of credit (such as
account-opening fees or membership fees) if those deposits or fees
utilized the majority of the available credit on the account. The
proposal would also have required security deposits and fees exceeding
25 percent of the credit limit to be spread over the first year, rather
than charged as a lump sum during the first billing cycle.

Seventh, institutions making firm offers of credit advertising multiple
annual percentage rates or credit limits would have been required to
disclose in the solicitation the factors that determine whether a
consumer will qualify for the lowest annual percentage rate and highest
credit limit advertised.

[Overdraft Services]{.underline}

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

The first provision provided that it would be an unfair act or practice
for an institution to assess a fee or charge on a consumer's account for
paying an overdraft unless the institution provided the consumer with
the right to opt out of the institution's payment of overdrafts and a
reasonable opportunity to exercise the opt out, and the consumer did not
opt out. The proposed opt-out right would have applied to all
transactions that overdraw an account regardless of whether the
transaction is, for example, a check, an ACH transaction, an ATM
withdrawal, a recurring payment, or a debit card purchase at a point of
sale.

The second proposal would have prohibited certain acts or practices
associated with assessing overdraft fees in connection with debit holds.
Specifically, the proposal would have prohibited an institution from
assessing an overdraft fee if the overdraft was caused solely by a hold
placed on funds that exceeded the actual purchase amount of the
transaction, unless this purchase amount would have caused the
overdraft.

[Comments on the May 2008 Proposal]{.underline}

The comment period for this proposal closed on August 4, 2008. The Board
received more than 60,000 comments on the May 2008 Proposal, more than
for any other regulatory proposal in its history. OTS received
approximately 5,200 comments. NCUA received approximately 1,000
comments. The overwhelming majority of these comments came from
individual consumers. A substantial majority of individual consumers
expressed support for the proposed rules, and many urged the Agencies to
go further in protecting consumers. The remaining comments came from
credit card issuers, banks, savings associations, credit unions, trade
associations, consumer groups, members of Congress, other federal
banking agencies, state and local governments, and others. These
commenters expressed varying views on the May 2008 Proposal. In
preparing this final rule, the Agencies considered the comments and the
accompanying information. To the extent that commenters addressed
specific aspects of the proposal, those comments are discussed below.

**II. Statutory Authority Under the Federal Trade Commission Act To
Address Unfair or Deceptive Acts or Practices**

[A. Rulemaking and Enforcement Authority Under the FTC Act]{.underline}

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).[^6]

The FTC Act allocates responsibility for enforcing compliance with
regulations prescribed under section 18 with respect to banks, savings
associations, and federal credit unions among the Board, OTS, and NCUA,
as well as the OCC and the FDIC. [See]{.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.[^7]

In response to the May 2008 Proposal, industry commenters and the OCC
noted that the Board has stated in the past that enforcement of the FTC
Act's prohibition on unfair and deceptive practices is best handled on a
case-by-case basis because determinations of unfairness and deception
depend heavily on individual facts and circumstances.[^8] These
commenters urged that the Agencies withdraw the proposed rules and that
the Board instead use its authority under TILA, the Electronic Fund
Transfer Act (EFTA), 15 U.S.C. 1693 [et]{.underline} [seq]{.underline}.,
or other statutes to promulgate rules regarding consumer credit card
accounts and overdraft services on deposit accounts, respectively. One
commenter suggested that OTS instead use its authority under HOLA.

As discussed in greater detail below in § VI of this **SUPPLEMENTARY
INFORMATION**, the Agencies agree that concerns about overdraft services
can be appropriately addressed using the Board's authority under the
EFTA. With respect to consumer credit card accounts, however, the
Agencies believe that use of their FTC Act authority is appropriate.
Although the Agencies continue to believe that case-by-case enforcement
is often the most effective means of addressing unfair and deceptive
practices, the practices addressed by the final rule are or have been
engaged in by a substantial number of the institutions offering credit
cards without significant material variation in the facts and
circumstances. As a result, case-by-case enforcement by the banking
agencies would not only be an inefficient means of addressing these
practices but could also lead to inconsistent outcomes. Accordingly, the
Agencies have determined that, in this instance, promulgating
regulations under the FTC Act is the most effective way to address the
practices at issue.[^9]

[B. Standards for Unfairness Under the FTC Act]{.underline}

Congress has codified standards developed by the FTC for its use in
determining whether acts or practices are unfair under section 5(a) of
the FTC Act.[^10] Specifically, the FTC Act provides that the FTC has no
authority to declare an act or practice unfair unless: (1) it causes or
is likely to cause substantial injury to consumers; (2) the injury is
not reasonably avoidable by consumers themselves; and (3) the injury is
not outweighed by countervailing benefits to consumers or to
competition. In addition, the FTC may consider established public
policy, but public policy may not serve as the primary basis for its
determination that an act or practice is unfair. [See]{.underline} 15
U.S.C. 45(n).

In proposing and finalizing rules under section 18(f)(1) of the FTC Act,
the Agencies have applied the statutory elements consistent with the
standards articulated by the FTC. The Board, FDIC, and OCC have
previously issued guidance generally adopting these standards for
purposes of enforcing the FTC Act's prohibition on unfair or deceptive
acts or practices.[^11] Although the OTS had not taken similar action in
generally applicable guidance prior to the May 2008 Proposal,[^12] the
commenters on OTS's ANPR who addressed this issue overwhelmingly urged
that any OTS action be consistent with the FTC's standards for
unfairness.

According to the FTC, an unfair act or practice will almost always
represent a market failure or imperfection that prevents the forces of
supply and demand from maximizing benefits and minimizing costs.[^13]
Not all market failures or imperfections constitute unfair acts or
practices, however. Instead, the central focus of the FTC's unfairness
analysis is whether the act or practice causes substantial consumer
injury.[^14]

[Substantial consumer injury]{.underline}. 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]

In response to the May 2008 Proposal, several commenters expressed
concern that the FTC's interpretation of substantial consumer injury is
overbroad and requested that the Agencies introduce a variety of
limitations. As noted above, the Agencies have adopted the FTC's
standards for determining whether an act or practice is unfair.
Accordingly, in the interest of uniform application of the FTC Act, the
Agencies decline to read in such limitations where the FTC has not done
so.[^18] Furthermore, the Agencies emphasize that a finding of consumer
injury does not, by itself, establish an unfair practice. Instead, as
discussed below and with respect to each of the prohibited practices,
the injury also must not be reasonably avoidable and must not be
outweighed by countervailing benefits to consumers or to competition.
Thus, while many practices that result in imposition of a fee or
assessment of interest may cause a substantial consumer injury, few may
satisfy the other elements of unfairness.

[Injury is not reasonably avoidable]{.underline}. The FTC has stated
that an injury is not reasonably avoidable when consumers are prevented
from effectively making their own decisions about whether to incur that
injury.[^19] The marketplace is normally expected to be self-correcting
because consumers are relied upon to survey the available alternatives,
choose those that are most desirable, and avoid those that are
inadequate or unsatisfactory.[^20] Accordingly, the test is not whether
the consumer could have made a wiser decision but whether an act or
practice unreasonably creates or takes advantage of an obstacle to the
consumer's ability to make that decision freely.[^21]

In response to the May 2008 Proposal, several industry commenters argued
that an injury resulting from the operation of a contractual provision
is always reasonably avoidable because the consumer could read the
contract and decide not to enter into it. These commenters further
argued that institutions could not be held responsible for consumers'
failure to read or understand the contract or the disclosures provided
by the institution. These arguments, however, are inconsistent with the
FTC's application of the unfairness analysis in support of its Credit
Practices Rule, where the FTC determined that consumers could not
reasonably avoid injuries caused by otherwise valid contractual
provisions.[^22] Furthermore, as discussed below, many of the practices
at issue either create the complexity that acts as an obstacle to
consumers' ability to make free and informed decisions or take advantage
of that complexity by assessing interest or fees when a consumer fails
to understand the practice.[^23]

[Injury is not outweighed by countervailing benefits]{.underline}. The
FTC has stated that the act or practice causing the injury must not also
produce benefits to consumers or competition that outweigh the
injury.[^24] Generally, it is important to consider both the costs of
imposing a remedy and any benefits that consumers enjoy as a result of
the practice.[^25] The FTC has stated that both consumers and
competition benefit from prohibitions on unfair or deceptive acts or
practices because prices may better reflect actual transaction costs and
merchants who do not rely on unfair or deceptive acts or practices are
no longer required to compete with those who do.[^26]

[Public policy]{.underline}. As noted above, the FTC may consider
established public policy in making an unfairness determination, but
public policy may not serve as the primary basis for such a
determination.[^27] For purposes of the unfairness analysis, public
policy is generally embodied in a statute, regulation, or judicial
decision.[^28] As discussed below, the Agencies have considered various
authorities cited by commenters as evidence of public policy.[^29] At no
point, however, have the Agencies used public policy as the primary
basis for a determination that a practice was unfair.

Some commenters argued that section 18(f)(1) of the FTC Act prevents the
Board from issuing final rules that would seriously conflict with the
Board's essential monetary and payments systems policies. The language
cited by the commenters, however, does not apply to this rulemaking.
Instead, this language creates an exception to the general requirement
that the Board promulgate regulations substantially similar to those
issued by the FTC if the Board "finds that implementation of similar
regulations with respect to banks, savings and loan institutions or
Federal credit unions would seriously conflict with essential monetary
and payments systems policies of such Board, and publishes any such
finding, and the reasons therefore, in the Federal Register."[^30]
Nevertheless, to the extent a commenter has cited a specific monetary or
payments systems policy that may conflict with one of these rules, the
Agencies have considered that potential conflict below.

[C. Standards for Deception Under the FTC Act]{.underline}

The FTC has also adopted standards for determining whether an act or
practice is deceptive under the FTC Act.[^31] Under the FTC's standards,
an act or practice is deceptive where: (1) there is a representation or
omission of information that is likely to mislead consumers acting
reasonably under the circumstances; and (2) that information is material
to consumers.[^32] Although these standards have not been codified, they
have been applied by numerous courts.[^33] Accordingly, in proposing
rules under section 18(f)(1) of the FTC Act, the Agencies applied the
standards articulated by the FTC for determining whether an act or
practice is deceptive.[^34]

A representation or omission is deceptive if the overall net impression
created is likely to mislead consumers.[^35] The FTC conducts its own
analysis to determine whether a representation or omission is likely to
mislead consumers acting reasonably under the circumstances.[^36] When
evaluating the reasonableness of an interpretation, the FTC considers
the sophistication and understanding of consumers in the group to whom
the act or practice is targeted.[^37] If a representation is susceptible
to more than one reasonable interpretation, and if one such
interpretation is misleading, then the representation is deceptive even
if other, non-deceptive interpretations are possible.[^38]

A representation or omission is material if it is likely to affect the
consumer's conduct or decision regarding a product or service.[^39]
Certain types of claims are presumed to be material, including express
claims and claims regarding the cost of a product or service.[^40]

[D. Choice of Remedy]{.underline}

The Agencies have wide latitude to determine what remedy is necessary to
prevent an unfair or deceptive act or practice so long as that remedy
has a reasonable relation to the act or practice.[^41] The Agencies have
carefully considered the potential remedies for addressing each practice
and have adopted the remedy that, in the Agencies' judgment, is
effective in preventing that practice while minimizing the burden on
institutions.

**III. Summary of Final Rule**

Based on the comments and further analysis, the Agencies have revised
the proposed rules substantially. As discussed in greater detail below,
the Agencies are not taking action on some aspects of the proposed rule
at this time. However, the Agencies note that this rule is not intended
to identify all unfair or deceptive acts or practices, even with regard
to consumer credit card accounts. Accordingly, the fact that a
particular act or practice is not addressed by today's final rule does
not limit the ability of the Agencies to make a determination that it is
unfair or deceptive. As noted elsewhere, to the extent that specific
practices raise concerns regarding unfairness or deception under the FTC
Act, the Agencies plan to continue to address those practices on a
case-by-case basis through supervisory and enforcement actions.

[Credit Practices Rule]{.underline}

The Agencies proposed to make certain non-substantive, organizational
changes to their respective versions of the Credit Practices Rule. These
changes are adopted as proposed except for one additional nonsubstantive
clarification to the scope paragraph of OTS's rule.

OTS also solicited comment on eliminating the section of its rule on
state exemptions. 73 FR at 28911. OTS is eliminating that section as
discussed in § IV of this **SUPPLEMENTARY INFORMATION**.

[Consumer Credit Card Accounts]{.underline}

In May 2008, the Agencies proposed several provisions under the FTC Act
related to consumer credit card accounts. As discussed below, based on
the comments and further analysis, the Agencies have adopted five
provisions designed to protect consumers who use credit cards from
unfair acts or practices.

First, the Agencies have adopted the proposed rule prohibiting
institutions from treating a payment as late for any purpose unless
consumers have been provided a reasonable amount of time to make that
payment. The Agencies have also adopted the proposed safe harbor
providing that institutions may comply with this requirement by adopting
reasonable procedures designed to ensure that periodic statements are
mailed or delivered at least 21 days before the payment due date.
Elsewhere in today's **Federal Register**, the Board has adopted two
additional proposals under Regulation Z that further ensure that
consumers receive a reasonable amount of time to make payment.
Specifically, the Board has revised 12 CFR 226.10(b) to seek to ensure
that creditors do not set cut-off times for mailed payments earlier than
5 p.m. at the location specified by the creditor for receipt of such
payments. The Board has also adopted 12 CFR 226.10(d), which requires
that, if the due date for payment is a day on which the U.S. Postal
Service does not deliver mail or the creditor does not accept payment by
mail, the creditor may not treat a payment received by mail the next
business day as late for any purpose.

Second, the Agencies have adopted a revised version of the proposed rule
regarding allocation of payments when different annual percentage rates
apply to different balances on a consumer credit card account. The final
rule requires institutions to allocate amounts paid in excess of the
minimum payment either by applying the entire amount first to the
balance with the highest annual percentage rate or by splitting the
amount pro rata among the balances.

Third, the Agencies have revised the proposed rule regarding increases
in annual percentage rates to require institutions to disclose at
account opening the rates that will apply to the account and to prohibit
institutions from increasing annual percentage rates unless expressly
permitted. Institutions are permitted to increase a rate disclosed at
account opening at the expiration of a specified period, provided that
the increased rate was also disclosed at account opening. After the
first year following opening of the account, institutions are also
permitted to increase rates for new transactions so long as the
institution complies with the 45-day advance notice requirement in
Regulation Z (adopted by the Board elsewhere in today's **Federal
Register**). In addition, institutions may increase a variable rate due
to the operation of an index and an increase a rate when the consumer is
more than 30 days' delinquent.

Fourth, the Agencies have adopted the proposed rule prohibiting
institutions from imposing finance charges based on balances for days in
billing cycles that precede the most recent billing cycle as a result of
the loss of a grace period. This rule generally prohibits institutions
from reaching back to earlier billing cycles when calculating the amount
of interest charged in the current cycle, a practice that is sometimes
referred to as two- or double-cycle billing.

Fifth, the Agencies have adopted a revised version of the proposed rule
regarding the financing of security deposits or fees for the issuance or
availability of credit (such as account-opening fees or membership
fees). The final rule prohibits institutions from financing security
deposits or fees for the issuance or availability of credit if, during
the first year after account opening, those deposits or fees consume the
majority of the available credit on the account. In addition, the
Agencies have adopted a requirement that security deposits and fees
exceeding 25 percent of the credit limit to be spread over no less than
the first six months, rather than charged as a lump sum during the first
billing cycle. Furthermore, elsewhere in today's **Federal Register**,
the Board has adopted revisions to Regulation Z requiring creditors that
collect or obtain a consumer's agreement to pay a fee before providing
account-opening disclosures to permit that consumer to reject the plan
after receiving the disclosures and, if the consumer does so, to refund
any fee collected or to take any other action necessary to ensure the
consumer is not obligated to pay the fee.

Finally, the Agencies are not taking action at this time on the proposed
rule addressing holds placed on available credit. As discussed below,
the Board is proposing to address holds placed on available funds in a
deposit account using its authority under Regulation E. In addition, the
Agencies are not taking action at this time on the proposed rule
regarding firm offers of credit advertising multiple annual percentage
rates or credit limits. Concerns about this practice are addressed by
amendments to Regulation Z adopted by the Board elsewhere in today's
**Federal Register**. The Agencies plan to rely on case-by-case
supervisory and enforcement actions in appropriate circumstances where
practices regarding credit holds or firm offers of credit raise
unfairness or deception concerns.

[Overdraft Services]{.underline}

The Agencies are not taking action on overdraft services on deposit
accounts or debit holds at this time. As discussed below, the Board has
published a separate proposal addressing these issues under Regulation E
elsewhere in today's **Federal Register**. The Agencies will review
information obtained through that rulemaking to determine whether to
take further action.

**IV. Section-by-Section Analysis of the Credit Practices Subpart**

On March 1, 1984, the FTC adopted its Credit Practices Rule pursuant to
its authority under the FTC Act to promulgate rules that define and
prevent unfair or deceptive acts or practices in or affecting
commerce.[^42] The FTC Act provides that, whenever the FTC promulgates a
rule prohibiting specific unfair or deceptive practices, the Board, OTS
(as the successor to the Federal Home Loan Bank Board), and NCUA must
adopt substantially similar regulations imposing substantially similar
requirements with respect to banks, savings associations, and federal
credit unions within 60 days of the effective date of the FTC's rule
unless the agency finds that such acts or practices by banks, savings
associations, or federal credit unions are not unfair or deceptive or
the Board finds that the adoption of similar regulations for banks,
savings associations, or federal credit unions would seriously conflict
with essential monetary and payment-systems policies of the Board. The
Agencies have previously adopted rules substantially similar to the
FTC's Credit Practices Rule.[^43]

As part of this rulemaking, the Agencies proposed to reorganize aspects
of their respective Credit Practices Rules. Although the Agencies have
approached these revisions differently in some respects, the Agencies do
not intend to create any substantive difference among their respective
rules and believe that these rules remain substantially similar to the
FTC's Credit Practices Rule. Except as otherwise stated below, the
Agencies did not receive comments on this portion of the proposal.

**Subpart A---General Provisions**

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

[\_\_.1 Authority, purpose, and scope]{.underline}[^44]

The provisions in proposed § \_\_.1 were largely drawn from the current
authority, purpose, and scope provisions in the Agencies' respective
Credit Practices Rules. As discussed below, § \_\_.1 is generally
adopted as proposed.

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

Proposed § \_\_.1(a) provided that the Agencies issued this part under
section 18(f) of the FTC Act. Section \_\_.1(a) is adopted largely as
proposed.

One commenter urged that OTS should use safety and soundness authority
as the legal basis for this rule, including its authority under HOLA.
While OTS disagrees with this commenter to the extent that it argued
that OTS should use its safety and soundness authority instead of its
FTC Act authority, OTS agrees that HOLA serves as an appropriate
secondary basis for OTS's portion of the rule. Accordingly, OTS is
inserting express references to HOLA in its rule (including § 535.1(a))
to reflect that HOLA serves as an independent secondary basis for OTS's
final rule.

HOLA provides authority for both safety and soundness and consumer
protection regulations. Consequently, HOLA serves as a secondary,
independent basis for OTS's rule. Using HOLA as a basis for this
rulemaking was discussed in the **SUPPLEMENTARY INFORMATION** that
accompanied the OTS's August 6, 2007 ANPR (72 FR at 43572-43573), was
reflected in the preamble to the proposed rule and proposed rule text
(73 FR at 28910 and 28948), and is also discussed further in the
section-by-section analysis of § 535.26 in this **SUPPLEMENTARY
INFORMATION**.

With regard to safety and soundness, HOLA section 4(a) (12 U.S.C.
1463(a)) authorizes the Director of OTS to issue regulations governing
savings associations that the Director determines to be appropriate to
carry out his responsibilities, including providing for the examination,
safe and sound operation, and regulation of savings associations. The
Director of OTS has used HOLA authority to issue regulations requiring
savings associations to operate safely and soundly.[^45] Existing OTS
rules also allow the agency to impose limits on credit card lending, if
a savings association's concentration in such lending presents a safety
and soundness concern.[^46] All of the practices addressed in the rule
will advance the safety and soundness of consumer credit card lending by
savings associations such as by reducing reputation risk, as well as the
risk of litigation under state contract laws and, where applicable,
state laws prohibiting unfair or deceptive acts or practices.

With regard to consumer protection, HOLA section 5(a) (12 U.S.C.
1464(a)) authorizes the Director of OTS to regulate federal savings
associations giving primary consideration to the best practices of
thrift institution in the United States. As courts have consistently and
repeatedly recognized for decades, HOLA empowered OTS and its
predecessor agency, the Federal Home Loan Bank Board (FHLBB), to adopt
comprehensive rules and regulations governing the operations of federal
savings associations.[^47] Consequently, OTS has a history of using HOLA
as the legal basis for consumer protection regulations. Examples include
the OTS Advertising Rule,[^48] OTS rules that limit home loan late
charges, prepayment penalties, and adjustments to the interest rate,
payment, balance, or term to maturity,[^49] as well as the portions of
the OTS Nondiscrimination Rule that exceed Equal Credit Opportunity Act
and Fair Housing Act requirements.[^50] All of the practices addressed
in the rule will help protect consumers.

[\_\_.1(b) Purpose]{.underline}

Proposed § \_\_.1(b) provided that the purpose of the part is to
prohibit unfair or deceptive acts or practices in violation of section
5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1). It further provided that the
part contains provisions that define and set forth requirements
prescribed for the purpose of preventing specific unfair or deceptive
acts or practices. In May 2008, the Agencies noted that these provisions
define and prohibit specific unfair or deceptive acts or practices
within a single provision, rather than setting forth the definitions and
remedies separately. Finally, proposed § \_\_.1(b) clarified that the
prohibitions in subparts B, C, and D do not limit the Agencies'
authority to enforce the FTC Act with respect to other unfair or
deceptive acts or practices.

The Agencies have revised proposed § \_\_.1(b) to reflect their decision
not to take action on proposed subpart D at this time. Also, OTS has
added an express reference to HOLA in § 535.1(b). Otherwise, this
provision is adopted as proposed.

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

Proposed § \_\_.1(c) described the scope of each agency's rules. The
Agencies each tailored this paragraph to describe those entities to
which their part applies.

The Board's proposed provision stated that the Board's rules would apply
to banks and their subsidiaries, except savings associations as defined
in 12 U.S.C. 1813(b). It further explained that enforcement of the
Board's rules is allocated among the Board, the OCC, and the FDIC,
depending on the type of institution. This provision was updated to
reflect intervening changes in law. The Board also proposed to revise
its Staff Guidelines to the Credit Practices Rule to remove questions
11(c)--1 and 11(c)--2, to update the substance of its answers to those
questions, and to publish those answers as commentary to proposed §
227.1(c). [See]{.underline} proposed Board comments 227.1(c)--1 and --2.
As proposed, the remaining questions and answers in the Board's Staff
Guidelines would remain in place. The Board has adopted these proposals
without alteration.

OTS's proposed provision stated that its rules apply to savings
associations and subsidiaries owned in whole or in part by a savings
association. OTS also enforces compliance with respect to these
institutions. As proposed, the entire OTS part would have the same
scope. In May 2008, OTS noted that this scope is somewhat different from
the scope of its existing Credit Practices Rule. Prior to today's
revisions, OTS's Credit Practices Rule applied to savings associations
and service corporations that were wholly owned by one or more savings
associations, which engaged in the business of providing credit to
consumers. Since the proposed rules would cover more practices than
consumer credit, the proposal deleted the reference to engaging in the
business of providing credit to consumers. The proposal also updated the
reference to wholly owned service corporations to refer instead to
subsidiaries in order to reflect the current terminology used in OTS's
Subordinate Organizations Rule.[^51]

Only one commenter addressed the scope of OTS's proposed rule. It
supported applying the rule to savings associations and subsidiaries as
proposed. Another commenter requested clarification of which entities
the rule refers to as "you." OTS is finalizing the scope as proposed but
clarifying through a parenthetical in section 535.1(c) that the term
"you" refers to savings associations and subsidiaries owned in whole or
in part by a savings association.

The NCUA's proposed provision stated that its rules would apply to
federal credit unions. This provision is adopted as proposed.

[227.1(d) Definitions]{.underline}

Proposed § \_\_.1(d) of the Board's rule would have clarified that,
unless otherwise noted, 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). This provision is adopted as proposed.

OTS and NCUA did not have a need for a comparable subsection so none was
included in their proposed rules.

[227.2 Consumer-Complaint Procedure]{.underline}

In order to accommodate the revisions discussed above, the Board
proposed to consolidate the consumer complaint provisions previously
located in 12 CFR 227.1 and 227.2 in proposed § 227.2. The Board has
revised the proposal for clarity and to include an e-mail address and
website where consumers can submit complaints. Otherwise, this provision
is adopted as proposed.

OTS and NCUA do not have and did not propose to add comparable
provisions.[^52]

**Subpart B---Credit Practices**

Each agency has placed the substantive provisions of their Credit
Practices Rule in Subpart B. In order to retain the current numbering in
its Credit Practices Rule, the Board has reserved 12 CFR 227.11, which
previously contained the Board's statement of authority, purpose, and
scope. The other provisions of the Board's Credit Practices Rule (§§
227.12 through 227.16) have not been revised.

As discussed below, OTS proposed several notable changes to its version
of Subpart B. Except as otherwise stated, these sections have been
adopted as proposed.

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

OTS received no comments on its proposed changes to this section and is
finalizing it as proposed. OTS has deleted the definitions of "Act,"
"creditor," and "savings association" as unnecessary. It has substituted
the term "you" for "savings association" or "creditor" in the
definitions of "consumer credit" and "obligation" as applicable. For the
convenience of the user, OTS has also incorporated the definition of
"consumer credit" into this section, instead of using a cross-reference
to a definition contained in a different part of OTS's rules. OTS has
moved the definition of "cosigner" to the section on unfair or deceptive
cosigner practices. OTS has also merged the definition of "debt" into
the definition of "collecting a debt" contained in the section on late
charges. Finally, OTS has moved the definition of "household goods" to
the section on unfair credit contract provisions.

[Section 535.12 Unfair Credit Contract Provisions (previously section
535.2)]{.underline}

OTS received no comments on its proposed changes to this section and is
finalizing it as proposed. OTS has revised the title of this section to
reflect its focus on credit contract provisions. OTS has also deleted
the obsolete reference to extensions of credit after January 1, 1986.

[Section 535.13 Unfair or Deceptive Cosigner Practices (previously
section 535.3)]{.underline}

OTS received no comments on its proposed changes to this section and is
finalizing it as proposed. OTS has deleted the obsolete reference to
extensions of credit after January 1, 1986. OTS has substituted the term
"substantially similar" for the term "substantially equivalent" in
referencing a document that equates to the cosigner notice for
consistency with the Board's rule and to avoid confusion with the term
of art "substantial equivalency" used in the Board's section on state
exemptions. OTS has also clarified that the date that may be stated on
the cosigner notice is the date of the transaction. NCUA has made
similar amendments to its rule in § 706.13 (previously § 706.3).

[Section 535.14 Unfair Late Charges (previously section
535.4)]{.underline}

OTS received no comments on its proposed changes to this section and is
finalizing it as proposed. OTS has revised the title of this section to
reflect its focus on unfair late charges. OTS has deleted the obsolete
reference to extensions of credit after January 1, 1986. Similarly, NCUA
has made similar revisions to § 706.14 (previously § 706.4).

[Section 535.15 State Exemptions (previously section 535.5)]{.underline}

OTS proposed to revise the subsection on delegated authority to update
the current title of the OTS official with delegated authority to make
determinations under this section. As discussed below, however, OTS has
removed § 535.5 from codification and has not replaced it with proposed
§ 535.15.

The FTC's Credit Practices Rule included a provision allowing states to
seek exemptions from the rule if state 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. The May 2008 Proposal did not extend this provision to the
proposed rules for consumer credit card accounts and overdraft services
because there was no legal requirement to do so.[^53] The Agencies noted
that only three states have been granted exemptions under the Credit
Practices Rule.[^54] The Agencies stated that, because the exemption is
available when state law is "substantially equivalent" to the federal
rule, an exemption may provide little relief from regulatory burden
while undermining the uniform application of federal standards.
Accordingly, the Agencies requested comment on whether states should be
permitted to seek exemption from the proposed rules on consumer credit
card accounts and overdraft services if state law affords a greater or
substantially similar level of protection. In addition, OTS requested
comment on whether the state exemption provision in its Credit Practices
Rule should be retained.

The Agencies received only a few comments on state exemptions. One
consumer advocacy organization urged the Agencies to expand the
opportunity for state exemptions to the final rule as a way to ensure a
consumer private right of action under state law and to enable states to
develop new protections. In contrast, several financial institutions
opposed allowing states to seek exemption from practices addressed in
the final rule. They argued that allowing such exemptions would provide
no meaningful regulatory burden relief and would interfere with
consistent implementation of the final rule.

The Agencies have decided not to extend the opportunity for state
exemptions to the final rule. First, as noted above, the FTC Act does
not require the Agencies to provide such an opportunity. Second,
requiring all institutions under the Agencies' jurisdiction to comply
with the final rule will enhance consumer protections nationwide and
facilitate uniformity in examinations.

OTS received a few comments on whether it should retain the existing
state exemption provision in its Credit Practices Rule. The comments on
this issue largely tracked those discussed above concerning whether to
expand the availability of state exemptions to new practices addressed
in the final rule. In addition, one organization representing state
banking interests supported preserving state laws that afford more
protection to consumers than the federal rule.

A few comments reflect confusion about how the availability or
unavailability of state exemptions would affect federal savings
associations. Eliminating the availability of exemptions under the OTS
Credit Practices Rule will have no direct effect on federal savings
associations. Apparently, the only state exemption granted by OTS or its
predecessor is to the State of Wisconsin for substantially equivalent
provisions of the Wisconsin Consumer Act. That exemption only applied to
state-chartered savings associations; it specifically did not extend to
federal savings associations.[^55]

For the same reasons the Agencies are not extending the opportunity for
state exemptions to apply to new practices addressed in the final rule,
OTS is removing § 535.5 and eliminating the existing state exemption
authority under its rule. Accordingly, the exemption granted to
Wisconsin and any other exemptions which may have been granted by OTS or
its predecessor with respect to its Credit Practices Rule will cease to
be in effect as of this rule's effective date.

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

Pursuant to their authority under 15 U.S.C. 57a(f)(1), the Agencies
adopt rules prohibiting specific unfair acts or practices with respect
to consumer credit card accounts. A secondary basis for OTS's rule is
HOLA. These rules are located in a new Subpart C to the Agencies'
respective regulations under the FTC Act.

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

Section \_\_.21 defines certain terms used in Subpart C.

[\_\_.21(a) Annual Percentage Rate]{.underline}

Proposed § \_\_.21(a) defined "annual percentage rate" as the product of
multiplying each periodic rate for a balance or transaction on a
consumer credit card account by the number of periods in a year. This
definition corresponded to the definition of "annual percentage rate" in
12 CFR 226.14(b). As discussed in the Board's official staff commentary
to 12 CFR 226.14(b), this computation does not reflect any particular
finance charge or periodic balance. [See]{.underline} 12 CFR 226.14
comment 226.14(b)--1. This definition also incorporated the definition
of "periodic rate" from Regulation Z. [See]{.underline} 12 CFR 226.2.

The Agencies did not receive any significant comments on this
definition. Accordingly, it is adopted as proposed.

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

Proposed § \_\_.21(b) defined "consumer" as a natural person to whom
credit is extended under a consumer credit card account or a natural
person who is a co-obligor or guarantor of a consumer credit card
account. The Agencies did not receive any significant comments on this
definition. Accordingly, it is adopted as proposed.

[\_\_.21(c) Consumer Credit Card Account]{.underline}

Proposed § \_\_.21(c) defined "consumer credit card account" as an
account provided to a consumer primarily for personal, family, or
household purposes under an open-end credit plan that is accessed by a
credit or charge card. This definition incorporated the definitions of
"open-end credit," "credit card," and "charge card" from Regulation Z.
[See]{.underline} 12 CFR 226.2. Under the proposed definition, a number
of accounts would have been excluded consistent with exceptions to
disclosure requirements for credit and charge card applications and
solicitations. [See]{.underline} 12 CFR 226.5a(a)(5). For example,
home-equity plans accessible by a credit card and lines of credit
accessible by a debit card are not covered by proposed § \_\_.21(c).

One consumer group requested that this definition be expanded to cover
debit cards with a linked credit card feature. The Agencies do not
believe any change is necessary because, to the extent such cards meet
the definition of "credit card" under 12 CFR 226.2, they are covered.
Accordingly, this definition is adopted as proposed.

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

Proposed § \_\_.21(d) defined "promotional rate." This definition was
similar to the definition of "promotional rate" proposed by the Board in
12 CFR 226.16(e)(2) in the May 2008 Regulation Z Proposal.
[See]{.underline} 73 FR at 28892. As discussed in greater detail below,
the provisions in proposed §§ \_\_.23 and \_\_.24 utilizing this
definition have been revised such that a definition of "promotional
rate" is no longer necessary for purposes of this subpart. Accordingly,
this definition and its accompanying commentary have not been included
in the final rule.

**Section \_\_.22---Unfair Acts or Practices Regarding Time To Make
Payment**

[Summary]{.underline}. In May 2008, the Agencies proposed § \_\_.22(a),
which would have prohibited institutions from treating payments on a
consumer credit card account as late for any purpose unless the
institution has provided a reasonable amount of time for consumers to
make payment. [See]{.underline} 73 FR at 28912-28914. The Agencies also
proposed a safe harbor in § \_\_.22(b) for institutions that adopt
reasonable procedures designed to ensure that periodic statements
specifying the payment due date are mailed or delivered to consumers at
least 21 days before the payment due date. Finally, to avoid any
potential conflict with section 163(a) of TILA (15 U.S.C. 1666b(a)), the
Agencies expressly stated in proposed § \_\_.22(c) that the rule would
not apply to any time period provided by an institution within which the
consumer may repay any portion of the credit extended without incurring
an additional finance charge. As discussed below, based on the comments
and further analysis, the Agencies have adopted § \_\_.22 as proposed
except that proposed § \_\_.22(b) has been revised to clarify that
institutions must be able to establish that they have complied with
§ \_\_.22(a).

[Background]{.underline}. Section 163(a) of TILA requires creditors to
send periodic statements at least 14 days before expiration of any
period during which consumers can avoid finance charges on purchases by
paying the balance in full (in other words, the "grace period"). 15
U.S.C. 1666b(a). TILA does not, however, mandate a grace period, and
grace periods generally do not apply when consumers carry a balance from
month to month. Regulation Z requires that creditors mail or deliver
periodic 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); 12 CFR 226.5
comment 5(b)(2)(ii)--1.

In its June 2007 Regulation Z Proposal, the Board noted anecdotal
evidence of consumers receiving statements relatively close to the
payment due date, with little time remaining to mail their payments in
order to avoid having those payments treated as late. The Board observed
that it may take several days for a consumer to receive a statement
after the close of a billing cycle. The Board also observed that
consumers who pay by mail may need to mail their payments several days
before the due date to ensure that the payment is received on or before
that date. Accordingly, the Board requested comment on whether it should
recommend to Congress that the 14-day requirement in section 163(a) of
TILA be increased. [See]{.underline} 72 FR at 32973.

In response to the June 2007 Regulation Z Proposal, individual
consumers, consumer groups, and a member of Congress stated that
consumers were not being provided with a reasonable amount of time to
pay their credit card bills. These commenters indicated that, because of
the time required for periodic statements to reach consumers by mail and
for consumers' payments to reach creditors by mail, consumers had little
time in between to review their statements for accuracy before making
payment. This situation can be exacerbated if the consumer is traveling
unexpectedly or otherwise unable to give the statement immediate
attention when it is delivered or if the consumer needs to compare the
statement to receipts or other records. In addition, some commenters
indicated that consumers are unable to accurately predict when their
payment will be received by a creditor due to uncertainties about how
quickly mail is delivered. Some commenters argued that, because of these
difficulties, consumers' payments were received after the due date,
leading to finance charges as a result of loss of the grace period, late
fees, rate increases, and other adverse consequences.

Industry commenters, however, generally stated that consumers currently
receive ample time to make payments, particularly in light of the
increasing number of consumers who receive periodic statements
electronically and make payments electronically or by telephone. These
commenters also stated that providing additional time for consumers to
make payments would be operationally difficult and would reduce interest
revenue, which would have to be recovered by raising the cost of credit
for all consumers.

Comments on the Agencies' May 2008 Proposal were generally consistent
with those on the Board's June 2007 Regulation Z Proposal. Individual
consumers, consumer groups, members of Congress, the FDIC, and state
attorneys general largely supported the proposed rule. Some of these
commenters stated that institutions have reduced the amount of time for
consumers to make payment while increasing the late payment fees,
penalty rates, and other costs imposed on consumers as a result of late
payment.[^56] In contrast, although some industry groups and credit card
issuers supported the proposal, most industry commenters opposed the
proposed rule, stating that consumers have more time to make payment
than ever before because of alternative means for receiving statements
and making payments. Some industry commenters also stated that complying
with the proposed safe harbor would be impossible without making costly
operational changes. To the extent that commenters addressed specific
aspects of the proposal or its supporting legal analysis, those comments
are discussed below.

**Legal Analysis**

The Agencies conclude that, based on the comments received and their own
analysis, it is an unfair act or practice under 15 U.S.C. 45(n) and the
standards articulated by the FTC to treat a payment on a consumer credit
card account as late for any purpose (other than expiration of a grace
period) unless the consumer has been provided a reasonable amount of
time to make that payment.

[Substantial consumer injury]{.underline}. In the May 2008 Proposal, the
Agencies stated that an institution's failure to provide consumers a
reasonable amount of time to make payment appeared to cause substantial
monetary and other injury. The Agencies noted that, when a payment is
received after the due date, institutions may impose late fees, increase
the annual percentage rate on the account as a penalty, or report the
consumer as delinquent to a credit reporting agency.

Several industry commenters stated that consumers are not harmed by the
lack of a reasonable amount of time to pay because a significant
majority of consumers pay on or before the due date, indicating that
they currently receive sufficient time to make payment. Other
commenters, however, noted that the GAO Report found that, in 2005, 35
percent of active accounts were assessed at least one late fee and that
the average late fee assessment per active account was \$30.92.[^57] In
addition, the Chairman of the Senate Permanent Subcommittee on
Investigations cited case histories of consumers who received periodic
statements shortly before the due date, making it difficult for them to
avoid a late fee and, in some cases, a rate increase. This comment also
cited instances in which consumers submitted payments 10 to 14 days in
advance of the due date, only to have the payment treated as late.
Individual consumers described similar experiences in their comments.
Thus, the Agencies conclude that the failure to provide a reasonable
amount of time to make payment causes or is likely to cause substantial
monetary injury to a significant number of consumers.

[Injury is not reasonably avoidable]{.underline}. The Agencies stated in
the May 2008 Proposal that it appeared consumers could not reasonably
avoid the injuries caused by late payment unless they were provided a
reasonable amount of time to pay. The Agencies observed that it could be
unreasonable to expect consumers to make a timely payment if they are
not given a reasonable amount of time to do so after receiving a
periodic statement, although what constitutes a reasonable amount of
time may vary based on the circumstances. The Agencies noted that TILA
and Regulation Z provide consumers with the right to dispute
transactions or other items that appear on their periodic statements.
Accordingly, the Agencies reasoned that, in order to exercise certain of
these rights, consumers must have a reasonable opportunity to review
their statements. [See]{.underline} 15 U.S.C. 1666i; 12 CFR 226.12(c).

The Agencies further stated that, in some cases, travel or other
circumstances may prevent the consumer from reviewing the statement
immediately upon receipt. Finally, as discussed above, the Agencies
recognized that, because consumers cannot control when a mailed payment
will be received by the institution, a payment mailed well in advance of
the due date may nevertheless arrive after that date.

Some industry commenters stated that consumers should know the due date
and minimum payment before receiving a periodic statement and should
therefore be prepared to make payment immediately. As an initial matter,
however, the consumer's due date and minimum payment may vary from month
to month depending on the institution's practices. For example, some
institutions use a 30-day billing cycle, which results in due dates that
vary with the length of the month. Similarly, a consumer would not
necessarily know how much to pay without the periodic statement because
the amount of the required minimum payment may vary depending on the
percentage of the total balance included and whether interest charges
and fees are included. Furthermore, a consumer who pays the balance in
full each month may not know how much to pay until receiving a periodic
statement stating the total amount owed.

Furthermore, this argument fails to recognize, as discussed above, that
consumers must have a reasonable opportunity to review their statement
in order to exercise their dispute rights under TILA and Regulation Z.
Finally, travel or other circumstances may prevent the consumer from
reviewing the statement immediately. Accordingly, the Agencies conclude
the injuries caused by late payment are not reasonably avoidable unless
the consumer is provided a reasonable amount of time to make payment.

[Injury is not outweighed by countervailing benefits]{.underline}. The
May 2008 Proposal stated that the injury does not appear to be
outweighed by any countervailing benefits to consumers or competition.
At the proposal stage, the Agencies were not aware of any direct benefit
to consumers from receiving too little time to make their payments. The
Agencies observed that, although a longer time to make payment could
result in additional finance charges for consumers who do not receive a
grace period, the consumer would have the choice whether to wait until
the due date to make payment. The Agencies also acknowledged that, as a
result of the proposed rule, some institutions could be required to
incur costs to alter their systems and would, directly or indirectly,
pass those costs on to consumers. The Agencies stated, however, that it
did not appear that these costs would outweigh the benefits to consumers
of receiving a reasonable amount of time to make payment.

Some industry commenters stated that, because their practices are
already consistent with the proposed safe harbor in § \_\_.22(b), the
costs of complying with the proposed rule would be minimal. Other
industry commenters indicated that complying with the proposed safe
harbor would require significant changes to their processes for
generating and delivering periodic statements. As discussed below, the
Agencies have adopted the safe harbor as proposed. [See]{.underline}
§ \_\_.22(b)(2). Assuming that the cost of altering practices to comply
with a 21-day safe harbor will be passed on to consumers, this cost will
be spread among thousands or hundreds of thousands of consumers and will
not outweigh the benefits to consumers of avoiding late fees and
increased annual percentage rates. Thus, the Agencies conclude that the
injury to consumers is not outweighed by any countervailing benefits to
consumers or competition.

[Public policy]{.underline}. Some industry commenters stated that the
proposed 21-day safe harbor was contrary to public policy and the
Board's established payment systems policy as set forth in section
163(a) of TILA and section 226.5(b)(2)(ii) of Regulation Z, which, as
discussed above, provide that periodic statements must be mailed at
least 14 days in advance of the expiration of the grace period. The
Agencies, however, have expressly provided that § \_\_.22 does not apply
to the mailing or delivery of periodic statements with respect to the
expiration of grace periods. [See]{.underline} § \_\_.22(c). In the May
2008 Proposal, the Agencies recognized that, in enacting section 163(a)
of TILA, Congress set the minimum amount of time between sending the
periodic statement and expiration of any grace period offered by the
creditor at 14 days. Because most creditors currently offer grace
periods and use a single due date for expiration of the grace period and
the date after which a payment will be considered late for other
purposes (such as the assessment of late fees), the Board requested
comment in its June 2007 Regulation Z Proposal on whether it should
request that Congress increase the mailing requirement with respect to
grace periods.

Based on the comments received, the Agencies concluded in May 2008 that,
because many consumers carry a balance from month to month and therefore
do not receive a grace period, a separate rule might be needed to
specifically address harms other than loss of the grace period when
institutions do not provide a reasonable amount of time for consumers to
make payment (such as late fees and rate increases as a penalty for late
payment). However, in order to avoid any conflict with the statutory
requirement regarding grace periods, proposed § \_\_.22(c) specifically
provided that the rule would not affect the requirements of section
163(a) of TILA. Accordingly, because § \_\_.22(c) has been adopted as
proposed, the Agencies conclude that § \_\_.22 is not contrary to public
policy generally or any established payment systems policy of the Board.

**Final Rule**

[§ \_\_.22(a) General rule]{.underline}

Proposed § \_\_.22(a) would have prohibited institutions from treating a
payment as late for any purpose unless the consumer has been provided a
reasonable amount of time to make that payment. For the reasons
discussed above, the Agencies have adopted § \_\_.22(a) as proposed.

Proposed comment 22(a)--1 clarified that treating a payment as late for
any purpose includes increasing the annual percentage rate as a penalty,
reporting the consumer as delinquent to a credit reporting agency, or
assessing a late fee or any other fee based on the consumer's failure to
make a payment within the amount of time provided under this section.
One industry commenter stated that the failure to provide a reasonable
amount of time to pay is unlikely to cause a consumer to be reported as
delinquent to a credit reporting agency, citing the policy of credit
reporting agencies to consider an account delinquent only when it is 30
days past due.[^58] Although the Agencies agree that the failure to
provide a reasonable amount of time to pay is unlikely to cause injury
in the form of a delinquency notation on a credit report, allowing
institutions that fail to provide a reasonable amount of time to pay to
treat payments as late for purposes of credit reporting but not for
other purposes would be anomalous. Accordingly, comment 22(a)-1 is
adopted as proposed.

Proposed comment 22(a)-2 stated that whether an institution had provided
a reasonable amount of time to pay would be evaluated from the
perspective of the consumer, not the institution. Some industry
commenters requested that the Agencies establish standards for
determining whether a particular amount of time is reasonable. The
Agencies, however, have adopted a flexible reasonableness analysis
rather than a set of fixed standards because whether a particular amount
of time is sufficient for consumers to make payment will depend on the
facts and circumstances. In addition, in order to remove uncertainty and
facilitate compliance, the Agencies have, as discussed below, provided a
means for complying with § \_\_.22(a) in § \_\_.22(b) and its
accompanying commentary. Accordingly, comment 22(a)-2 is adopted as
proposed.

[\_\_.22(b) Compliance with general rule]{.underline}

As proposed, § \_\_.22(b) provided a safe harbor for institutions that
have adopted reasonable procedures designed to ensure that periodic
statements specifying the payment due date are mailed or delivered to
consumers at least 21 days before the payment due date. As explained in
the May 2008 Proposal, the 21-day safe harbor was intended to ensure
that consumers received at least a week to review their statement and
make payment. Compliance with this safe harbor would allow seven days
for the periodic statement to reach the consumer by mail, seven days for
the consumer to review the statement and make payment, and seven days
for that payment to reach the institution by mail. The Agencies noted
that, although increasing numbers of consumers are receiving periodic
statements and making payments electronically, a significant number
still utilize mail. The Agencies further noted that, while first class
mail is often delivered within three business days, in some cases it can
take significantly longer.[^59] Furthermore, some large credit card
issuers already recommend that consumers allow up to seven days for
their payments to be received by the issuer via mail.

The Agencies requested comment on whether the proposed 21-day safe
harbor provided a reasonable amount of time for consumers to review
their periodic statements and make payment. Consumer groups and others
stated that a longer period of 28 or 30 days was needed. Some industry
commenters stated that they currently mail or deliver periodic
statements 21 days in advance of the due date. Most industry commenters,
however, raised the following objections to the proposed 21-day safe
harbor.

First, many industry commenters stated that allowing seven days for
receipt of mailed periodic statements was excessive because, in most
cases, statements are generally delivered two to four days after
mailing. These commenters, however, provided only the average delivery
time or the delivery time for the great majority of consumers, not the
outer range of delivery times. For example, as one consumer group noted,
mailing times are often significantly longer for consumers in sparsely
populated rural areas. Thus, while the Agencies agree that seven days
may be more time than is needed for most consumers to receive a periodic
statement by mail, a safe harbor based solely on average mailing times
would not adequately protect the small but significant number of
consumers whose delivery times are longer than average. Furthermore,
because many institutions use practices that reduce delivery times for
periodic statements (such as pre-sorting statements by ZIP code prior to
delivery to the U.S. Postal Service), delivery times for periodic
statements mailed by institutions to consumers likely are not
representative of delivery times for payments mailed by consumers to
institutions.

Second, several industry commenters stated that allowing seven days for
mailing time was excessive for the additional reason that many consumers
receive their statements electronically and make payment electronically
or by telephone. These commenters, however, also confirmed that a
significant number of consumers receive statements and make payments by
mail. While many consumers at larger institutions have the ability to
review statements online, it is unclear how many actually do so since
most also receive statements by mail. Furthermore, the percentage of
consumers paying by mail varied significantly by the type of
institution. For example, some larger institutions reported that less
than half of their consumers use mail to submit payments, while an
industry group reported that 70 to 80 percent of community bank
consumers mail their payments. In addition, one consumer group cited a
study indicating that internet usage is not evenly distributed among the
population.[^60] Thus, a safe harbor based on the assumption that
consumers use alternative means to receive statements or make payments
would not protect a significant number of consumers.[^61]

Third, many industry commenters stated that complying with the 21-day
safe harbor would require significant and costly changes to
institutions' practices for generating and mailing periodic statements.
As discussed above, however, the Agencies have concluded that these
costs are outweighed by the benefits to consumers of receiving a
reasonable amount of time to pay.

Finally, some commenters stated that adjusting to the 21-day safe harbor
could lead to consumer confusion because the institution would not have
sufficient time to reflect timely payments on the subsequent periodic
statement. This concern, however, depends on a number of variables,
including the number of days in the month, whether the institution uses
billing cycles that vary with the length of the month (as opposed to a
fixed 30-day billing cycle), and whether the institution processes
payments on weekends or holidays. Although it is possible that, in some
narrow set of circumstances, an institution may not be able to reflect a
timely payment on the periodic statement, the Agencies conclude that any
resulting confusion does not warrant a reduction in the proposed safe
harbor. Accordingly, the 21-day safe harbor is adopted as proposed
except that, for the reasons discussed below, this provision has been
retitled and, for reasons discussed below, moved to § \_\_.22(b)(2).

In order to minimize burden and facilitate compliance, proposed comment
22(b)--1 clarified that an institution with reasonable procedures in
place designed to ensure that statements are mailed or delivered within
a certain number of days from the closing date of the billing cycle may
utilize the safe harbor by adding that number to the 21-day safe harbor
for purposes of determining the payment due date on the periodic
statement. Proposed comment 22(b)-1 is adopted as proposed. Accordingly,
if, for example, an institution had reasonable procedures in place
designed to ensure that statements are mailed or delivered within three
days of the closing date of the billing cycle, the institution could
comply with the safe harbor by stating a payment due date on its
periodic statements that is 24 days from the close of the billing cycle
(in other words, 21 days plus three days). Similarly, if an
institution's procedures reasonably ensured that payments would be sent
within five days of the close of the billing cycle, the institution
could comply with the safe harbor by setting the due date 26 days from
the close of the billing cycle.

Proposed comment 22(b)--2 further clarified that the payment due date is
the date by which the institution requires the consumer to make payment
in order to avoid being treated as late for any purpose (except with
respect to expiration of a grace period). Comment 22(b)-2 is adopted as
proposed.

The Agencies also received requests from industry for clarification that
compliance with the safe harbor is not the only means of complying with
the requirement that consumers be provided a reasonable amount of time
to make the payment. Accordingly, the Agencies have restructured §
\_\_.22(b) to provide additional clarity regarding compliance with §
\_\_.22(a). The Agencies have added a new § \_\_.22(b)(1), which
clarifies that institutions are responsible for establishing that they
have complied with § \_\_.22(a). The 21-day safe harbor, which the
Agencies have moved to § \_\_.22(b)(2), provides one method of
compliance. Finally, the Agencies have added comment 22(b)-3, which
provides an example of an alternative compliance method. In this
example, because an institution only provides periodic statements and
accepts payments electronically, the institution could deliver
statements for those accounts less than 21 days before the payment due
date and still satisfy the general rule in § \_\_.22(a) because those
consumers would need less time to receive their statements or make their
payments by mail.

[\_\_.22(c) Exception for grace periods]{.underline}

In order to avoid any potential conflict with section 163(a) of TILA,
proposed § \_\_.22(c) provided that proposed § \_\_.22(a) would not
apply to any time period provided by the institution within which the
consumer may repay the new balance or any portion of the new balance
without incurring finance charges (in other words, a grace period).

Several industry commenters argued that, notwithstanding proposed §
\_\_.22(c), institutions would essentially be required to use a single
date for the payment due date and for expiration of the grace period
because consumers would be confused by different dates. Consumer groups
also raised concerns about the potential for consumer confusion. One
consumer group requested that the Board use its authority under section
1604(a) of TILA to require that the expiration of the grace period
coincide with the payment due date. Because the mailing or delivery of
periodic statements in relation to expiration of the grace period is
specifically addressed by section 163(a) of TILA, the Agencies believe
that deviating from the statutory requirement would be inappropriate and
unnecessary in this case, particularly because Regulation Z would
require an institution that elected to use separate dates to disclose
both dates on the periodic statement. [See]{.underline} 12 CFR 226.6(b),
adopted elsewhere in today's **Federal Register**. An institution that
chooses to use separate dates, however, must ensure that consumers
understand the implications if payment is not received on or before each
date.

**Other Issues**

[Implementation]{.underline}. As discussed in § VII of this
**SUPPLEMENTARY INFORMATION**, the effective date for § \_\_.22 is July
1, 2010. As of that date, this provision applies to existing as well as
new consumer credit card accounts. Thus, institutions must provide
consumers with a reasonable amount of time to make any payment due on or
after the effective date.

[Alternatives to proposed rule]{.underline}. The Agencies requested
comment on two potential alternatives to the proposed rule. First, the
Agencies asked for comment on whether to adopt a rule that would
prohibit institutions from treating a payment as late if received within
a certain number of days after the due date and, if so, the number of
days that would be appropriate. Consumer groups and some institutions
that currently provide such a period of time were supportive, but most
industry commenters stated that this requirement would be operationally
burdensome. The Agencies have concluded that requiring institutions to
provide a period of time after the due date during which payments must
be treated as timely could create consumer confusion regarding when
payment is actually due and undermine the Board's efforts elsewhere in
today's **Federal Register** to ensure that consumers' due dates are
meaningful.[^62]

Second, the Agencies sought comment on whether to adopt a rule that
would require institutions, upon the request of a consumer, to reverse a
decision to treat a payment mailed before the due date as late and, if
so, what evidence the institution could require the consumer to provide
(for example, a receipt from the U.S. Postal Service or other common
carrier) and what time frame would be appropriate (for example, payment
mailed at least five days before the due date, payment received no more
than two business days' late). Although some commenters supported such a
requirement, the Agencies also received comments from both industry and
a consumer group opposing the requirement on the grounds that it would
be burdensome for consumers to obtain proof of mailing and for
institutions to establish systems for accepting such proof. Furthermore,
the Agencies note that some institutions stated that they will generally
waive any late payment fee when a consumer produces proof that a payment
was mailed sufficiently in advance of the due date.

**Supplemental Legal Basis for This Section of the OTS Final Rule**

As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.22 supports
safety and soundness by reducing reputational risk that would result
from providing consumers an unreasonably short period of time to make
payment. Section 535.22 also protects consumers by providing sufficient
time to make payment. It is somewhat akin to OTS's late charge provision
for home loans, which prohibits federal savings associations from
imposing a late charge as to any payment received within 15 days of the
due date.[^63] Further, mailing or delivery of periodic statements at
least 21 days before the payment due date is consistent with best
industry practices. Consequently, HOLA serves as an independent basis
for § 535.22.

**Section \_\_.23---Unfair Acts or Practices Regarding Allocation of
Payments**

[Summary]{.underline}. In May 2008, the Agencies proposed § \_\_.23 in
response to concerns that institutions were applying consumers' payments
in a manner that inappropriately maximized interest charges on consumer
credit card accounts with balances at different annual percentage rates.
Specifically, most institutions allocate consumers' payments first to
the balance with the lowest annual percentage rate, resulting in the
accrual of interest at higher rates on other balances (unless all
balances are paid in full). [See]{.underline} 73 FR at 28914-28917.
Proposed § \_\_.23(a) would have addressed this practice by requiring
institutions to allocate payments in excess of the required minimum
periodic payment ("excess payments") using one of three permitted
methods or a method equally beneficial to consumers. The permitted
methods were allocating the excess payment first to the balance with the
highest annual percentage rate, allocating equal portions of the excess
payment to each balance, and allocating the excess payment pro rata
among the balances.

In addition, because the Agencies were concerned that existing payment
allocation practices were especially harmful when an account had a
balance at a discounted promotional rate or a balance on which interest
was deferred, proposed § \_\_.23(b) would have placed more stringent
requirements on those accounts. Proposed § \_\_.23(b)(1)(i) would have
prohibited institutions from allocating excess payments to promotional
rate and deferred interest balances unless all other balances had been
paid in full. Proposed § \_\_.23(b)(1)(ii), however, created an
exception for the existing practice by some institutions of allocating
excess payments first to a deferred interest balance during the last two
billing cycles of the deferred interest period so that consumers could
pay off that balance and avoid assessment of deferred interest. Finally,
proposed § \_\_.23(b)(2) would have prohibited institutions from denying
consumers a grace period solely because an account had a promotional
rate or deferred interest balance.

Based on the comments received and further analysis, the Agencies have
revised the general payment allocation rule in proposed § \_\_.23(a) to
require institutions either to apply excess payments first to the
balance with the highest annual percentage rate or to allocate excess
payments pro rata among the balances. The final version of § \_\_.23
prohibits the current practice of applying payments to the lowest rate
balance first while also responding to concerns raised by commenters
that the number of allocation methods permitted by the proposed rule
would have increased the complexity of payment allocation, making the
practice and its effects on interest charges even less transparent for
consumers.

In addition, the Agencies have not included proposed § \_\_.23(b) in the
final rule. First, because current practices regarding assessment of
deferred interest are not permitted under the final version of
§ \_\_.24, the provisions regarding deferred interest plans are no
longer necessary. Second, due to concerns that proposed § \_\_.23(b)
could significantly reduce or eliminate promotional rate offers that
provide substantial benefits to consumers, the Agencies have not
included the provisions regarding promotional rate balances. Instead,
the Agencies believe that applying the general allocation rule in
§ \_\_.23 in all circumstances strikes the appropriate balance by
preserving promotional rate offers that provide substantial benefits to
consumers while prohibiting the most harmful payment allocation
practices.

[Background]{.underline}. In its June 2007 Regulation Z Proposal, the
Board discussed the practice among some creditors of allocating payments
first to balances that are subject to the lowest interest rate. 72 FR at
32982--32983. Because many creditors offer different rates for
purchases, cash advances, and balance transfers, this practice can
result in consumers who do not pay the balance in full each month
incurring higher finance charges than they would under any other
allocation method. The Agencies were also concerned that, when the
consumer has responded to a promotional rate or deferred interest offer,
the allocation of payments to balances with the lowest interest rate
often prevents the consumer from receiving the full benefit of the
promotional rate or deferred interest plan if the consumer uses the
credit card account for other transactions.

For example, assume that a consumer credit card account charges annual
percentage rates of 12% on purchases and 20% on cash advances. Assume
also that, in the same billing cycle, the consumer uses the account for
purchases totaling \$3,000 and cash advances totaling \$300. If the
consumer makes an \$800 excess payment, most creditors would apply the
entire payment to the purchase balance and the consumer would incur
interest charges on the more costly cash advance balance. Under these
circumstances, the consumer is effectively prevented from paying off the
balance with the higher interest rate (cash advances) unless the
consumer pays the total balance (purchases and cash advances) in full.

This outcome is exacerbated if the consumer uses the card in reliance on
a promotional rate or deferred interest offer. For example, assume the
same facts as above but that, during the same billing cycle, the
consumer also transfers to the account a balance of \$3,000 in response
to a promotional rate offer of 5% for six months. In this case, most
creditors would apply the consumer's \$800 excess payment to the
promotional rate balance and the consumer would incur interest charges
on the more costly purchase and cash advance balances. Under these
circumstances, the consumer would effectively be denied the benefit of
the 5% promotional rate for six months if the card is used for purchase
or cash advance transactions because the consumer must pay off the
entire transferred balance in order to avoid paying a higher rate on
other transactions. Indeed, the only way for the consumer to receive the
full benefit of the 5% promotional rate is not to use the card for
purchases, which would effectively require the consumer to use an
open-end credit account as a closed-end installment loan.

Deferred interest plans raise similar -- but not identical -- concerns.
Currently, some creditors offer deferred interest plans under which
interest accrues on purchases at a specified rate but is not charged to
the account for a period of time. If the balance is paid in full by the
end of the period, the consumer generally will not be charged any
interest. If, however, the balance is not paid in full by the end of the
period, all interest accrued during that period will be charged to the
account. With respect to payment allocation, a consumer whose payments
are applied to a deferred interest balance instead of balances on which
interest is not deferred will incur additional finance charges during
the deferred interest period.

In addition, creditors typically provide consumers who pay their balance
in full each month a grace period for purchases but not for balance
transfers or cash advances. Because payments generally will be allocated
to the transferred balance first, a consumer typically cannot take
advantage of both a promotional rate on balance transfers or cash
advances and a grace period on purchases. Under these circumstances, the
only way for a consumer to avoid paying interest on purchases would be
to pay off the entire balance, including the transferred balance or cash
advance balance subject to the promotional rate.

In preparing its June 2007 Regulation Z Proposal, the Board sought to
address issues regarding payment allocation by developing disclosures
explaining payment allocation methods on accounts with multiple balances
at different annual percentage rates so that consumers could make
informed decisions about card usage, particularly with regard to
promotional rates. For example, if consumers knew that they would not
receive the full benefit of a promotional rate on a particular credit
card account if they used that account for purchases during the
promotional period, they might use a different account for purchases and
pay that second account in full every month to take advantage of the
grace period. The Board conducted extensive consumer testing in an
effort to develop disclosures that would enable consumers to understand
typical payment allocation practices and make informed decisions
regarding the use of credit cards for different types of transactions.
In this testing, many participants did not understand that they could
not take advantage of the grace period on purchases and the discounted
rate on balance transfers at the same time. Model forms were tested that
included a disclosure notice attempting to explain this to consumers.
Testing, however, showed that a significant percentage of participants
still did not fully understand how payment allocation can affect their
interest charges, even after reading the model disclosures.

In the June 2007 Regulation Z Proposal, the Board acknowledged these
results and stated that it would conduct further testing to determine
whether the disclosure could be improved to communicate more effectively
to consumers how payment allocation can affect their interest charges.
The Board also solicited comment on a proposed amendment to Regulation Z
that would have required creditors to explain payment allocation to
consumers. Specifically, the Board proposed that creditors explain how
payment allocation would affect consumers' interest charges if an
initial discounted rate was offered on balance transfers or cash
advances but not purchases. The Board proposed that creditors must
disclose to consumers that: (1) the initial discounted rate applies only
to balance transfers or cash advances, as applicable, and not to
purchases; (2) that payments will be allocated to the balance transfer
or cash advance balance, as applicable, before being allocated to any
purchase balance during the time the initial discounted rate is in
effect; and (3) that the consumer will incur interest on the purchase
balance until the entire balance is paid, including the transferred
balance or cash advance balance, as applicable.  72 FR at 33047-33050.

In response to the June 2007 Regulation Z Proposal, several commenters
recommended that the Board test a simplified payment allocation
disclosure that covered situations other than low rate balance
transfers. One credit card issuer, however, stated that, even if an
effective disclosure could be developed, consumers could not shop for a
better payment allocation method because creditors almost uniformly
apply payments to the balance with the lowest annual percentage rate.
Furthermore, consumer and consumer group commenters urged the Board to
go further and prohibit payment allocation methods that applied payments
to the lowest rate balance before other balances.

In consumer testing conducted for the Board prior to the May 2008
Proposal, the Board tested a revised payment allocation disclosure. This
disclosure was not effective in improving consumers' understanding. The
majority of participants understood from earlier experience that
creditors typically will apply payments to lower rate balances first and
that this method causes them to incur higher interest charges. However,
for those participants that did not know about payment allocation
methods from earlier experience, the disclosure tested was not effective
in communicating payment allocation methods.[^64]

Accordingly, because the Board's testing indicated that disclosure was
not effective in allowing consumers to avoid the common practice of
allocating payments first to the balance with the lowest rate, the
Agencies proposed in May 2008 to address concerns regarding payment
allocation in proposed § \_\_.23 by placing limitations on allocation of
excess payments.[^65] The Agencies also solicited comment on whether the
exception regarding deferred interest balances was needed. 73 FR 28916.

The Agencies received comments in support of proposed § \_\_.23 from
individual consumers, consumer groups, members of Congress, the FDIC,
state attorneys general, a state consumer protection agency, and others.
Nevertheless, many of these commenters criticized the proposed rule as
overly complex, arguing that -- if consumers cannot understand the
effects of the current low-to-high allocation method on interest charges
-- increasing the number and complexity of allocation methods would only
make the cost of credit less transparent. These commenters urged the
Agencies to revise the proposed rule to require that excess payments be
applied first to the balance with the highest rate in all circumstances.
Some consumer advocates urged the Agencies to ban deferred interest
balances rather than create an exception for them.

In contrast, credit card issuers and industry groups strongly opposed
the proposal, particularly the special requirements regarding accounts
with promotional rate and deferred interest balances. These commenters
generally argued that disclosure would enable consumers to avoid any
harm caused by payment allocation, that the proposed restrictions
regarding promotional rate and deferred interest balances would
ultimately harm consumers by reducing or eliminating promotional rate
and deferred interest offers, and that complying with the proposed rule
would require burdensome systems changes.

To the extent that commenters addressed specific aspects of the proposal
or its supporting legal analysis, those comments are discussed below.

**Legal Analysis**

When different annual percentage rates apply to different balances on a
consumer credit card account, the Agencies conclude that, based on the
comments received and their own analysis, it is an unfair act or
practice under 15 U.S.C. 45(n) and the standards articulated by the FTC
to allocate amounts paid by the consumer in excess of the required
minimum periodic payment in a manner that does not apply a significant
portion of the amount to the balance with the highest annual percentage
rate.[^66]

[Substantial consumer injury]{.underline}. In the May 2008 Proposal, the
Agencies stated that allocating excess payments first to the balance
with the lowest rate appeared to cause substantial monetary injury to
consumers in the form of higher interest charges than would be incurred
if some or all of the excess payment were applied to balances with
higher rates.

In response, the Agencies received an analysis of credit card data
purporting to represent approximately 70 percent of outstanding consumer
credit card balances (the Argus Analysis). Although the Agencies are not
able to verify the accuracy of the Argus Analysis or the data supporting
it, the Agencies note that this analysis estimated that consumers are
charged an additional \$930 million annually as a result of the
practices addressed by proposed § \_\_.23.[^67] In addition, a state
consumer protection agency stated that the practice of allocating
payments first to the balance with the lowest rate is particularly
harmful to low-income consumers, citing its own study finding that a
quarter of low-income cardholders surveyed used a credit card for a cash
advance (which generally accrues interest at a higher rate than other
transactions) every few months.[^68]

One industry commenter asserted that allocating payments first to the
balance with the lowest interest rate could not cause an injury for
purposes of the FTC Act merely because other, less costly allocation
methods exist. It is well established, however, that monetary harm
constitutes an injury under the FTC Act.[^69] This comment did not
provide any legal authority distinguishing interest charges assessed as
a result of current payment allocation practices from other monetary
harms, nor are the Agencies aware of any such authority.

Another industry commenter stated that assessing interest consistent
with a contractual provision to which the consumer has agreed cannot
constitute an injury under the FTC Act. This argument, however, is
inconsistent with the FTC's application of the unfairness analysis in
support of its Credit Practices Rule, where the FTC determined that
otherwise valid contractual provisions injured consumers.[^70]

Accordingly, the Agencies conclude that the failure to allocate a
significant portion of an excess payment to the balance with the highest
rate causes or is likely to cause substantial monetary injury to
consumers.

[Injury is not reasonably avoidable]{.underline}. In May 2008, the
Agencies cited several factors that appeared to prevent consumers from
reasonably avoiding the injury. First, consumers generally have no
control over the institution's allocation of payments. Second, the
Board's consumer testing indicated that disclosures do not enable
consumers to understand sufficiently the effects of payment allocation.
Furthermore, the Agencies stated that, even if disclosures were
effective, it appeared consumers still could not avoid the injury by
selecting a credit card account with more favorable terms because
institutions almost uniformly apply payments first to the balance with
the lowest rate.[^71] Third, although a consumer could avoid the injury
by paying the balance in full each month, this may not be a reasonable
expectation as many consumers are unable to do so.

The Agencies conclude that these factors support a determination that
the injury caused by the failure to allocate a significant portion of an
excess payment to the highest rate balance is not reasonably avoidable.
In particular, the Agencies note that additional consumer testing has
further confirmed that disclosure is not an effective alternative to the
proposed rule.[^72]

Furthermore, although one industry commenter argued that consumers could
reasonably avoid the injury by paying their balance in full each month,
one of the intended purposes of a credit card (as opposed to a charge
card) is to finance purchases over multiple billing cycles. Thus, it is
unreasonable to expect consumers to avoid the harm caused by current
payment allocation practices by paying their balances in full each
month.

[Injury is not outweighed by countervailing benefits]{.underline}. In
the May 2008 Proposal, the Agencies stated that the prohibited practices
did not appear to create benefits for consumers or competition that
outweighed the injury. The Agencies noted that, if implemented, the
proposal could reduce the revenue that institutions receive from
interest charges, which could in turn lead institutions to increase
rates generally. The Agencies stated, however, that this effect should
be muted because the proposal prohibited only the practices that are
most harmful to consumers and leaves institutions with considerable
flexibility. Specifically, the proposed rule permitted institutions to
choose between three specified allocation methods or any other method
that was no less beneficial to the consumer. In addition, the proposed
rule did not apply to the allocation of minimum payments.

Furthermore, the Agencies stated that the proposal would enhance
transparency and enable consumers to better assess the costs associated
with using their credit card accounts at the time they engage in
transactions. The Agencies noted that, to the extent that upfront costs
have been artificially reduced because many consumers cannot reasonably
avoid paying higher interest charges later, the reduction does not
represent a true benefit to consumers as a whole. Finally, the Agencies
stated that it appeared the proposal would enhance rather than harm
competition because institutions offering rates that reflect the
institution's costs (including the cost to the institution of borrowing
funds and operational expenses) would no longer be forced to compete
with institutions offering rates that are artificially reduced based on
the expectation that interest will accrue on higher rate balances until
the promotional rate balance is paid in full.

Based on the comments and further analysis, the Agencies conclude that
these rationales support a determination that the injury to consumers
when institutions do not allocate a significant portion of the excess
payment to the balance with the highest annual percentage rate outweighs
any benefits of this practice for consumers and competition. Industry
commenters generally argued that the restrictions in proposed § \_\_.23
would reduce interest revenue and force institutions to compensate by
increasing the interest rates or fees charged to consumers, decreasing
the amount of available credit, or using some combination of the two.
For example, the Argus Analysis stated that, as a result of proposed §
\_\_.23, institutions could lose 0.125 percent of their annual interest
revenue on revolving credit card accounts (in other words, accounts
where interest is charged because the balance is not paid in full each
billing cycle).[^73] Again, as noted above, the Agencies are unable to
verify the accuracy of the conclusions reached by the Argus Analysis or
its supporting data. Furthermore, the Argus Analysis did not estimate
the potential impact of proposed § \_\_.23 on the cost and availability
of credit.[^74] Nevertheless, assuming for the sake of discussion that
the data and assumptions underlying the Argus Analysis are accurate, it
appears that institutions might respond by increasing interest rates
approximately 0.15 percentage points or by decreasing credit limits
approximately \$155.[^75] Accordingly, if, for example, an institution
charges its consumers an interest rate of 15% on a credit line of
\$9,000, the Argus Analysis appears to indicate that the institution
might respond to proposed § \_\_.23 by increasing the rate to 15.15% or
by decreasing the credit limit to \$8,850.[^76]

The Argus Analysis also stated that more than three quarters of
revolving accounts do not carry multiple balances, meaning that the
estimated \$930 million in interest revenue is currently generated from
only one quarter of all revolving accounts.[^77] Thus, even if the
Agencies were to accept the Argus Analysis and its underlying data at
face value, it appears that the restrictions in proposed § \_\_.23 will
result in significantly reduced interest charges for one quarter of
consumer credit card accounts, while potentially resulting in a smaller
increase in interest charges for all other accounts or a small reduction
in available credit for all accounts. Furthermore, the Argus Analysis
was based on the proposed rule. Although the final rule permits only two
allocation methods, the Agencies' decision to omit from the final rule
the more restrictive rules for accounts with promotional rate balances
in proposed § \_\_.23(b) should significantly reduce the estimated
impact.[^78] The Agencies therefore conclude that, based on the
available information, the injury to consumers as a result of the
current practice of applying excess payments in a manner that maximizes
interest charges outweighs the potential increase in interest rates or
reduction in available credit as a result of prohibiting that practice.
Even if the shifting of costs from one group of consumers to another,
much larger group is viewed as neutral from a cost-benefit perspective,
the less quantifiable benefits to consumers and competition of more
transparent upfront pricing weigh in favor of the proposed rule.

Some industry commenters also argued that compliance with proposed §
\_\_.23 would require extensive changes to payment allocation systems,
the cost of which would be passed on to consumers. One systems provider
estimated the cost of developing systems to allocate payments among
different balances at tens of thousands of dollars per institution.
Another systems provider, however, stated that these systems currently
exist. Again, because the Agencies have simplified the payment
allocation rule by permitting only two payment allocation methods and by
omitting the special allocation requirements for promotional rate
balances, the burden associated with systems changes should be reduced.
Furthermore, if the cost of altering practices to comply with § \_\_.23
is passed on to consumers, that cost will be spread among thousands,
hundreds of thousands, or millions of consumers and will not outweigh
the benefits to consumers of avoiding additional interest charges and
more transparent upfront pricing.[^79]

[Public policy]{.underline}. Some industry commenters argued that the
proposed rule was contrary to public policy as set forth in statements
by another federal banking agency. Specifically, these commenters
pointed to statements in Congressional testimony and an advisory letter
by the OCC suggesting that concerns regarding payment allocation should
be addressed through disclosure rather than substantive regulation.[^80]

While public policy may be considered as part of the unfairness analysis
under the FTC Act, it is not a required element of that analysis and
cannot serve as the primary basis for determining that an act or
practice is unfair.[^81] For purposes of the unfairness analysis, public
policy is generally embodied in a statute, regulation, or judicial
decision.[^82] Nevertheless, to the extent that the OCC's statements
constitute public policy, the Agencies find that those statements (which
the Agencies have not adopted) do not preclude a determination that
allocating excess payments in a manner that does not apply a significant
portion to the balance with the highest rate is an unfair practice. The
May 2008 Proposal explained that extensive consumer testing conducted by
the Board indicated that disclosure was not effective in enabling
consumers to avoid the harm caused by current payment allocation
practices. The Agencies also note that the OCC statements cited by the
commenters were made prior to the May 2008 Proposal and were not
repeated in the OCC's comment on that proposal.

**Final Rule**

As proposed, § \_\_.23(a) would have established a general rule
governing payment allocation on accounts that have balances with
different annual percentage rates but do not have a promotional rate or
deferred interest balance. Proposed § \_\_.23(b) would have established
special rules for accounts with balances at different rates that do have
a promotional rate or deferred interest balance. As discussed below,
however, the final rule eliminates the special rules in proposed §
\_\_.23(b) and applies a revised version of the general rule in proposed
§ \_\_.23(a) to all types of balances.

As an initial matter, industry commenters and a member of Congress
criticized proposed § \_\_.23 as overly complex. They stated that,
rather than making payment allocation practices easier for consumers to
understand, the proposed rule would make payment allocation harder to
disclose and increase consumer confusion. The Agencies reemphasize that
the Board's consumer testing indicates that, regardless of the
complexity of the method, payment allocation methods cannot be
effectively disclosed. The proposed restrictions on payment allocation
were not intended to ease disclosure but instead to protect consumers
from unfair practices that cannot be effectively addressed by
disclosure. Nevertheless, as discussed below, the Agencies have greatly
simplified the final rule.

[\_\_.23 Allocation of excess payments]{.underline}

When an account has balances with different annual percentage rates,
proposed § \_\_.23(a) would have required institutions to allocate any
amount paid by the consumer in excess of the required minimum periodic
payment among the balances in a manner that is no less beneficial to
consumers than one of three listed methods. First, proposed
§ \_\_.23(a)(1) would have allowed an institution to apply the excess
payment first to the balance with the highest annual percentage rate and
any remaining portion to the balance with the next highest annual
percentage rate and so forth. Second, proposed § \_\_.23(a)(2) would
have allowed an institution to allocate equal portions of the excess
payment to each balance. Third, proposed § \_\_.23(a)(3) would have
allowed an institution to allocate the excess payment among the balances
in the same proportion as each balance bears to the total balance (in
other words, pro rata).

As discussed above, some consumer group commenters argued that --
because the Board's consumer testing indicates that disclosure does not
enable consumers to understand the effects of payment allocation on
interest charges -- providing institutions with the ability to choose
between different allocation methods would only make payment allocation
more complex and the associated costs less transparent. Because this
result would be contrary to the intended purpose of proposed § \_\_.23,
the final rule allows only two allocation methods for excess payments:
applying the excess payment first to the balance with the highest annual
percentage rate and any remaining amount to the other balances in
descending order based on the applicable annual percentage rate; and
allocating the excess payment pro rata.

Although consumer groups and others argued that the Agencies should
require allocation to the highest rate balance first in all
circumstances because this method would minimize interest charges, the
Agencies believe that the final version of § \_\_.23 strikes the
appropriate balance between institutions and consumers. It prohibits
institutions from using the allocation method that maximizes interest
charges but does not require use of the method that minimizes interest
charges. The Agencies expect that most institutions will use the pro
rata method, which will standardize payment allocation practices and
focus competition on more transparent costs of credit (such as interest
rates). Although permitting a second allocation method creates the
potential for increased complexity, the Agencies believe that the
allocation of excess payments first to the highest rate balance should
be permitted because, even if few institutions will do so, this method
minimizes interest charges for consumers.

The Agencies have not included the proposed methods allowing allocation
of equal portions of the excess payment to each balance and allowing
institutions to allocate excess payments in a manner that is no less
beneficial to the consumer than one of the listed methods in order to
reduce complexity and promote transparency. In addition, because
information received during the comment period indicates that, as a
general matter, consumers have approximately 25 percent of their total
balance at a discounted promotional rate,[^83] it appears that the equal
share method would generally be less beneficial to consumers than the
pro rata method because -- unless the account has four or more balances
-- the equal share method would apply more of the excess payment to the
discounted promotional rate balance (and therefore less to balances with
higher interest rates) than the pro rata method.[^84] Finally, because
an allocation method would have been no less beneficial to a consumer
than a listed method only if it resulted in the same or lesser interest
charges,[^85] institutions were unlikely to take advantage of this
option because it would require individualized determinations based on
each consumer's balances and rates.

The Agencies note that several industry commenters argued that
institutions should be permitted to allocate payments first to the
oldest transactions on the account, which would often be transactions on
which the institution is prohibited from increasing the annual
percentage rate pursuant to proposed § \_\_.24. These commenters stated
that this method (which is sometimes referred to as "first in, first
out" or "FIFO") would pay down those transactions faster, thereby
reducing the burden to institutions of carrying balances at rates that
no longer reflect market rates or the consumer's risk. However, the
Agencies believe that concerns related to proposed § \_\_.24 are better
addressed through revisions to that proposal (as discussed below),
rather than through payment allocation. In addition, permitting FIFO
allocation would, in some circumstances, allow institutions to allocate
excess payments first to the balance with the lowest rate. For example,
if a consumer opened an account by transferring a balance in reliance on
a discounted promotional rate, that balance would be the oldest balance
on the account. Consequently, FIFO allocation could perpetuate the
current practice of using payment allocation to maximize interest
charges.

Although some industry commenters stated that their payment allocation
systems could allocate excess payments pro rata or in equal portions,
others stated that their systems could not and that they would be forced
instead to allocate payments first to the balance with the highest
interest rate. The Agencies note that neither the proposal nor the final
rule require institutions to allocate first to the balance with the
highest interest rate. Accordingly, if an institution's payment
allocation system cannot currently allocate excess payments pro rata,
the institution must make the determination whether to adjust that
system or allocate to the highest rate balance first and forego the
additional interest charges. As discussed below in § VII of this
**SUPPLEMENTARY INFORMATION**, institutions will be provided with
18 months in which to adjust their systems.

The Agencies proposed commentary to clarify how proposed § \_\_.23 would
be applied. Proposed comment 23-1 clarified that § \_\_.23 would not
limit or otherwise address the institution's ability to determine the
amount of the required minimum periodic payment or how that payment is
allocated. Consumer groups urged the Agencies to apply proposed §
\_\_.23 to the entire payment. In contrast, one industry commenter
stated that excluding the minimum payment was not helpful because such
payments are kept small for competitive reasons. Another industry
commenter urged the Agencies to remove the distinction between minimum
and excess payments in order to reduce the rule's complexity.

The Agencies, however, believe that proposed § \_\_.23 strikes the
appropriate balance by providing institutions flexibility regarding the
minimum amount consumers must pay while ensuring that, when consumers
voluntarily pay more than the minimum, those payments are not allocated
in a manner that maximizes interest charges.[^86] In response to
comments from institutions whose systems cannot distinguish between
minimum and excess payments when allocating and comments objecting to
the complexity created by the distinction, the Agencies clarify in
comment 23-1 that institutions may apply the entire payment consistent
with § \_\_.23 (unless doing so would be inconsistent with applicable
law and regulatory guidance). The Agencies have also clarified that the
amount and allocation of the required minimum periodic payment must be
determined consistent with applicable law and regulatory guidance.
Otherwise, proposed comment 23-1 is adopted as proposed.

In order to simplify the allocation process and reduce the operational
burden on institutions, proposed comment 23-2 permitted institutions to
make small adjustments of one dollar or less when allocating payments.
One industry commenter requested that institutions also be permitted to
make adjustments equal to or less than one percent of the total balance.
This is not, however, the type of small adjustment envisioned by the
Agencies. For example, one percent of a \$5,000 balance would be \$50.
Accordingly, comment 23-2 adopted as proposed.

Because proposed § \_\_.23 would have required institutions to allocate
payments based on the balances and annual percentage rates on the
account, some industry commenters requested guidance regarding the point
in time at which the various determinations required by proposed §
\_\_.23 would be made. For example, because transactions are commonly
made between the close of a billing cycle and the date on which payment
for that billing cycle is received, the balances on the account on the
day the payment is applied will often be different than the balances on
the periodic statement for the billing cycle. Similarly, the annual
percentage rates may have changed in the interim. One industry commenter
stated that payment allocation should be based on the balances and rates
on the preceding periodic statement, while two other industry commenters
stated that the balances and rates at the time the payment is credited
should be used. The Agencies believe that, because the benefit to
consumers of one approach or the other will depend on the consumer's
individual circumstances, there is no need to require a particular
approach. Accordingly, the Agencies adopt comment 23-3, which clarifies
that an institution may allocate based on the balances and annual
percentage rates on the date the preceding billing cycle ends (which
will typically be the balances and rates reflected on the periodic
statement), on the date the payment is credited to the account, or on
any day in between those two dates.

Some commenters requested that the Agencies prohibit institutions from
varying the allocation method on an account from billing cycle to
billing cycle or from account to account, while others requested that
this be expressly permitted. The Agencies are not prohibiting
institutions from moving from one permissible allocation method to
another or from using one permissible method on some accounts and a
different permissible method on other accounts. Because, under the final
rule, the only alternative to allocating pro rata is allocating to the
highest rate balance first, the Agencies do not believe there is a
significant danger that institutions will be able to manipulate the
payment allocation process to their advantage by switching from one
method to another. Accordingly, the Agencies adopt comment 23-4, which
acknowledges that § \_\_.23 does not restrict an institution's ability
to shift between permissible allocation methods or to use different
permissible allocation methods for different accounts.

One industry commenter noted that the commentary to Regulation Z, 12 CFR
226.12(c) sets forth specific payment allocation requirements when a
consumer asserts a claim or defense under that section that could be
inconsistent with those in proposed § \_\_.23. Because the payment
allocation requirements in the commentary to § 226.12(c) are intended to
prevent extinguishment of claims or defenses, the Agencies adopt comment
23-5, which clarifies that, when a consumer has made a claim or defense
pursuant to 12 CFR 226.12(c), an institution must allocate payments
consistent with 12 CFR 226.12 comment 226.12(c)-4, as adopted elsewhere
in today's **Federal Register**.

An industry commenter requested clarification regarding allocation of
payments when an account has multiple balances with the same annual
percentage rate. As an initial matter, because § \_\_.23 applies only
"when different annual percentage rates apply to different balances on a
consumer credit card account," this section does not apply if all
balances in the account have the same rate. If, however, an account has
multiple balances with the same annual percentage rate and another
balance with a different rate, the benefit to the consumer of allocating
between the balances with the same rate in a particular manner will
depend on the circumstances and the allocation method chosen by the
institution. Accordingly, the Agencies have adopted comment 23-6, which
clarifies that, in these circumstances, the institution may allocate
between balances with the same rate in the manner that the institution
determines is appropriate. This comment also clarifies that institutions
may treat balances with the same annual percentage rate as separate
balances or as a single balance.

The Agencies have also revised the proposed commentary and adopted new
commentary in response to comments regarding specific allocation
methods.[^87] Proposed comment 23(a)(1)-1 provided examples of
allocating excess payments to the highest rate balance first. In
response to requests from commenters, the Agencies have added examples
illustrating application of this method to accounts with balances on
which the annual percentage rate cannot be increased pursuant to §
\_\_.24 and accounts with multiple balances at the same rate and at
least one balance at a different rate. Otherwise, this comment is
redesignated as comment 23(a)-1 and adopted as proposed.

With respect to pro rata allocation, some industry commenters requested
guidance on how the total balance should be determined. They suggested
that amounts paid by the required minimum periodic payment should be
included in the total balance because excluding such amounts would be
operationally burdensome insofar as it would require institutions to
allocate the minimum payment and then recalculate each balance for
purposes of allocating pro rata. The Agencies agree that the suggested
clarification will reduce burden and assist institutions in allocating
payments consistent with § \_\_.23(b). Accordingly, the Agencies have
adopted comment 23(b)-1 clarifying that an institution may, but is not
required to, deduct amounts paid by the consumer's required minimum
periodic payment when calculating the total balance for purposes of §
\_\_.23(b). An illustrative example is provided in comment 23(b)-2.iii.

In the May 2008 Proposal, proposed comment 23(a)(3)-1 provided an
example of allocating excess payments pro rata among the balances. This
comment is redesignated as comment 23(b)-2 for organizational reasons
and generally adopted as proposed. In response to requests from
commenters, however, the Agencies have added examples illustrating
application of this method to accounts with balances on which the annual
percentage rate cannot be increased pursuant to § \_\_.24 and, as noted
above, the different methods of calculating the total balance consistent
with comment 23(b)-1.

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

As proposed, § \_\_.23(b) contained special rules for accounts with
promotional rate and deferred interest balances that were intended to
ensure that consumers received the full benefit of the promotional rate
or deferred interest plan. Proposed § \_\_.23(b)(1)(i) would have
required that excess payments be allocated to promotional rate balances
or deferred interest balances only after all other balances had been
paid in full. Because, however, the Agencies were concerned that
consumers may want to pay off deferred interest balances shortly before
the deferred interest period expired, proposed § \_\_.23(b)(1)(ii) would
have permitted the existing practice by some institutions of allocating
the entire payment first to the deferred interest balance in the last
two months of the deferred interest period. Finally, proposed §
\_\_\_.23(b)(2) would have prohibited institutions from requiring
consumers who are otherwise eligible for a grace period to repay any
portion of a promotional rate balance or deferred interest balance in
order to receive the benefit of a grace period on other balances (such
as purchases).

Proposed § \_\_.23(b) was strongly opposed by industry commenters on the
grounds that, if implemented, it would significantly diminish interest
revenue, leading institutions to significantly reduce or eliminate
promotional rate and deferred interest offers that provide substantial
benefits to consumers. Many of these commenters requested that proposed
§ \_\_.23(b) be withdrawn and that institutions instead be permitted to
apply excess payments first to promotional rate and deferred interest
balances. Some industry commenters, however, requested that the general
rule in proposed § \_\_.23(a) be applied to all balances. In contrast,
some consumer advocates urged the Agencies to ban deferred interest
balances rather than create an exception for them.

As an initial matter, the Agencies have not included the special rules
regarding deferred interest balances. As discussed below with respect to
the § \_\_.24, the final rule does not permit institutions to charge
interest retroactively and thus does not permit deferred interest plans.

With respect to promotional rates, the Argus Analysis indicates that
16-19 percent of active accounts have one or more promotional rate
balances and that the average promotional rate on those balances is
between two and three percent, which is approximately 13 percentage
points lower than the average non-promotional rate.[^88] Furthermore,
when the rates were weighted to account for the proportion of the total
balance that was at a promotional rate, the effective annual percentage
rate for these accounts was approximately 5.5 percent or roughly ten
percentage points lower than the average rate for non-promotional
balances.[^89] Assuming this information is accurate, it appears that
discounted promotional rates offer significant benefits to many
consumers.

Notwithstanding these benefits, the Agencies continue to believe that,
as suggested by other commenters, allocating payments to promotional
rate balances before other balances with higher interest rates
significantly diminishes the value of promotional rate offers.
Furthermore, although the Agencies believe that proposed § \_\_.23 would
have had a negative impact on the availability of promotional rates, the
commenters provided little data regarding the extent of that impact.
Thus, the Agencies believe that application of the general payment
allocation rule in § \_\_.23 to promotional rate balances is
appropriate. Application of this rule to all balances will limit the
extent to which institutions may reduce promotional rate offers while
ensuring that payment allocation is not used to significantly undercut
the benefits to consumers who act in reliance on such offers.
Accordingly, the Agencies have not included proposed § \_\_.23(b)(1)(i)
in the final rule. To the extent that specific practices raise concerns
regarding unfairness or deception under the FTC Act, the Agencies plan
to address those practices on a case-by-case basis through supervisory
and enforcement actions.

The Agencies have also omitted proposed § \_\_.23(b)(2), which would
have prohibited institutions from denying a grace period solely because
a consumer did not repay a promotional rate or deferred interest
balance. This proposal was strongly criticized by industry as
operationally burdensome and punitive for institutions that voluntarily
provide a grace period on purchases. Proposed § \_\_.23(b)(2) was
intended to act in combination with proposed § \_\_.23(b)(1)(i) to
ensure that consumers receive the full benefit of promotional rate and
deferred interest offers. Because the Agencies have concluded that a
different approach is appropriate, the Agencies have not included
proposed § \_\_.23(b)(2) in the final rule. To the extent that specific
practices raise concerns regarding unfairness or deception under the FTC
Act, the Agencies plan to address those practices on a case-by-case
basis through supervisory and enforcement actions.

**Other Issues**

[Implementation]{.underline}. As discussed in § VII of this
**SUPPLEMENTARY INFORMATION**, the effective date for § \_\_.23 is July
1, 2010. As of that date, this provision applies to existing as well as
new consumer credit card accounts and balances. Thus, institutions must
apply amounts paid by the consumer in excess of the required minimum
periodic payment that the institution receives after the effective date
consistent with § \_\_.23.

[Alternative to proposed rule]{.underline}. The Agencies requested
comment on whether consumers should be permitted to instruct the
institution regarding allocation of amounts in excess of the required
minimum periodic payment. The response was mixed. Some consumer groups
supported creating an exception to proposed § \_\_.23 allowing consumers
to select how their excess payments would be allocated, while others
expressed concern that such an exception would be ineffective and
subject to abuse because disclosures do not enable consumers to
understand payment allocation. Similarly, institutions that currently
allow consumers to select how their payments are allocated requested
that they be permitted to continue doing so, while most industry
commenters opposed any provision that would require them to allocate
consistent with consumer choice as operationally burdensome.

In consumer testing prior to the May 2008 Proposal, the Board tested
whether, given the opportunity, consumers could select how amounts paid
in excess of the minimum would be allocated using the payment coupon.
Most participants, however, were not able to understand the effects of
payment allocation sufficiently to apply payments in a manner that
minimized interest charges. Additional testing conducted by the Board
after the May 2008 Proposal produced similar results. Accordingly,
because it does not appear that consumer choice would be effective, the
Agencies have not included such an exception in the final rule.

**Supplemental Legal Basis for This Section of the OTS Final Rule**

As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.23 supports
safety and soundness by reducing reputational risk that would result
from allocating consumers' payments in an unfair manner. Section 535.23
also protects consumers by providing them with fair allocations of their
payments. When a creditor treats a consumer credit card account as
having separate balances with separate interest rates and terms, it is
essentially treating the card as having separate debts even though the
consumer makes only one payment. Were the separate balances actually
separate debts being collected by a debt collector, the consumer would
have the right under section 810 of the Fair Debt Collection Practices
Act (15 U.S.C. 1692h) to have payments applied in accordance with the
consumer's directions. As discussed above, that approach did not test
well for consumer credit card accounts with multiple balances, and the
Agencies are not imposing the same requirement under § \_\_.23. However,
ensuring that the consumer's payment will be applied to the highest rate
balance first or pro rata will be an important protection for consumers.
Consequently, HOLA serves as an independent basis for § 535.23.

**Section \_\_.24---Unfair Acts or Practices Regarding Increases in
Annual Percentage Rates**

[Summary]{.underline}. In May 2008, the Agencies proposed to prohibit
the application of increased rates to outstanding balances, except in
certain limited circumstances. [See]{.underline} 73 FR 28917-28921.
Specifically, proposed § \_\_.24(a)(1) would have prohibited the
application of an increased annual percentage rate to an outstanding
balance on a consumer credit card account, except as provided in
proposed § \_\_.24(b). Proposed § \_\_.24(a)(2) would have defined
"outstanding balance" as the amount owed on an account at the end of the
fourteenth day after the institution provides the notice required by
Regulation Z, 12 CFR 226.9(c) or (g). Proposed § \_\_.24(b) would have
permitted institutions to increase the rate on an outstanding balance
due to an increase in an index, when a promotional rate expired or was
lost, or when the account became more than 30 days' delinquent. Finally,
proposed § \_\_.24(c) would have prohibited institutions from engaging
in certain practices that would undercut the protections in proposed
§ \_\_.24(a). Under proposed § \_\_.24(c)(1), institutions would have
been prohibited from requiring consumers to repay the outstanding
balance over a period of less than 5 years or from more than doubling
the repayment rate on the outstanding balance. Proposed § \_\_.24(c)(2)
would also have prohibited institutions from assessing fees or charges
based solely on the outstanding balance (for example, assessing a
maintenance fee in lieu of increased interest charges).

Based on the comments received and further analysis, the Agencies have
revised proposed § \_\_.24(a) to prohibit institutions from increasing
the annual percentage rate for a category of transactions on any
consumer credit card account unless specifically permitted by one of the
exceptions in § \_\_.24(b). The final rule also requires institutions to
disclose at account opening all rates that will apply to each category
of transactions on the account. Because consumers rely on the rates
stated by the institution when deciding whether to open a credit card
account and whether to use the account for transactions, these
requirements are intended to ensure that consumers are protected from
unfair surprise.

The Agencies have also revised the exceptions in proposed § \_\_.24(b).
First, the Agencies have adopted a new § \_\_.24(b)(1), which permits an
institution that has disclosed at account opening that an annual
percentage rate will increase at a specified time to a specified amount
to increase that rate accordingly. Second, the Agencies have adopted the
proposed exception for variable rates as § \_\_.24(b)(2). Third, the
Agencies have adopted a new § \_\_.24(b)(3), which permits institutions
to increase rates for new transactions pursuant to the 45-day advance
notice requirement in 12 CFR 226.9 (adopted by the Board elsewhere in
today's **Federal Register**), although this exception does not apply
during the first year after account opening. Fourth, to allow
institutions to adjust rates in response to serious delinquencies, the
Agencies have adopted the proposed exception allowing repricing when an
account becomes more than 30 days' delinquent as § \_\_.24(b)(4). Fifth,
to avoid discouraging workout arrangements that decrease rates for
consumers in default if the consumer abides by certain conditions (for
example, making payment on time each month), § \_\_.24(b)(5) has been
added allowing a decreased rate to be returned to the pre-existing rate
if the consumer fails to abide by the conditions of the workout
arrangement. Finally, the Agencies have adopted the repayment provisions
in proposed § \_\_.24(c) with some stylistic changes.

[Background]{.underline}. Prior to the Regulation Z amendments published
elsewhere in today's **Federal Register**, 12 CFR 226.9(c) required 15
days' advance notice of certain changes to the terms of an open-end plan
as well as increases in the minimum payment. However, advance notice was
not required if an interest rate or other finance charge increased due
to a consumer's default or delinquency.[^90] Furthermore, no
change-in-terms notice was required if the creditor set forth the
specific change in the account-opening disclosures.[^91]

In its June 2007 Regulation Z Proposal, the Board expressed concern that
the imposition of penalty pricing can come as a costly surprise to
consumers who are not aware of, or do not understand, what behavior is
considered a ''default'' under their agreement.
[See]{.underline}* *72 FR at 33009--33013. The Board noted that penalty
rates can be more than twice as much as the consumer's normal rate on
purchases and may apply to all of the balances on the consumer's account
for several months or longer.[^92]

Consumer testing conducted for the Board indicated that interest rates
are a primary consideration for consumers when shopping for credit card
accounts but that some consumers do not understand that events such as
one late payment can cause them to lose the advertised rate and incur
penalty pricing. In addition, some testing participants did not appear
to understand that penalty rates can apply to all of their balances,
including outstanding balances. Some participants also did not appear to
understand how long a penalty rate could remain in effect. The Board
observed that account-opening disclosures may be provided to the
consumer too far in advance for the consumer to recall the circumstances
that may cause rates to increase. In addition, the consumer may not have
retained a copy of the account-opening disclosures and may not be able
to effectively link the information disclosed at account opening to the
current repricing of the account.

The Board's June 2007 Regulation Z Proposal included revisions to the
regulation and its commentary designed to improve consumers' awareness
about changes in their account terms and increased rates, including rate
increases imposed as a penalty for delinquency or other acts or
omissions constituting default under the account agreement. These
revisions were also intended to enhance consumers' ability to shop for
alternative financing before such changes in terms or increased rates
become effective. Specifically, the Board proposed to give consumers 45
days' advance notice of a change in terms or an increased rate imposed
as a penalty and to make the disclosures about changes in terms and
increased rates more effective.[^93] The Board also proposed to require
that periodic statements for credit card accounts disclose the annual
percentage rate or rates that may be imposed as a result of late
payment.[^94]

When developing the June 2007 Regulation Z Proposal, the Board
considered, but did not propose, a prohibition on so-called "universal
default clauses" or similar practices under which a creditor raises a
consumer's interest rate to the penalty rate if, for example, the
consumer makes a late payment on an account with a different creditor.
The Board also considered but did not propose a requirement similar to
that in some state laws providing consumers with the right to reject a
change in terms if the consumer agrees to close the account.

In response to its June 2007 Regulation Z Proposal, individual
consumers, consumer groups, another federal banking agency, and a member
of Congress stated that notice alone was not sufficient to protect
consumers from the harm caused by rate increases. These commenters
argued that many consumers would not read or understand the proposed
disclosures and, even if they did, many would be unable to transfer the
balance to a new credit card account with comparable terms before the
increased rate went into effect. Some of these commenters argued that
creditors should be prohibited from increasing the rate on an
outstanding balance in all instances. Others argued that consumers
should be given the right to reject application of an increased rate to
an outstanding balance by closing the account, but only if the increase
was not triggered by a late payment or other violation of the terms of
that account. This approach was also endorsed by some credit card
issuers. On the other hand, most industry commenters stated that the
45-day notice requirement would delay issuers from increasing rates to
reflect a consumer's increased risk of default, requiring them to
account for that risk by, for example, charging higher annual percentage
rates at the outset of the account relationship. These commenters also
noted that, because rate increases are also used to pass on the cost of
funds issuers themselves pay, delays in the imposition of increased
rates could result in higher costs of credit or less available credit.

In the May 2008 Proposal, the Agencies expressed concern that disclosure
alone may be insufficient to protect consumers from the harm caused by
the application of increased rates to outstanding balances. Accordingly,
the Agencies proposed § \_\_.24, which would have prohibited this
practice except in certain limited circumstances. This aspect of the
proposal received strong support from individual consumers, consumer
groups, members of Congress, the FDIC, two state attorneys general, and
a state consumer protection agency. Many of these commenters urged the
Agencies to go further, by eliminating all but the exception for
variable rates and by applying the prohibition to rate increases on
future transactions. In contrast, however, the proposal received strong
opposition from credit card issuers, industry groups, and the OCC. These
commenters generally argued that the proposed restrictions undermined
institutions' ability to price according to current market conditions
and the risk presented by the consumer and would therefore result in
higher costs of credit or reduced credit availability for all consumers.
They requested that the Agencies adopt additional exceptions to the
proposed rule, take a different approach (such as requiring consumers to
opt out of rate increases), or withdraw the proposal entirely. To the
extent that commenters addressed specific aspects of the proposal or its
supporting legal analysis, those comments are discussed below.

**Legal Analysis**

The Agencies conclude that, except in certain limited circumstances,
increasing the annual percentage rate applicable to an outstanding
balance on a consumer credit card account is an unfair practice under 15
U.S.C. 45(n) and the standards articulated by the FTC. In addition,
based on these standards, the Agencies conclude that it is also an
unfair practice to increase an annual percentage rate that applies to a
consumer credit card account during the first year after account opening
(except in certain limited circumstances).

[Substantial consumer injury]{.underline}. In May 2008, the Agencies
stated that application of an increased annual percentage rate to an
outstanding balance appeared to cause substantial monetary injury by
increasing the interest charges assessed to a consumer's credit card
account. Commenters who opposed the proposed rule did not dispute that
such increases result in additional interest charges. Indeed, the Argus
Analysis indicated that consumers are charged more than \$11 billion in
interest annually as a result of the practices addressed by proposed §
\_\_.24.[^95]

Some industry commenters stated that only a minority of accounts are
repriced each year and that even consumers who have violated the account
terms by, for example, paying late are, as a general matter, not
repriced. This does not, however, alter the fact that consumers who are
repriced incur substantial monetary injury.

Some industry commenters argued that, to the extent the increased rate
reflects the prevailing market rate for consumers with the same risk
profile and other relevant characteristics, it cannot constitute an
injury under the FTC Act. These commenters did not provide -- nor are
the Agencies aware of -- any legal authority supporting the proposition
that increasing the cost of credit is not an injury under the FTC Act so
long as the increased rate does not exceed the market rate.

For all of these reasons, the Agencies conclude that applying an
increased annual percentage rate to an outstanding balance causes
substantial consumer injury. The Agencies further conclude that
consumers who rely on advertised interest rates when deciding to open
and use a credit card account experience substantial injury in the form
of the increased cost of new transactions when rates are increased
during the first year after account opening.[^96] In addition, the
account loses some of its value because the cost of financing
transactions is higher than anticipated when the consumer decided to
open the account.

[Injury is not reasonably avoidable]{.underline}. In May 2008, the
Agencies stated that, although the injury resulting from increases in
the annual percentage rate may be avoidable by some consumers under
certain circumstances, this injury did not appear to be reasonably
avoidable as a general matter because consumers appeared to lack control
over many of the circumstances in which institutions increase rates. The
Agencies grouped these circumstances into four categories: circumstances
that are completely unrelated to the consumer's behavior (for example,
changes in market conditions); consumer behavior that is unrelated to
the account on which the rate is increased (for example, so-called
"universal defaults"); consumer behavior that is related to the account
in question but does not violate the terms of that account (for example,
using most but not all of the credit limit); and consumer behavior that
violates the terms of the account (for example, late payment or
exceeding the credit limit). As discussed below, based on the comments
and further analysis, the Agencies conclude that consumers cannot, as a
general matter, reasonably avoid rate increases on outstanding balances.

First, an institution may increase a rate for reasons that are
completely unrelated to the consumer's behavior. For instance, an
institution may increase rates to increase revenues or to respond to
changes in the cost to the institution of borrowing funds. In May 2008,
the Agencies observed that consumers lack any control over these
increases and cannot be reasonably expected to predict when such
repricings will occur because many institutions reserve the right to
change the terms of the consumer's account at any time and for any
reason. Accordingly, the Agencies concluded that consumers appeared to
be unable to reasonably avoid injury in these circumstances.

Some industry commenters responded that consumers can reasonably avoid
injury by transferring the balance to another credit card account,
particularly if the consumer receives the 45 days' advance notice
required by proposed 12 CFR 226.9. These commenters acknowledged,
however, that many consumers will be unable to find another credit card
account with a rate comparable to the pre-increase rate. Furthermore,
even if a comparable rate could be found, the transfer may carry a cost
because many institutions charge a flat fee for transferring a balance
or a fee equal to a percentage of the transferred balance. Accordingly,
the Agencies conclude that consumers cannot reasonably avoid the injury
caused by rate increases on outstanding balances for reasons that are
unrelated to their behavior.

Second, an institution may increase an annual percentage rate on a
consumer credit card account based on behavior that is unrelated to the
consumer's performance on that account. This is sometimes referred to as
"off-account" behavior or "universal default." For example, an
institution may increase a rate due to a drop in a consumer's credit
score or a default on an account with a different creditor even though
the consumer has paid the credit card account with the institution
according to the terms of the cardholder agreement.[^97] The consumer
may or may not have been aware of or able to control the factor that
caused the drop in credit score, and the consumer cannot control what
factors are considered or how those factors are weighted in creating the
credit score. For example, a consumer is not likely to be aware that
using a certain amount of the available credit on open-end credit
accounts can lead to a reduction in credit score. Moreover, even if a
consumer were aware that the utilization of available credit can affect
a credit score, the consumer could not control how the institution uses
credit scores or other information to set interest rates.[^98]
Furthermore, as discussed below, a late payment or default on a
different account (or the account in question) will not be reasonably
avoidable in some instances.

One industry commenter stated that a consumer has a right under the Fair
Credit Reporting Act (FRCA) to dispute any inaccurate information that
causes a drop in credit score.[^99] This right, however, does not assist
consumers whose credit scores decrease due to information that
accurately reflects events that were nevertheless unavoidable by the
consumer. Furthermore, even when the drop in credit score was caused by
inaccurate information, the right to dispute that information comes too
late to enable the consumer to avoid the harm caused by an increase in
rate on an outstanding balance. Accordingly, the Agencies conclude that,
as a general matter, consumers cannot reasonably avoid the injury caused
by rate increases on outstanding balances that are based on a drop in
credit score or on behavior that is unrelated to the consumer's
performance on the account in question.

Third, some institutions increase annual percentage rates on consumer
credit card accounts based on consumer behavior that is related to the
account but does not violate the account terms. For example, an
institution may increase the annual percentage rates of consumers who
are close to (but not over) the credit limit on the account or who make
only the required minimum periodic payment set by the institution for
several consecutive months.[^100] Although in some cases this type of
activity may be within the consumer's control, the consumer cannot
reasonably avoid the resulting injury because the consumer is not aware
that this behavior may be used by the institution's internal risk models
as a basis for increasing the rate on the account. Indeed, a consumer
could reasonably interpret an institution's provision of a specific
credit limit, minimum payment, or other account term as an implicit
representation that the consumer will not be penalized if the credit
limit is not exceeded, the minimum payment is made, or the consumer
otherwise complies with the terms of the account. Accordingly, the
Agencies conclude that consumers cannot reasonably avoid the injury
caused rate increases based on behavior that does not violate the
account terms.

Fourth, institutions increase annual percentage rates based on consumer
behavior that violates the account terms. Although what violates the
account terms can vary from institution to institution and from account
to account, the most common violations that result in an increase in
rate are exceeding the credit limit, a payment that is returned for
insufficient funds, and a late payment.[^101] In the May 2008 Proposal,
the Agencies stated that, in some cases, it appeared that individual
consumers could avoid these events by taking reasonable precautions. In
other cases, however, it appeared that the event was not reasonably
avoidable. For example, consumers who carefully track their transactions
are less likely to exceed their credit limit than those who do not, but
these consumers may still exceed the limit due to charges of which they
were unaware (such as the institution's imposition of interest or fees)
or because of the institution's delay in replenishing the credit limit
following payment. Similarly, although consumers can reduce the risk of
making a payment that will be returned for insufficient funds by
carefully tracking the credits and debits on their deposit account,
consumers still lack sufficient information about key aspects on their
accounts, including when funds from a deposit or a credit will be made
available by the depository institution.[^102] Finally, the Agencies
noted that, although proposed § \_\_.22 would ensure that a consumer's
payment would not be treated as late for any reason (including for
purposes of triggering an increase in rate) unless the consumer received
a reasonable amount of time to make that payment, consumers may
nevertheless pay late for reasons that are not reasonably avoidable. As
support, the Agencies cited the FTC's conclusion with respect to its
Credit Practices Rule that the majority of defaults are not reasonably
avoidable by consumers as well as studies, reports, and other evidence
indicating that involuntary factors such as unemployment play a large
role in delinquency.[^103]

In response, some industry commenters asserted that, because most
consumers pay on time and do not otherwise violate the account terms,
these behaviors must be reasonably avoidable. As an initial matter,
although the information available is limited, it appears that a
significant number of consumers are penalized for violating the account
terms.[^104] Furthermore, the fact that a particular behavior may be
relatively infrequent does not necessarily make it reasonably
avoidable.[^105]

Another commenter cited as evidence that late payment is reasonably
avoidable a study finding that a consumer is 44 percent less likely to
pay a late fee in the current month if that consumer paid a late fee the
prior month.[^106] While this study indicates that consecutive late
payments are less likely to be accidental, it does not indicate that the
initial late payment (which currently may trigger a rate increase) is
reasonably avoidable.

Accordingly, the Agencies conclude that, as a general matter, the injury
caused by rate increases on outstanding balances due to a violation of
the account terms is not reasonably avoidable. For all of the reasons
discussed above, the Agencies further conclude that, although the injury
resulting from the application of increased annual percentage rates to
outstanding balances is avoidable in some individual cases, this injury
is not reasonably avoidable by consumers as a general matter.[^107]

For these same reasons, the Agencies also conclude that the injury
caused by rate increases during the first year after account opening is
not, as a general matter, reasonably avoidable, particularly if
consumers are not informed at account opening of the rates that will
apply to the account. A consumer will receive 45 days' advance notice of
such increases pursuant to the Board's revisions to 12 CFR 226.9
(adopted elsewhere in today's **Federal Register**) but, as discussed
above, many consumers will be unable to find another credit card account
with a rate comparable to the pre-increase rate. Thus, although some
consumers may be able to avoid injury by using a different credit card
account for transactions or ceasing to use credit cards entirely,
consumers who open an account to finance important purchases (such as
medical services or home or automotive repairs) and cannot obtain credit
at the same or a better rate elsewhere cannot reasonably avoid injury.
Furthermore, to the extent that consumers are injured because the rate
increase caused the account to lose value as a means of financing
transactions, this injury is not reasonably avoidable because, as
discussed above, rate increases are not, as a general matter, reasonably
avoidable.

[Injury is not outweighed by countervailing benefits]{.underline}. In
May 2008, the Agencies stated that, although proposed § \_\_.24 could
result in increased costs or reduced credit availability for consumers
generally, these costs did not appear to outweigh the substantial
benefits to consumers of avoiding significant unanticipated increases in
the cost of completed transactions. As discussed below, based on the
comments received and further analysis, the Agencies have revised
aspects of proposed § \_\_.24 in order to ensure that the final rule
creates benefits for consumers that exceed any associated costs. In
light of these revisions, the Agencies conclude that, to the extent
prohibited by § \_\_.24, increases in the annual percentage rate do not
produce benefits for consumers or competition that outweigh the injury.

In response to the May 2008 Proposal, individual consumers, consumer
groups, and some members of Congress argued that repricing is inherently
unfair and should be prohibited in most if not all circumstances. In
contrast, industry commenters generally argued that flexible pricing
models that respond to changes in the consumer's risk of default have
produced substantial benefits for consumers and competition that
outweigh any injury. These commenters noted that, whereas institutions
once charged a single rate of around 20 percent on all credit card
accounts regardless of the risk presented by the consumer, institutions
now vary the interest rate based on the consumer's risk profile with the
result that the great majority of consumers receive rates below 20
percent.[^108]

The exceptions in proposed § \_\_.24(b) permitted three types of
repricing that appeared to produce benefits for consumers and
competition that outweighed the injury. These exceptions were designed
to provide institutions with flexibility in the repricing of outstanding
balances while protecting consumers from unfair surprise. Based on the
comments and further analysis, the Agencies have modified these
exceptions as well as the general rule. As discussed below, the Agencies
believe that the final rule achieves the appropriate balance between
providing consumers with increased certainty and transparency regarding
the cost of credit and providing institutions with sufficient
flexibility to adjust to market conditions and allocate risk
efficiently.

[1. Increases in the rate that applies to new transactions]{.underline}

Individual consumers, consumer groups, members of Congress, and the FDIC
urged the Agencies to apply the proposed restrictions on the repricing
of outstanding balances to increases in the rates that apply to future
transactions. Some argued that consumers who have opened an account in
reliance on the rates stated by the institution should be protected from
unexpected increases in those rates for a specified period of time.

As discussed above, the Agencies agree that rate increases during the
first year after account opening can cause substantial injury that is
not, as a general matter, reasonably avoidable by consumers. In
addition, because the Board's consumer testing indicates that interest
rates are a primary focus for consumers when reviewing credit card
applications and solicitations, the Agencies believe that allowing
unlimited rate increases during the first year would be contrary to the
purpose of § \_\_.24, which is to prevent surprise increases in the cost
of credit. Indeed, as noted below with respect to promotional rates,
allowing this type of repricing while restricting others would create an
incentive for institutions to offer artificially low interest rates to
attract new customers based on the expectation that future repricings
will generate sufficient revenues, a practice which distorts competition
and undermines consumers' ability to evaluate the true cost of using
credit. Accordingly, because consumers who open an account should be
able to rely on the interest rate (or rates) stated by the institution,
the Agencies have revised § \_\_.24 to prohibit, as a general matter,
rate increases during the first year after account opening.

This prohibition, however, is not absolute. The exception in §
\_\_.24(b)(1) permits an institution to increase any annual percentage
rate disclosed at account opening so long as the institution also
disclosed a period of time after which the rate will increase and the
increased rate that will apply. In addition, a variable rate may be
increased due to an increase in the index pursuant to § \_\_.24(b)(2).
Furthermore, after the first year, § \_\_.24(b)(3) permits an
institution to increase the rates that apply to new transactions,
provided the institution complies with Regulation Z's 45-day advance
notice requirement. Finally, § \_\_.24(b)(4) permits an institution to
increase rates when the account becomes more than 30 days' delinquent.

The Agencies acknowledge that these additional restrictions will reduce
interest revenue and therefore have some effect on the cost and
availability of credit. Industry commenters, however, generally stated
that the amount of interest revenue generated from raising rates on
future transactions was relatively small in comparison to the revenue
generated from applying increased rates to outstanding balances.
Therefore, the Agencies believe that the effect of restricting rate
increases during the first year after account opening will be
significantly less than that for restricting rate increases on
outstanding balances. Accordingly, the Agencies conclude that repricing
during the first year after account opening does not produce benefits
for consumers or competition that outweigh the injury to consumers.

By requiring institutions to commit in advance to the rates that will
ultimately apply to transactions and to disclose those rates to
consumers, the final rule will also prevent institutions from relying on
the ability to reprice outstanding balances when setting upfront rates,
thereby creating additional incentives for institutions to ensure that
the rates offered to consumers at the outset fully reflect the risk
presented by the consumer as well as current and anticipated market
conditions.

[2. Variable rates]{.underline}

The proposed rule provided that the prohibition on applying an increased
annual percentage rate to an outstanding balance would not extend to
variable rates. This exception was intended to allow institutions to
adjust to increases in the cost of funds by utilizing a variable rate
that reflects market conditions because, if institutions were not
permitted to do so, they would be less willing to extend open-end
credit. The Agencies reasoned that, although the injury caused by
application of an increased variable rate to an outstanding balance is
not reasonably avoidable insofar as the increase is due to market
conditions that are beyond the consumer's ability to predict or control,
the proposed exception would protect consumers from arbitrary rate
increases by requiring that the index for the variable rate be outside
the institution's control and available to the general public. This
exception was supported by most commenters. Accordingly, because
allowing institutions to utilize variable rates provides countervailing
benefits sufficient to outweigh the increased interest charges, the
Agencies have adopted the proposed exception for variable rates as
§ \_\_.24(b)(2) with some stylistic changes.

[3. Non-variable rates]{.underline}

Industry commenters urged the Agencies to revise proposed § \_\_.24 to
provide greater flexibility to offer rates that do not vary with an
index. Without such an exception, they argued, concerns regarding
increases in the cost of funds would force institutions to offer only
variable rates, depriving consumers of the reliability of rates that do
not fluctuate with the market. Some of these commenters requested that
proposed § \_\_.24 be revised to allow repricing of outstanding balances
at the end of a specified period (such as six months, one year, or two
years).

The Agencies agree that non-variable rates can provide significant
benefits to consumers but only if consumers are informed before opening
an account or engaging in transactions how long the rate will apply and
what rate will be applied thereafter. Accordingly, the final rule
provides two ways for institutions to offer non-variable rates. First,
at account opening, § \_\_.24(b)(1) permits institutions to offer
non-variable rates that apply for a specified period of time and to
reprice at the end of that period so long as the institution discloses
at account opening the increased rate that will apply. For example, an
institution could offer a consumer credit card account with a
non-variable rate of 10% for six months after which a variable rate
based on a disclosed index and margin will apply to outstanding balances
and new transactions. Similarly, following the first year after account
opening, § \_\_.24(b)(3) permits institutions to provide non-variable
rates that apply for a specified period of time, although these rates
can only be applied to new transactions. For example, consistent with
the notice requirements in 12 CFR 226.9(c), an institution could apply a
non-variable rate of 15% to purchases for one year after which a
variable rate will apply.

In either case, a consumer who receives a non-variable rate would be
subject to repricing. However, the consumer will know at the time of
each purchase not only how long the current rate will apply to that
purchase but also the specific rate that will apply thereafter. Thus,
the final rule provides institutions with the ability to increase rates
to reflect anticipated changes in market conditions while enabling
consumers to make informed decisions about the cost of using credit.
Accordingly, the Agencies conclude that the benefits of allowing
repricing under these circumstances outweigh the injury.

[4. Promotional rates]{.underline}

The proposed rule would have allowed institutions to apply an increased
rate to an outstanding balance upon expiration or loss of a promotional
rate, except that, when a promotional rate was lost, the increased rate
could not exceed the rate that would have applied after expiration.
Consumer groups opposed this exception, stating that, because it did not
limit the circumstances in which a promotional rate could be lost, it
would leave in place abusive repricing practices. These commenters
argued that this exception would allow institutions to continue to
engage in "hair trigger" repricing by, for example, increasing the rate
on an outstanding balance from a 0% promotional rate to a 15% standard
rate when the consumer's payment was received one day after the due
date. They also stated that some institutions impose conditions on
retention of a promotional rate that are unrelated to the consumer's
risk of default and are instead intended to trap unwary consumers into
losing the discounted rate (for example, requiring consumers to make a
certain number or dollar amount of purchases each billing cycle).
Accordingly, they argued that, because discounted promotional rate
offers are used to encourage consumers to engage in transactions they
would not otherwise make (such as large purchases or balance transfers),
consumers who rely on promotional rate offers need the same protections
as consumers who rely on non-promotional rates.

Based on the comments and further analysis, the Agencies agree that this
aspect of the proposed rule could allow the very practices that the
Agencies intended to prevent. For example, an institution seeking to
attract new consumers by offering a promotional rate that is lower than
its competitors' rates could offer a rate that would be unprofitable if
the institution did not place conditions on retention of the rate that,
based on past consumer behavior, it anticipates will result in a
sufficient number of repricings to generate sufficient revenues. This
type of practice distorts competition and undermines consumers' ability
to evaluate the true cost of using credit.

Although the Agencies understand that discounted promotional rates can
provide substantial benefits to consumers[^109] and that institutions
may reduce promotional rate offers if their ability to reprice is
restricted, practices that cause consumers to lose a promotional rate
before the previously-disclosed expiration date deprive those consumers
of the benefit of a rate on which they have relied. Accordingly, because
proposed § \_\_.24 was intended to improve transparency and prevent
surprise increases in the cost of completed transactions, the Agencies
conclude that the injury caused by the repricing of promotional rate
balances prior to expiration is not outweighed by the benefits of the
promotional rate itself. Absent a serious default, a consumer should be
able to rely on a rate for the period specified in advance by the
institution. Therefore, the final rule does not permit repricing of
outstanding balances prior to the end of the specified period (except in
the case of a delinquency of more than 30 days as provided in
§ \_\_.24(b)(4)). As discussed above, however, the final rule (like the
proposal) permits repricing at the end of a specified period so long as
the increased rate was disclosed in advance.

[5. Violations of the account terms]{.underline}

The proposed rule would have permitted institutions to increase the
annual percentage rate on an outstanding balance if the consumer became
more than 30 days' delinquent. The Agencies observed that, although this
delinquency may not have been reasonably avoidable in certain individual
cases, the consumer will have received notice of the delinquency (in the
periodic statement and likely in other notices as well) and had an
opportunity to cure before becoming more than 30 days' delinquent. The
Agencies noted that a consumer is unlikely, for example, to become more
than 30 days' delinquent due to a single returned item or the loss of a
payment in the mail. Thus, the harm in individual cases where a
delinquency of more than 30 days is not reasonably avoidable appeared to
be outweighed by the benefits to all consumers (in the form of lower
annual percentage rates and broader access to credit) of allowing
institutions to reprice for risk once a consumer has become
significantly delinquent. For these reasons and for the additional
reasons discussed below, the Agencies conclude that the benefits of
allowing repricing in these circumstances outweigh the costs. The
Agencies further conclude, however, that the same is not true for
repricing based on other violations of the account terms.

In response to the May 2008 Proposal, consumer groups argued that
repricing outstanding balances based on violations of the account terms
is fundamentally unfair and should be prohibited entirely or, failing
that, a delinquency of more than 30 days should be the only circumstance
in which institutions are permitted to reprice based on a violation of
the account terms. A consumer group explained that a delinquency of more
than 30 days was the appropriate period because, under industry
guidelines governing credit reporting, an account is not reported as
delinquent until it is at least 30 days late, suggesting that paying
less than 30 days late is not considered to affect creditworthiness
significantly.[^110] In contrast, industry commenters and the OCC argued
that the proposed rule provided insufficient flexibility because
accounts that become more than 30 days' delinquent have such a high rate
of loss that repricing is ineffective. The Argus Analysis stated that
32.4 percent of accounts that are more than 30 days past due and 49.8
percent of the balances on those accounts will become losses within the
next twelve months.[^111] Industry commenters argued that, given these
rates, institutions would be unable to compensate for the losses through
rate increases on all accounts that become more than 30 days'
delinquent. Instead, they argued, these losses would have to be spread
over a larger population of accounts, potentially raising rates and
reducing credit availability for many or all consumers.

The Argus Analysis stated that -- as a result of the restrictions in
proposed § \_\_.23 (payment allocation), proposed § \_\_.24 (repricing),
and proposed 12 CFR 226.9 (45 days' advance notice of most rate
increases) -- institutions could lose 1.639 percent of their annual
interest revenue on revolving credit card accounts.[^112] This analysis
estimated that, in order to offset this loss, institutions might
increase interest rates by approximately 120 percent of the loss (1.937
percentage points), decrease the average credit line of \$9,561 by
approximately 22 percent (\$2,029), cease lending to consumers with Fair
Isaac Corporation ("FICO") scores below 620, or engage in some
combination of these responses.[^113]

Although the Argus Analysis did not estimate the potential impact on
interest rates and credit availability specifically attributable to
proposed § \_\_.24, it did state that annual interest revenue on
revolving accounts would be reduced by approximately 1.514 percent as a
result of proposed § \_\_.24 and proposed 12 CFR 226.9.[^114] Therefore,
assuming for the sake of discussion that the data and assumptions
underlying the Argus Analysis are accurate, that analysis predicts that
institutions might respond by increasing interest rates approximately
1.817 percentage points, by decreasing credit limits approximately
\$1,874, or by substantially reducing lending to consumers with FICO
scores below 620.[^115] Accordingly, if, for example, an institution
currently charges a consumer an interest rate of 15% on a credit line of
\$9,000, the institution could respond to proposed § \_\_.24 and
proposed 12 CFR 226.9 by increasing the rate to 16.82% or by decreasing
the credit limit to \$7,126.

As noted above, however, the Agencies are unable to verify the accuracy
of the conclusions reached by the Argus Analysis or its supporting data.
Furthermore, this analysis assumed that institutions could only respond
to the proposed rules by increasing rates, reducing credit limits, or
eliminating credit to consumers with FICO scores below 620, ignoring
other potential responses such as offsetting lost interest revenue by
increasing revenue from fees (including annual fees) or developing
improved underwriting techniques in order to reduce losses on accounts
that eventually default.[^116]

In addition, even if the Agencies were to accept the Argus Analysis and
its underlying data at face value, that analysis also indicates that the
typical rate increase is approximately eight percentage points and that
approximately 22 percent of accounts are repriced over the course of a
year.[^117] Thus, with respect to interest rates, the Argus Analysis
indicates that the impact of the proposed rule would be relatively
neutral because the rule would prevent a six percentage point net
increase on roughly a quarter of accounts while the other three-quarters
may experience an increase of less than two percentage points.[^118]
Although the Argus Analysis also predicted that -- instead of increasing
interest rates -- institutions might reduce credit limits or lending to
consumers with lower FICO scores, those responses would reduce or
eliminate the need for a rate increase, thereby retaining roughly the
same relationship between the costs and benefits of the rule.[^119]

As with § \_\_.23, even if the shifting of costs from one group of
consumers to another, much larger group is viewed as neutral from a
cost-benefit perspective, the less quantifiable benefits to consumers
and competition of more transparent upfront pricing weigh in favor of §
\_\_.24. Upfront annual percentage rates that are artificially reduced
based on the expectation of future increases do not represent a true
benefit to consumers as a whole. In addition to protecting consumers
from unexpected increases in the cost of transactions that have already
been completed, § \_\_.24 will enable consumers to more accurately
assess the cost of using their credit card accounts at the time they
engage in new transactions. Finally, competition will be enhanced
because institutions that offer annual percentage rates that more
accurately reflect risk and market conditions will no longer be forced
to compete with institutions offering artificially reduced rates.
Accordingly, the Agencies conclude that limiting rate increases on
outstanding balances and during the first year to circumstances where
the account is more than 30 days' delinquent produces benefits that
outweigh the associated costs.

Industry commenters and the OCC urged the Agencies to adopt additional
exceptions to proposed § \_\_.24 based on violations of the account
terms other than a single late payment (specifically, exceeding the
credit limit, making payment with a check that is returned for
insufficient funds, and paying late twice in a twelve month period).
Many of these commenters provided data indicating that these behaviors
are associated with loss rates that are significantly higher than those
for consumers who do not violate the account terms (although all of
these loss rates were significantly lower than the loss rates associated
with delinquencies of more than 30 days). As an initial matter, the
Agencies note that the impact on the cost and availability of credit of
prohibiting repricing based on these behaviors is subsumed within the
impact of prohibiting repricing based on any violation of the account
terms other than a delinquency of more than 30 days. Accordingly, for
the reasons already stated above, repricing outstanding balances based
on these behaviors does not provide benefits to consumers or competition
that outweigh the injury to consumers.

Furthermore, with respect to repricing outstanding balances when the
credit limit is exceeded or when a payment is returned for insufficient
funds, the Agencies have already concluded that these violations of the
account terms are not, as a general matter, reasonably avoidable by
consumers. Accordingly, allowing repricing in those circumstances would
undermine the purpose of § \_\_.24, which is to protect consumers from
being unfairly surprised by increases in the cost of completed
transactions.

Similarly, the Agencies conclude that allowing repricing based on two
late payments in twelve months would not sufficiently protect consumers
from unfair surprise. As discussed above, the Agencies have already
concluded that consumers cannot, as a general matter, reasonably avoid
repricing based on late payments. Furthermore, making a payment that is
received one day after the due date twice in a period of twelve months
is precisely the type of "hair trigger" repricing that § \_\_.24 is
intended to prevent. Even if repricing were allowed only when the late
payments were received two, three, or even five days after the due date
(as some commenters suggested), these periods would not provide
consumers with sufficient time to learn of the delinquency and cure it
(unlike a delinquency of 30 days or more).[^120] Furthermore, as
discussed above with respect to § \_\_.22, the Agencies have already
concluded that providing a short period of time after the due date
during which payments must be treated as timely could create consumer
confusion regarding when payment is actually due and undermine the
Board's efforts elsewhere in today's **Federal Register** to ensure that
consumers' due dates are meaningful. Finally, the Agencies note that the
exception in § \_\_.24(b)(4) permitting repricing for delinquencies of
more than 30 days is similar to an exception allowing repricing based on
consecutive delinquencies because a consumer who is more than 30 days'
delinquent will, in most cases, have missed two due dates.

[6. Assessment of deferred interest]{.underline}

As noted above, consumer groups stated that the assessment of deferred
interest raises many of the same concerns as the repricing of
outstanding balances. Deferred interest plans are typically marketed as
being "interest free" for a specified period (such as a year) and are
often offered to promote large purchases such as furniture or
appliances. However, although interest is not charged to the account
during that period, interest accrues at a specified rate. If the
consumer violates the account terms (which could include a "hair
trigger" violation such as paying one day late) or fails to pay the
purchase balance in full before expiration of the period, the
institution retroactively charges all interest accrued from the date of
purchase.

Consumer groups stated that, like discounted promotional rates, deferred
interest plans are used to encourage consumers to engage in transactions
they would not otherwise make. They argued that, because of "hair
trigger" repricing, many consumers lose the benefit of the deferred
interest plan earlier than expected and that many other consumers incur
deferred interest charges by failing to pay the balance in full prior to
expiration either inadvertently or because they lack the resources to do
so. In addition, they noted that the injury to the consumer in such
cases may be far greater than when a promotional rate is lost because
interest is charged retroactively on the outstanding balance. Finally,
they stated that deferred interest plans cannot be adequately disclosed
to consumers because of their complexity.

Based on the comments and further analysis, the Agencies believe that
the assessment of deferred interest under these circumstances is
effectively a repricing of an outstanding balance. For example, assume
that an institution offers a consumer credit card account that accrues
interest on purchases at an annual percentage rate of 15% but interest
will not be charged on purchases for one year unless the consumer
violates the account terms or the purchase balance is not paid in full
by the end of the year. The account is marketed as "no interest on
purchases for one year." On January 1 of year one, a consumer opens an
account in order to make a \$3,000 purchase. Although interest
technically accrues on the \$3,000 purchase at 15% from January 1
through December 31, this interest is not charged to the account, making
the rate that applies to the purchase effectively zero during that
period. If, however, the consumer violates the account terms during year
one by paying late or fails to pay the \$3,000 in full by January 1 of
year two, all of the interest that has accrued at 15% since January 1 of
year one will be charged retroactively to the account. In addition, the
15% rate (or a higher penalty rate) will apply to the \$3,000 balance
thereafter.

The Agencies believe that this is precisely the type of surprise
increase in the cost of completed transactions that § \_\_.24 is
intended to prevent. As noted by the commenters, the assessment of
accrued interest causes substantial injury to consumers. In addition,
for the same reasons that consumers cannot, as a general matter,
reasonably avoid rate increases as a result of a violation of the
account terms, consumers cannot, as a general matter, reasonably avoid
assessment of deferred interest as a result of a violation of the
account terms or the failure to pay the balance in full prior to
expiration of the deferred interest period. For example, just as illness
or unemployment may reasonably prevent some consumers from paying on
time, these conditions may reasonably prevent some consumers from paying
the deferred interest balance in full prior to expiration. In addition,
as noted by the commenters, disclosure may not provide an effective
means for consumers to avoid the harm caused by these plans.

Finally, although deferred interest plans provide some consumers with
substantial benefits in the form of an interest-free advance if the
balance is paid in full prior to expiration, the Agencies conclude that
these benefits do not outweigh the substantial injury to consumers. As
discussed above, deferred interest plans are typically marketed as
"interest free" products but many consumers fail to receive that benefit
and are instead charged interest retroactively. Accordingly, as with the
prohibitions on other repricing practices discussed above, prohibiting
the assessment of deferred interest will improve transparency and enable
consumers to make more informed decisions regarding the cost of using
credit. Accordingly, the Agencies conclude that an exception to the
general prohibition on rate increases is not warranted for the
assessment of deferred interest.

The Agencies note, however, that the final rule does not preclude
institutions from offering consumers interest-free promotional plans. As
discussed above, institutions can still offer 0% promotional rates for
specified periods so long as they disclose the rate that will apply
thereafter. Furthermore, an institution could offer a plan where
interest is assessed on purchases at a disclosed rate for a period of
time but the interest charges are waived or refunded if the principal is
paid in full by the end of the period. For example, assume that an
institution offers an account that charges interest on purchases at a
15% non-variable rate but only requires the consumer to repay a portion
of the outstanding principal balance each month during the first year
after the account is opened. If the principal is paid in full by the end
of that year, the institution waives all interest accrued during that
year. At account opening on January 1 of year one, the institution
discloses these terms (including the 15% rate at which interest will
accrue). The consumer uses the account for a \$3,000 purchase on
January 1. The consumer makes no other purchases and makes no payments.
At the end of each billing cycle, the institution charges to the account
interest accrued on the \$3,000 balance at the 15% rate. On December 15
of year one, the consumer pays \$3,000 and the institution waives all
accrued interest. This type of product would comply with the final rule.

[Public policy]{.underline}. Industry commenters and the OCC argued that
proposed § \_\_.24 conflicted with established public policy, citing a
variety of sources. The Agencies note that public policy is not a
required element of the unfairness analysis.[^121] Nevertheless, after
carefully considering the materials cited by the comments, the Agencies
conclude that any inconsistency is necessary to protect consumers from
practices that satisfy the required statutory elements of unfairness.

First, industry commenters and the OCC cited testimony, guidance,
reports, and advisory letters from federal banking regulators (including
the Board and OTS) stating or suggesting that institutions should
actively manage risk on credit card accounts, that one method of
managing risk is adjusting interest rates on outstanding balances and
new transactions to reflect the consumer's risk of default, and that
doing so can be beneficial for consumers insofar as it reduces rates
overall.[^122] The Agencies agree that, to the extent that these
materials constitute public policy for purposes of the FTC Act
unfairness analysis, many contain statements that could be deemed
inconsistent with the restrictions in § \_\_.24. As discussed above,
however, the Agencies have already taken the benefits of adjusting rates
to reflect changes in a consumer's risk of default into account and
concluded that these benefits do not outweigh the injury to consumers
caused by this practice. Accordingly, the Agencies find that the
regulatory materials cited do not preclude a determination that, to the
extent prohibited by § \_\_.24, application of increased annual
percentage rates is an unfair practice.

Second, some industry commenters and the OCC stated that proposed §
\_\_.24 conflicts with previous Board policy regarding rate increases.
Specifically, these commenters noted that, prior to the revisions to
Regulation Z in today's **Federal Register**, 12 CFR 226.9 placed no
restrictions on rate increases resulting from a violation of the account
terms and required only 15 days' advance notice of rate increases
resulting from a change in the terms of the contract. These commenters
further noted that, rather than proposing to prohibit repricing of
outstanding balances in the June 2007 Regulation Z Proposal, the Board
instead proposed to improve disclosures regarding the rate increases.
According to these commenters, the improved Regulation Z disclosures are
sufficient, by themselves, to address any concerns regarding application
of increased rates to outstanding balances.

These commenters first argued that disclosure in solicitations and at
account opening of the circumstances in which a penalty rate will be
applied to a consumer credit card account will enable consumers to avoid
those circumstances and therefore any injury. Although these disclosures
are necessary and appropriate for the informed use of credit, the
Agencies do not believe that, by themselves, they would be effective in
preventing the harm caused by application of increased rates. Disclosure
will not enable consumers to select a credit card that does not reprice
outstanding balances because institutions almost uniformly reserve the
right to increase rates at any time and for any reason and to apply
those increased rates to prior transactions.[^123] Nor, as discussed
above, would disclosure enable consumers to avoid rate increases
resulting from circumstances outside their control, such as late
payments due to delays in the delivery of mail. Furthermore, as noted in
the May 2008 Proposal, there is evidence that disclosure at solicitation
and account opening has limited effectiveness in preventing subsequent
defaults because consumers do not focus on the consequences of default
when deciding whether to open a credit card account and whether to use
the account for a particular transaction.[^124]

Industry commenters also argued that disclosure of the rate increase 45
days before that increase goes into effect allows consumers to avoid
injury by paying the balance in full or transferring that balance to
another credit card account.[^125] It would be unreasonable, however, to
expect consumers who have chosen to use a credit card to finance
purchases in reliance on the rate in effect at that time to pay those
purchases in full in order to avoid injury. Furthermore, as discussed
above, alternative financing (such as a balance transfer) only enables
the consumer to avoid injury if the consumer can obtain a comparable
annual percentage rate and terms elsewhere, which often will not be the
case. Accordingly, because disclosure alone would not be effective in
preventing the harm caused by application of increased rates to
outstanding balances, the Agencies conclude that § \_\_.24 does not
conflict with the Board's Regulation Z.

Third, industry commenters and the OCC argued that proposed § \_\_.24
conflicts with state laws that, rather than prohibiting repricing of
outstanding balances, require consumers to affirmatively reject (or opt
out of) such increases by closing the account.[^126] These commenters
urged the Agencies to adopt this approach as a less restrictive
alternative to proposed § \_\_.24.

In the May 2008 Proposal, the Agencies considered a similar suggestion
raised by some commenters in response to the Board's June 2007
Regulation Z Proposal and concluded that this remedy would not
effectively protect consumers.[^127] The Agencies noted that, in most
cases, it would not be economically rational for a consumer to choose to
pay more for credit that has already been extended, particularly when
the increased rate is significantly higher than the prior rate. If
consumers understand their right to reject a rate increase, most would
rationally exercise that right.[^128] Thus, the Agencies conclude that
providing consumers with a right to opt out of rate increases on
outstanding balances would be less restrictive than prohibiting such
increases only if a significant number of consumers inadvertently
forfeited that right by failing to read, understand, or act on the
notice.[^129] According to the GAO Report, however, although state laws
applying to four of the six largest credit card issuers require an
opt-out, representatives of those issuers stated that few consumers
exercise that right.[^130] Although several institutions asserted that
providing an opt-out would allow consumers to reasonably avoid injury,
none provided the percentage of consumers that currently opt out under
applicable state statutes.[^131]

Finally, some industry commenters argued that the failure to provide an
opt-out for rate increases was inconsistent with the provision of an
opt-out for payment of overdrafts in proposed § \_\_.32(a). As discussed
below, the Agencies are not taking action on proposed § \_\_.32(a) at
this time. The Board has proposed a revised opt-out right with respect
to overdraft services under Regulation E elsewhere in today's **Federal
Register**. The Board is also proposing an alternative approach that
would require consumer opt-in to overdraft services. Furthermore, the
Agencies' decision to propose an opt-out with respect to payment of
overdrafts but not with respect rate increases was based on an
evaluation of the consumers' incentives in each situation. A consumer
could rationally prefer assessment of an overdraft fee to rejection of
the transaction because of the costs associated with rejection (for
example, a merchant fee for a check that is not honored), whereas -- for
the reasons discussed above -- few if any consumers would willingly
choose to pay more for credit already extended.

Accordingly, although § \_\_.24 is broader than the law in some states,
the Agencies conclude that provision of a right to opt out of rate
increases would not be effective in preventing the harm caused by
application of increased rates to outstanding balances.

[Applicability of unfairness analysis to other practices]{.underline}.
Industry and consumer group commenters questioned why the Agencies'
unfairness analysis with respect to rate increases as a result of a
violation of the account terms could not be applied to other
consequences of such violations, such as increases in the rate for new
transactions or fees. As discussed above, the Agencies have concluded
that the unfairness analysis does, in fact, preclude rate increases
during the first year after account opening. After the first year,
however, the Agencies believe that the consumer has less of a reasonable
expectation that the rate promised at account opening will continue to
apply to new transactions. At that point, even if the reason for the
rate increase was not reasonably avoidable, other provisions should
enable consumers to reasonably avoid the harm caused by an increase in
the rate for new transactions. Specifically, consumers will receive
notice of most rate increases 45 days before the increase goes into
effect.[^132] Furthermore, as discussed below, § \_\_.24(b)(3) prevents
surprise by prohibiting application of the increased rate to
transactions made up to seven days after provision of the 45-day notice.
After the first year, these provisions will enable consumers to
reasonably avoid any injury caused by application of an increased rate
to new transactions by providing them sufficient time to receive the
45-day notice and to decide whether to continue using the card.

Similarly, although there will be circumstances in which some consumers
cannot reasonably avoid fees for violating the account terms (for
example, a late payment fee when a delay in mail delivery caused the
late payment), this injury is not sufficient to outweigh the
countervailing benefits to consumers and competition of discouraging
violations of the account terms. The application of an increased rate to
an outstanding balance increases consumers' costs until the rate is
reduced or the balance is paid in full or transferred to an account with
more favorable terms. Similarly, an increase in the rate applicable to
new transactions increases the costs of using the account indefinitely.
The assessment of a fee, however, is generally an isolated cost that
will not be repeated unless the account terms are violated again.

**Final Rule**

As discussed below, § \_\_.24 imposes certain disclosure requirements on
institutions. Comment 24-1 clarifies that an institution that complies
with the applicable disclosure requirements in Regulation Z, 12 CFR part
226, has complied with the disclosure requirements in § 227.24. This
comment further clarifies that nothing in § \_\_.24 alters the 45-day
advance notice requirements in 12 CFR 226.9(c) and (g). However, nothing
in § \_\_.24, its commentary, or this **SUPPLEMENTARY INFORMATION**
should be construed to suggest that, by itself, a failure to comply with
the notice requirements in 12 CFR 226.9 constitutes a violation of §
\_\_.24.

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

Proposed § \_\_.24(a)(1) would have prohibited institutions from
increasing the annual percentage rate applicable to any outstanding
balance on a consumer credit card account, except in the circumstances
set forth in proposed § \_\_.24(b). Proposed § \_\_.24(a)(2) defined
"outstanding balance."

As discussed above, the Agencies have adopted a new § \_\_.24(a), which
requires institutions to disclose at account opening the annual
percentage rates that will apply to each category of transactions on the
consumer credit card account. Section \_\_.24(a) further provides that
an institution must not increase the annual percentage rate for a
category of transactions on any consumer credit card account except as
provided in § \_\_.24(b). As discussed below, the general prohibition on
increasing rates in § \_\_.24(b) applies to existing accounts and
balances as of the July 1, 2010 effective date.

Comment 24(a)-1 clarifies that an institution cannot satisfy the
disclosure requirement in § \_\_.24(a) by disclosing at account opening
only a range of rates or that a rate will be "up to" a particular
amount. Comment 24(a)-2 provides illustrative examples of the
application of the prohibition on increasing rates.

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

Proposed § \_\_.24(b) set forth exceptions to the general prohibition in
proposed § \_\_.24(a) on applying increased rates to outstanding
balances. As discussed above, the Agencies have revised § \_\_.24(b) to
reflect the changes to § \_\_.24(a) and to ensure that consumers are
protected from unfair surprise regarding the cost of credit.

[\_\_.24(b)(1) Account opening disclosure exception]{.underline}

Section \_\_.24(b)(1) permits an increase in the annual percentage rate
for a category of transactions to a rate that was disclosed at account
opening upon expiration of a period of time that was also disclosed at
account opening. For example, an institution could offer a consumer
credit card account that applies a 5% non-variable rate during the first
six months after account opening, a 15% non-variable rate for an
additional six months, and a variable rate thereafter. So long as the
institution discloses these terms to the consumer at account opening,
§ \_\_.24(b)(1) permits the institution to apply the 15% rate to the
purchase balance and to new purchases after six months and the variable
rate to the purchase balance and new purchases after the first year.
However, the institution could not subsequently increase that variable
rate unless specifically permitted by one of the other exceptions in §
\_\_.24(b).

Comment 24(b)(1)-1 clarifies that § \_\_.24(b)(1) does not permit
application of increased rates that are disclosed at account opening but
are contingent on a particular event or occurrence or may be applied at
the institution's discretion (unless one of the exceptions in §
\_\_.24(b) applies). The comment provides several examples, including
the retroactive assessment of deferred interest. However, comment
24(b)(1)-2 clarifies that nothing in § \_\_.24 prohibits an institution
from assessing interest due to the loss of a grace period as provided in
§ \_\_.25. In addition, comment 24(b)(1)-3 clarifies that nothing in §
\_\_.24 prohibits an institution from applying a rate that is lower than
the disclosed rate upon expiration of the period. However, if the lower
rate is applied to an existing balance, the institution cannot
subsequently increase the rate with respect to that balance unless it
has provided the consumer with advance notice pursuant to 12 CFR
226.9(c). An illustrative example is provided.

[\_\_.24(b)(2) Variable rate exception]{.underline}

Proposed § \_\_.24(b)(1) would have permitted an increase in the annual
percentage rate due to an increase in an index that is not under the
institution's control and is available to the general public. This
exception was designed to be similar to the exception for variable rates
in 12 CFR 226.5b(f)(1). This aspect of the proposal was supported by
comments from both industry and consumer groups. Accordingly, proposed §
\_\_.24(b)(1) is adopted as § \_\_.24(b)(2) with stylistic revisions.
This provision cannot be used to increase the annual percentage rate
based on an index except to the extent disclosed.

The Agencies have adopted a new comment 24(b)(2)-1, which clarifies that
§ \_\_.24(b)(2) does not permit an institution to increase an annual
percentage rate by changing the method used to determine a variable
(such as by increasing the margin), even if that change will not result
in an immediate increase.

Proposed comment 24(b)(1)--1 clarified that an institution may not
increase a variable rate balance based on its own prime rate but may use
a published prime rate, such as that in the [Wall]{.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 also clarified that an institution may not increase a
variable rate by changing the method used to determine the indexed rate.
Proposed comment 24(b)(1)--2 clarified when a rate is considered
"publicly available."

One industry commenter requested clarification that institutions were
not limited to basing variable rates on prime rates and could also use
one or more other publicly available indices, such as the Consumer Price
Index. Because the method for determining the variable rate must be
disclosed consistent with 12 CFR 226.6, the Agencies believe that the
use of multiple indices is appropriate so long as those indices are
publicly available. The Agencies have revised proposed comments
24(b)(1)-1 and -2 accordingly and adopted those comments as 24(b)(2)-2
and -3.

Some industry commenters requested that institutions be permitted to
change a non-variable rate to a variable rate or to change the method
used to determine a variable rate so long as, at the time of the change,
the rate would not increase. Because such changes could lead to future
increases in a rate during the first year or a rate applicable to an
outstanding balance, comment 24(b)(2)-4 clarifies that a non-variable
rate may be converted to a variable rate only when specifically
permitted by § \_\_.24. For example, under § \_\_.24(b)(1), an
institution may convert a non-variable rate to a variable rate if this
change was disclosed at account opening.

Because § \_\_.24 applies only to increases in annual percentage rates,
the Agencies have adopted comment 24(b)(2)-5, which clarifies that
nothing in § \_\_.24 prohibits an institution from changing a variable
rate to an equal or lower non-variable rate. Whether the non-variable
rate is equal to or lower than the variable rate is determined at the
time the institution provides the notice required by 12 CFR 226.9(c).
For example, assume that on March 1 a variable rate that is currently
15% applies to a balance of \$2,000 and the institution sends a notice
pursuant to 12 CFR 226.9(c) informing the consumer that the variable
rate will be converted to a non-variable rate of 14% effective April 16.
On April 16, the institution may apply the 15% non-variable rate to the
\$2,000 balance and to new transactions even if the variable rate on
April 16 was less than 14%.

Comment 24(b)(2)-6 clarifies that an institution may change the index
and margin used to determine a variable rate if the original index
becomes unavailable, so long as historical fluctuations in the original
and replacement indices were substantially similar and the replacement
index and margin will produce a rate similar to the rate that was in
effect at the time the original index became unavailable. This comment
further clarifies that, if the replacement index is newly established
and therefore does not have any rate history, it may be used if it
produces a rate substantially similar to the rate in effect when the
original index became unavailable. This comment is modeled on comment
226.5b(f)(3)(ii)-1 to 12 CFR 226.5b.

[\_\_.24(b)(3) Advance notice exception]{.underline}

The Agencies have adopted a new § \_\_.24(b)(3), which provides that an
annual percentage rate for a category of transactions may be increased
pursuant to a notice under 12 CFR 226.9(c) or (g) for transactions that
occur more than seven days after provision of the notice. An institution
cannot, however, utilize this exception during the first year after
account opening.

The prohibition in § \_\_.24(b)(3) on applying an increased rate to
transactions that occur more than seven days after provision of the 12
CFR 226.9 notice is modeled on the definition of "outstanding balance"
in proposed § \_\_.24(a)(2). Proposed § \_\_.24(a)(2) defined
"outstanding balance" as the amount owed on a consumer credit card
account at the end of the fourteenth day after the institution provides
the notice required by proposed 12 CFR 226.9(c) or (g). This definition
was intended to prevent the requirement in proposed 12 CFR 226.9 that
creditors provide 45 days' advance notice of rate increases from
creating an extended period following receipt of that notice during
which new transactions could be made at the prior rate. Although
institutions could address this concern by denying additional extensions
of credit after sending the 45-day notice, the Agencies believe that
this outcome would not be beneficial to consumers who have received the
notice and wish to use the account for new transactions. The 14-day
period was intended to be consistent with the 21-day safe harbor in
proposed § \_\_.22(b) insofar as it would allow seven days for the
notice to reach the consumer and seven days for the consumer to review
that notice and take appropriate action.

Some industry commenters opposed proposed § \_\_.24(a)(2) entirely,
arguing that -- because rates are often increased as a result of
increases in the consumer's risk of default -- delaying imposition of
the new rate only increases the risk borne by the institution. Other
industry commenters acknowledged that it is reasonable to provide some
period of time for consumers to receive and review the notice but that
fourteen days is excessive because average mail times are much less than
seven days and because a consumer who does not wish to engage in
transactions at the new rate need only cease to use the card.

As discussed above with respect to § \_\_.22, while the Agencies believe
that seven days will be more than sufficient for the great majority of
consumers to receive a periodic statement or notice by mail, relying on
average mailing times would not adequately protect the significant
number of consumers whose delivery times are longer than average. The
Agencies agree, however, that consumers do not require seven days to
review the notice and take appropriate action. Indeed, many consumers
will not be required to take any action to reasonably avoid transactions
to which the increased rate will apply. In addition, because in most
cases the notice will be delivered in less than seven days, most
consumers will have time to cancel recurring charges to their account
(if necessary). The Agencies conclude that, in order to protect
consumers from inadvertently engaging in transactions to which an
increased rate will apply while minimizing the period during which
credit extended by the institution must remain at the pre-increase rate,
a rate that is increased pursuant to § \_\_.24(b)(3) should apply only
to transactions that occur after the seventh day following provision of
the 12 CFR 226.9 notice.

Comment 24(b)(3)-1 clarifies that the limitation in § \_\_.24(b)(3)
regarding rate increases during the first year after an account is
opened does not apply to accounts opened prior to July 1, 2010.

One industry commenter expressed concern that the "outstanding balance"
under proposed § \_\_.24(a)(2) could be construed to include
transactions that were authorized before the end of the relevant date
but were settled until after that date. The Agencies agree that an
institution should not be required to include such transactions in the
balance to which the increased rate cannot be applied. Accordingly,
comment 24(b)(3)-2 clarifies that an institution may apply a rate
increased pursuant to § \_\_.24(b)(3) to transactions that occur within
seven days after provision of the notice but are settled more than seven
days after that notice was provided. An illustrative example is provided
in comment 24(b)(3)-3.

[\_\_.24(b)(4) Delinquency exception]{.underline}

Proposed § \_\_.24(b)(3) provided that an institution could apply an
increased rate if the consumer's minimum payment had not been received
within 30 days after the due date. This exception was intended to ensure
that consumers would generally have notice and an opportunity to cure
the delinquency before becoming more than 30 days' past due. As
discussed above, the Agencies have adopted proposed § \_\_.24(b)(3) as §
\_\_.24(b)(4) with stylistic changes.[^133]

Some commenters requested that, in addition to restricting the
circumstances in which institutions could apply high penalty rates to
existing balances based on a violation of the account terms, the
Agencies also restrict the length of time a penalty rate can be applied
to an account. They suggested that, for example, institutions be
prohibited from applying a penalty rate to an account for more than six
months if the consumer does not violate the account terms during that
period. The Agencies, however, are not imposing a substantive
prohibition at this time. As discussed above, the Agencies have placed
significant limitations on institutions' ability to reprice outstanding
balances based on violations of the account terms. Furthermore, because
the amendments to Regulation Z adopted by the Board elsewhere in today's
**Federal Register** require creditors to provide 45 days' advance
notice of the imposition of a penalty rate, a consumer will have the
opportunity to decide whether to engage in transactions at the penalty
rate.[^134] Finally, the Board has also improved the disclosures under
Regulation Z to require creditors to disclose how long a penalty rate
will remain in effect or, if the creditor reserves the right to apply
the penalty rate indefinitely, to affirmatively state that fact.[^135]
Although the Agencies are not requiring such practices as part of
today's final rule, they believe that limiting the duration of a penalty
rate and periodically reevaluating a consumer's creditworthiness to
determine eligibility to return to the non-penalty rate are policies
that can be both beneficial for the consumer and safe and sound policy
for the institution. Some industry commenters indicated that they
already follow such a practice.

[\_\_.24(b)(5) Workout arrangement exception]{.underline}

One commenter noted that, as proposed, § \_\_.24 would prohibit
institutions that reduced the annual percentage rate on an account
pursuant to a workout arrangement from increasing the rate if the
consumer failed to comply with the terms of the arrangement. Because
workout arrangements can provide important benefits to consumers in
serious default, the Agencies have adopted § \_\_.24(b)(5), which
provides that, when a consumer fails to comply with the terms of a
workout arrangement, the institution may increase the annual percentage
rate to a rate that does not exceed the rate that applied prior to the
arrangement. For example, assume that, consistent with § \_\_.24(b)(4),
the annual percentage rate on a \$5,000 balance is increased from 15% to
25%. Assume also that the institution and the consumer subsequently
agree to a workout arrangement that reduces the rate to 15% on the
condition that the consumer pay a specified amount by the payment due
date each month. If the consumer does not pay the agreed-upon amount by
the payment due date, § \_\_.24(b)(5) permits the institution to
increase the rate on the \$5,000 balance to no more than 25%.
[See]{.underline} comment 24(b)(5)-3.

Comment 24(b)(5)-1 clarifies that, except as expressly provided, §
\_\_.24(b)(5) does not permit an institution to alter any of the
requirements in § \_\_.24 pursuant to a workout arrangement between a
consumer and the institution. For example, an institution cannot
increase a rate pursuant to a workout arrangement unless otherwise
permitted by § \_\_.24. In addition, an institution cannot require the
consumer to make payments with respect to a protected balance that
exceed the payments permitted under § \_\_.24(c).

Comment 24(b)(5)-2 clarifies that, if the rate that applied prior to the
workout arrangement was a variable rate, the rate that can be applied if
the consumer fails to comply with the terms of the arrangement must be
calculated using the same formula as before the arrangement.

[\_\_.24(c) Treatment of protected balances]{.underline}

Proposed § \_\_.24(c) was intended to ensure that the protections in §
\_\_.24 were not undercut. Accordingly, it would have provided that,
when an institution increases the annual percentage rate applicable to a
category of transactions (for example, purchases), the institution was
prohibited from requiring repayment of an outstanding balance in that
category using a method that is less beneficial to the consumer than one
of the methods listed in § \_\_.24(c)(1) and from assessing fees or
charges solely on an outstanding balance. In order to clarify the
application of § \_\_.24(c), the Agencies have revised this paragraph to
state that it applies only to "protected balances," which are defined as
amounts owed for a category of transactions to which an increased annual
percentage rate cannot be applied after the rate for that category of
transactions has been increased pursuant to § \_\_.24(b)(3). This
definition is similar to the definition of "outstanding balance" in
proposed § \_\_.24. In addition, proposed § \_\_.24(c) has been revised
for consistency with the revisions to § \_\_.24(b) and for stylistic
reasons. Otherwise, it has been adopted as proposed.

The Agencies have replaced proposed comments 23(c)-1 and -2 with a new
comment 24(c)-1, which clarifies that, because rates cannot be increased
pursuant to § \_\_.24(b)(3) during the first year after account opening,
the requirements of § \_\_.24(c) do not apply to balances during the
first year. Instead, § \_\_.24(c) applies only to "protected balances."
For example, assume that, on March 15 of year two, an account has a
purchase balance of \$1,000 at a non-variable rate of 12% and that, on
March 16, the bank sends a notice pursuant to 12 CFR 226.9(c) informing
the consumer that the rate for new purchases will increase to a
non-variable rate of 15% on May 2. On March 20, the consumer makes a
\$100 purchase. On March 24, the consumer makes a \$150 purchase. On May
2, § \_\_.24(b)(3) permits the bank to start charging interest at 15% on
the \$150 purchase made on March 24 but does not permit the bank to
apply that 15% rate to the \$1,100 purchase balance as of March 23.
Accordingly, § \_\_.24(c) applies to the \$1,100 purchase balance as of
March 23 but not the \$150 purchase made on March 24.

[\_\_.24(c)(1) Repayment]{.underline}

In the May 2008 Proposal, the Agencies stated that, while there may be
circumstances in which institutions would accelerate repayment of the
outstanding balance to manage risk, proposed § \_\_.24 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 have required institutions to provide consumers
with a method of paying the outstanding balance that is no less
beneficial to the consumer than one of the methods listed in proposed §
\_\_.24(c)(1)(i) and (ii).

Proposed § \_\_.24(c)(1)(i) would have allowed an institution to
amortize the outstanding balance over a period of no less than five
years, starting from the date on which the increased rate went into
effect for new transactions. Although some industry commenters
criticized the five-year period as excessive and requested that it be
reduced or eliminated, the OCC and consumer groups generally supported
this repayment period as reasonable. One consumer group argued that, if
the amount owed is large, five years may be insufficient.

In May 2008, the Agencies cited as support for the proposed five-year
amortization period guidance issued by the Board, OCC, FDIC, and OTS
(under the auspices of the Federal Financial Institutions Examination
Council) stating that credit card workout arrangements should generally
strive to have borrowers repay debt within 60 months.[^136] One
commenter argued that the Agencies' reliance on this guidance was
misplaced because it applies to workout arrangements and uses 60 months
as a maximum repayment period, rather than a minimum. The Agencies note,
however, that the guidance set 60 months as the repayment period
preferred in most cases for consumers who had become sufficiently
delinquent to be placed in workout arrangements. Section \_\_.24(c),
however, will generally apply to a less risky population of consumers
because accounts that have paid more than 30 days' late are excluded.
[See]{.underline} § \_\_.24(b)(4). Accordingly, based on the comments
and the Agencies' own analysis, the Agencies conclude that a five-year
minimum amortization period is appropriate. Therefore, proposed
§ \_\_.24(c)(1)(i) has been revised for stylistic reasons and adopted as
proposed.

An industry commenter requested clarification regarding the relationship
between § \_\_.24(c)(1) and the payment allocation rules in proposed §
\_\_.23. Section \_\_.23 addresses only payments in excess of the
required minimum periodic payment. Thus, nothing in § \_\_.23 limits an
institution's ability to set a required minimum periodic payment
consistent with § \_\_.24(c). By the same token, nothing in §
\_\_.24(c)(1) alters the requirement regarding allocation of excess
payments in § \_\_.23. Thus, if an institution has elected to set a
required minimum periodic payment on a protected balance that will
amortize that balance over a five-year period consistent with
§ \_\_.24(c)(1)(i), the institution must apply excess payments
consistent with § \_\_.23 even if doing so will cause the protected
balance to pay off in less than five years. In order to eliminate any
ambiguity, the Agencies have added examples to the commentary to
§ \_\_.23 illustrating how an excess payment could be applied in this
situation. [See]{.underline} comment 23(a)-1.iii; comment 23(b)-2.ii. In
addition, the Agencies have added comment 24(c)(1)(i)-1, which clarifies
that an institution is not required to recalculate the amortization
period even if, during the course of that period, allocation of excess
payments to the protected balance means the balance will be paid off in
less than 5 years.

An industry commenter requested clarification on whether an institution
that chose to provide an amortization period of five years for the
outstanding balance consistent with proposed § \_\_.24(c)(1)(i) was
prohibited from applying some or all of the required minimum periodic
payment to the outstanding balance before the effective date of the rate
increase if doing so would result in a shorter amortization period.
Section \_\_.24(c)(1)(i) provides for "\[a\]n amortization period for
the outstanding balance of no less than five years, [starting from the
date on which the increased annual percentage rate becomes
effective]{.underline}." (Emphasis added.) Accordingly, §
\_\_.24(c)(1)(i) does not affect an institution's ability to apply some
or all of the required minimum periodic payment to the protected balance
prior to the effective date of the rate increase.

An industry commenter requested clarification regarding how an
amortization period would be calculated if the annual percentage rate
was variable. Comment 24(c)(1)(i)-2 clarifies that, if the annual
percentage rate that applies to the protected balance varies with an
index as provided in § \_\_.24(b)(2), the institution may vary the
interest charges included in the required minimum periodic payment for
that balance accordingly in order to ensure that the protected balance
is amortized in five years.

As an alternative to the five-year amortization period, proposed §
\_\_.24(c)(1)(ii) would have allowed the percentage of the total balance
that was included in the required minimum periodic payment before the
rate increase to be doubled with respect to the outstanding balance. For
example, if the required minimum periodic payment prior to the rate
increase was one percent of the total amount owed plus accrued interest
and fees, an institution would be permitted to increase the minimum
payment for the outstanding balance up to two percent of that balance
plus accrued interest and fees. The Agencies did not receive any
significant comment on this aspect of the proposal. Accordingly,
§ \_\_.24(c)(1)(ii) has been revised for stylistic reasons and adopted
as proposed.

Proposed comment 24(c)(1)(ii)--1 clarified that proposed §
\_\_.24(c)(1)(ii) did not limit or otherwise address an institution's
ability to determine the amount of the minimum payment on other balances
(in other words, balances that are not outstanding balances under §
\_\_.24(a)(2)). This comment has been revised for stylistic reasons and
adopted as proposed.

Proposed comment 24(c)(1)(ii)--2 provided an example of how an
institution could adjust the minimum payment on the outstanding balance.
This comment has been revised for clarity.

Proposed comment 24(c)(1)--1 clarified that an institution may provide a
method of paying the outstanding balance that is different from the
methods listed in § \_\_.24(c)(1) so long as the method used is no less
beneficial to the consumer than one of the listed methods. It further
stated that a method is no less beneficial to the consumer if the method
amortizes the outstanding balance in five years or longer or if the
method results in a required minimum periodic payment on the outstanding
balance that is equal to or less than a minimum payment calculated
consistent with § \_\_.24(c)(1)(ii). As requested by the commenters, the
Agencies have clarified and expanded the examples provided in the
proposed comment. Otherwise, the comment has been revised for stylistic
reasons and adopted as proposed.

An industry commenter asked whether, if amortization of the outstanding
balance over a five-year period would result in a required minimum
periodic payment below the lower limit or "floor" used by the
institution for such payments,[^137] the institution could require the
consumer to pay the floor minimum payment. The Agencies believe this
should be permitted, so long as the lower limit for the required minimum
periodic payment on the protected balance is the same limit used by the
institution before the increased rate went into effect. Similarly, an
institution is permitted to require the consumer to make a pre-existing
floor minimum payment that exceeds the amount permitted under §
\_\_.24(c)(1)(ii). Accordingly, the Agencies have adopted
comment 24(c)-2.

[\_\_.24(c)(2) Fees and charges]{.underline}

The protections of proposed § \_\_.24(a) would also be undercut if
institutions were permitted to assess fees or other charges as a
substitute for an increase in the annual percentage rate. Accordingly,
proposed § \_\_.24(c)(2) would have prohibited institutions from
assessing any fee or charge based solely on the outstanding balance. As
explained in proposed comment 24(c)(2)--1, this proposal would have
prohibited, for example, an institution from assessing a monthly
maintenance fee on the outstanding balance. The proposal would not,
however, have prohibited an institution from assessing fees such as late
payment fees or fees for exceeding the credit limit that are based in
part on the outstanding balance. Similarly, proposed § \_\_.24(c)(2)
would not have prohibited assessment of fees that are unrelated to the
outstanding balance, such as fees for providing account documents.

The Agencies did not receive any significant comment on this aspect of
the proposal. Accordingly, proposed § \_\_.24(c)(2) and the accompanying
commentary have been revised for stylistic reasons and adopted as
proposed.

**Other Issues**

[Implementation]{.underline}. As discussed in § VII of this
**SUPPLEMENTARY INFORMATION**, the effective date for § \_\_.24 is July
1, 2010. As of that date, this provision applies to existing as well as
new consumer credit card accounts and balances (except as expressly
stated below). The Agencies provide the following guidance:

-   [Account opening disclosures]{.underline}. The disclosure
    requirements in § \_\_.24(a) apply only to accounts opened on or
    after the effective date. Thus, if a consumer credit card account is
    opened on or after July 1, 2010, the institution must disclose the
    annual percentage rates that will apply to each category of
    transactions on that account.

-   [Rates that expire after a specified period of time]{.underline}. If
    a rate that will expire after a specified period of time applies to
    a balance on the effective date, the institution can apply an
    increased rate to that balance at expiration so long as the
    institution previously disclosed the increased rate. For example, if
    on January 1, 2010 an account is opened with a non-variable
    promotional rate of 5% on purchases that applies for one year (after
    which a variable rate will apply) and, on July 1, 2010, the 5% rate
    applies to a balance of \$2,000, the institution can apply the
    previously-disclosed variable rate to any remaining portion of the
    \$2,000 balance on January 1, 2011 pursuant to § \_\_.24(b)(1).

-   [Variable rates that do not expire]{.underline}. If a variable rate
    that does not expire applies to a balance on the effective date, the
    institution may continue to adjust that rate due to increases in an
    index consistent with § \_\_.24(b)(2).

-   [Non-variable rates that do not expire]{.underline}. If a
    non-variable rate that does not expire applies to a balance on the
    effective date, the institution cannot increase the rate that
    applies to that balance unless the account becomes more than
    30 days' delinquent (in which case an increase is permitted by §
    \_\_.24(b)(4)). For example, if an account has a \$3,000 purchase
    balance at a non-variable rate of 15% on July 1, 2010, the
    institution cannot subsequently increase the rate that applies to
    the \$3,000 (unless the account becomes more than 30 days'
    delinquent, in which case § \_\_.24(b)(4) applies).

-   [Rate increases pursuant to advance notice under 12 CFR 226.9(c) or
    (g)]{.underline}. Section \_\_.24(b)(3) applies to any rate increase
    for new transactions that will take effect on or after the July 1,
    2010 effective date. For example, assume that an account has a
    \$3,000 purchase balance at a non-variable rate of 15%. In order to
    increase the rate that applies to purchases made on or after
    July 1, 2010 to a non-variable rate of 18%, the institution must
    comply with 12 CFR 226.9(c) by providing notice of the increase at
    least 45 days in advance (in this case, on or before May 17, 2010).
    Assuming the institution provides the notice on May 17, the
    requirements in § \_\_.24(c) will apply to the \$3,000 balance
    beginning on May 24, 2010.

-   [First year after the account is opened]{.underline}. An institution
    may not increase in an annual percentage rate pursuant to §
    \_\_.24(b)(3) during the first year after the account is opened.
    However, this limitation does not apply to accounts opened prior to
    July 1, 2010. For example, if an account is opened on June 1, 2010,
    the institution may increase a rate for new transactions pursuant to
    § \_\_.24(b)(3).

-   [Delinquencies of more than 30 days]{.underline}. An institution may
    increase a rate pursuant to § \_\_.24(b)(4) when an account becomes
    more than 30 days' delinquent even if the delinquency began prior to
    the effective date. For example, if the required minimum periodic
    payment due on June 15, 2010 is not received until July 20, §
    \_\_.24(b)(4) permits the institution to increase the rates on that
    account.

-   [Workout arrangements]{.underline}. If a workout arrangement applies
    to an account on the effective date and the consumer fails to comply
    with the terms of arrangement after the effective date, §
    \_\_.24(b)(5) only permits the institution to apply an increased
    rate that does not exceed the rate that applied prior to
    commencement of the workout arrangement. For example, assume that,
    on June 1, 2010, an institution decreases the rate that applies to a
    \$5,000 balance from a non-variable penalty rate of 30% to a
    non-variable rate of 15% pursuant to a workout arrangement between
    the institution and the consumer. Under this arrangement, the
    consumer must pay by the fifteenth of each month in order to retain
    the 15% rate. The institution does not receive the payment due on
    July 15 until July 20. In these circumstances, § \_\_.24(b)(5) does
    not permit the institution to apply a rate to the \$5,000 balance
    that exceeds the 30% penalty rate.

[Effect of § \_\_.24 on securitization]{.underline}. In the May 2008
Proposal, the Agencies requested comment on what effect the restrictions
in proposed § \_\_.24 would have on outstanding securitizations and
institutions' ability to securitize credit card assets in the future. In
response, industry commenters raised general concerns that a reduction
in interest revenue as a result of proposed § \_\_.24 could require
institutions to alter the structure of existing securities and could
reduce investor interest in future offerings. As discussed below,
however, the Agencies are providing institutions and the markets for
credit card securities with 18 months in which to adjust interest rates
and other account terms to compensate for the restrictions in the final
rules. Accordingly, the Agencies do not believe that any additional
revisions are necessary to accommodate securitization of credit card
assets.

**Supplemental Legal Basis for This Section of the OTS Final Rule**

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

**Section \_\_.25---Unfair Balance Computation Method**

[Summary]{.underline}. In the May 2008 Proposal, the Agencies proposed §
\_\_.26, which would have prohibited institutions from imposing finance
charges on consumer credit card accounts based on balances for days in
billing cycles that precede the most recent billing cycle. 73 FR at
28922-28923. This proposal was intended to prohibit the balance
computation method sometimes referred to as "two-cycle billing" or
"double-cycle billing." As discussed below, based on the comments and
further analysis, the Agencies have revised the proposed rule and its
commentary to clarify that the final rule prohibits the assessment of
interest charges on balances for days in prior billing cycles when such
charges are imposed as a result of the loss of a grace period. The
Agencies have also removed the exception for assessment of deferred
interest and added an exception permitting adjustments to finance
charges following the return of a payment for insufficient funds.
Finally, because the Agencies are not taking action on proposed
§ \_\_.25 at this time (as discussed below), proposed § \_\_.26 has been
designated in the final rule as § \_\_.25.

[Background]{.underline}. TILA requires creditors to explain as part of
the account-opening disclosures the method used to determine the balance
to which interest rates are applied. 15 U.S.C. 1637(a)(2). In its June
2007 Regulation Z Proposal, the Board proposed that the balance
computation method be disclosed outside the account-opening table
because explaining lengthy and complex methods may not benefit
consumers. 72 FR at 32991--32992. That proposal was based on the Board's
consumer testing, which indicated that consumers did not understand
explanations of balance computation methods. Nevertheless, the Board
observed that, because some balance computation methods are more
favorable to consumers than others, it was appropriate to highlight the
method used, if not the technical computation details.

In response to the June 2007 Regulation Z Proposal, consumers, consumer
groups, and a member of Congress urged the Board to prohibit two-cycle
billing. The two-cycle balance computation method has several
permutations but, generally speaking, an institution using the two-cycle
method assesses interest not only on the balance for the current billing
cycle but also on balances on days in the preceding billing cycle. This
method generally does not result in additional finance charges for a
consumer who consistently carries a balance from month to month (and
therefore does not receive a grace period) because interest is always
accruing on the balance. Nor does the two-cycle method affect consumers
who pay their balance in full within the grace period every month
because interest is not imposed on their balances. The two-cycle method
does, however, result in greater interest charges for consumers who pay
their balance in full one month but not the next month (and therefore
lose the grace period).

The following example illustrates how the two-cycle method results in
higher costs for these consumers than other balance computation methods:
Assume that the billing cycle on a consumer credit card account starts
on the first day of the month and ends on the last day of the month. The
payment due date for the account is the twenty-fifth day of the month.
Under the terms of the account, the consumer will not be charged
interest on purchases if the balance at the end of a billing cycle is
paid in full by the following payment due date (in other words, if the
consumer receives a grace period). The consumer uses the credit card to
make a \$500 purchase on March 15. The consumer pays the balance for the
February billing cycle in full on March 25. At the end of the March
billing cycle (March 31), the consumer's balance consists only of the
\$500 purchase and the consumer will not be charged interest on that
balance if it is paid in full by the following due date (April 25). The
consumer pays \$400 on April 25, leaving a \$100 balance. Because the
consumer did not pay the balance for the March billing cycle in full on
April 25, the consumer would lose the grace period and most institutions
would charge interest on the \$500 purchase from the start of the April
billing cycle (April 1) through April 24 and interest on the remaining
\$100 from April 25 through the end of the April billing cycle (April
30). Institutions using the two-cycle method, however, would also charge
interest on the \$500 purchase from the date of purchase (March 15) to
the end of the March billing cycle (March 31).

The proposed ban on two-cycle billing was generally supported by
individual consumers, consumer groups, members of Congress, other
federal banking regulators, state consumer protection agencies, state
attorneys general, and some industry groups and credit card issuers. On
the other hand, some credit card issuers and one industry group opposed
the proposal on the grounds that two-cycle billing was not sufficiently
prevalent to warrant a ban. As discussed below, the Agencies are
including a prohibition on the two-cycle method because that method
continues to be used by a number of large credit card issuers. To the
extent that the commenters addressed specific aspects of the proposal or
the supporting legal analysis, those comments are discussed below.

**Legal Analysis**

The Agencies conclude that, based on the comments received and their own
analysis, it is an unfair act or practice under 15 U.S.C. 45(n) and the
standards articulated by the FTC to impose finance charges on consumer
credit card accounts based on balances for days in billing cycles that
precede the most recent billing cycle as a result of the loss of any
time period provided by the institution within which the consumer may
repay any portion of the credit extended without incurring a finance
charge (in other words, a grace period).

[Substantial consumer injury]{.underline}. In the May 2008 Proposal, the
Agencies stated that computing finance charges based on balances
preceding the most recent billing cycle appeared to cause substantial
consumer injury because consumers who lose the grace period incur higher
interest charges than they would under a balance computation method that
calculates interest based only on the most recent billing cycle.

One industry commenter asserted that use of the two-cycle method could
not cause an injury for purposes of the FTC Act simply because other,
less costly methods exist. As discussed above, however, it is well
established that monetary harm constitutes an injury under the FTC
Act.[^138] As with similar arguments raised regarding § \_\_.23, this
commenter did not provide any legal authority distinguishing interest
charges assessed as a result of the two-cycle method from other monetary
harms, nor are the Agencies aware of any such authority.

Another industry commenter stated that assessing interest consistent
with a contractual provision to which the consumer agreed cannot
constitute an injury under the FTC Act. As discussed above, however,
this argument is inconsistent with the FTC's application of the
unfairness analysis in support of the Credit Practices Rule, where the
FTC determined that otherwise valid contractual provisions injured
consumers.[^139]

Finally, an industry commenter argued that the two-cycle method was not
unfair because it only injures consumers who lose the grace period. A
practice need not, however, injure all consumers in order to be unfair.

Accordingly, the Agencies conclude that the two-cycle balance
computation method causes substantial consumer injury.

[Injury is not reasonably avoidable]{.underline}. The Agencies' May 2008
Proposal stated that it did not appear that consumers can reasonably
avoid injury because, once they use the card, they have no control over
the methods used to calculate the finance charges on their accounts. The
proposal further noted that, because the Board's consumer testing
indicates that disclosures are not successful in helping consumers
understand balance computation methods, a disclosure would not enable
consumers to avoid the two-cycle method when comparing credit card
accounts or to avoid the effects of the two-cycle method when using a
credit card.[^140]

One industry commenter argued that consumers could reasonably avoid the
injury by paying their balance in full each month. As discussed above,
however, because one of the intended purposes of a credit card (as
opposed to a charge card) is to finance purchases over multiple billing
cycles, it would not be reasonable to expect consumers to avoid the
two-cycle method by paying their balance in full each month.

Accordingly, the Agencies conclude that consumers cannot reasonably
avoid the injury caused by the two-cycle balance computation method.

[Injury is not outweighed by countervailing benefits]{.underline}. The
May 2008 Proposal stated that there did not appear to be any significant
benefits to consumers or competition from computing finance charges
based on balances for days in billing cycles preceding the most recent
billing cycle. The Agencies also noted that many institutions no longer
use the two-cycle balance computation method. In addition, the Agencies
noted that, although prohibition of the two-cycle method may reduce
revenue for the institutions that currently use it and those
institutions may replace that revenue by charging consumers higher
annual percentage rates or fees, it appeared that this result would
nevertheless benefit consumers because it will result in more
transparent pricing.

One industry commenter stated that, given a preference, consumers would
choose lower prices and other purported benefits of the two-cycle method
(such as the provision of a grace period) over transparency. As an
initial matter, the commenter did not cite any evidence that
institutions that use the two-cycle method are more likely to offer
lower prices and grace periods than institutions that do not, nor are
the Agencies aware of any such evidence. Furthermore, individual
consumers overwhelmingly supported the proposed prohibition on the
two-cycle method. Finally, the Agencies believe that transparent pricing
provides substantial benefits to consumer by enabling them to make
informed decisions about the use of credit.

Accordingly, the Agencies conclude that the two-cycle method does not
produce benefits that outweigh the injury to consumers.

[Public policy]{.underline}. Several industry commenters stated that the
proposed rule was contrary to established public policy because, as
noted above, TILA requires creditors to disclose the balance computation
method at account opening (15 U.S.C. 1637(a)(2)) and Regulation Z
includes the two-cycle method in the list of methods that may be
described by name (12 CFR 226.5a(g)).[^141] Regulation Z's
acknowledgement that the two-cycle method has been a commonly-used
balance computation method does not, however, constitute an endorsement
of that method. Furthermore, nothing in TILA or Regulation Z requires
use of the two-cycle method.

One industry commenter noted that, more than twenty years ago, a member
of the Board expressed concern that the costs of regulating balance
computation methods could outweigh the benefits for consumers.[^142] As
discussed above, however, the Agencies have concluded that, in today's
marketplace, the costs associated with prohibiting this particular
balance computation method do not outweigh the benefits to consumers.

**Final Rule**

As discussed below, the Agencies are not taking action on credit holds
at this time. Accordingly, subject to the revisions discussed below,
proposed § \_\_.26 is adopted as § \_\_.25. The proposed commentary has
been redesignated to reflect this change.

[\_\_.25(a) General rule]{.underline}

The proposed rule prohibited institutions from imposing finance charges
on balances on consumer credit card accounts based on balances for days
in billing cycles preceding the most recent billing cycle. Proposed
comment 26(a)--1 cited the two-cycle average daily balance computation
method as an example of balance computation methods that would be
prohibited by the proposed rule, tracking commentary under Regulation Z.
[See]{.underline} 12 CFR 226.5a(g)(2). Proposed comment 26(a)--2
provided an example of the circumstances in which the proposed rule
prohibited the assessment of interest.

Industry commenters stated that, as drafted, the proposed rule went
further than necessary to protect consumers from the injury caused by
the two-cycle balance computation method. Specifically, because the
proposed rule was not limited to circumstances in which the two-cycle
method results in greater interest charges than other balance
computation methods (that is, when a consumer who has been eligible for
a grace period does not pay the balance in full on the due date), it
would prohibit the assessment of interest from the date of the
transaction even when the consumer was not eligible for a grace period.
Because the Agencies did not intend this result, § \_\_.25(a) and its
commentary have been revised to clarify that an institution is
prohibited from imposing finance charges based on balances for days in
billing cycles that precede the most recent billing cycle as a result of
the loss of the grace period. Otherwise, the Agencies adopt the proposed
rule and commentary.

[\_\_.25(b) Exceptions]{.underline}

As proposed, § \_\_.26(b) contained two exceptions to the general
prohibition in § \_\_.26(a). First, under proposed § \_\_.26(b)(1),
institutions would not be prohibited from charging consumers for
deferred interest even though that interest may have accrued over
multiple billing cycles. Thus, if a consumer did not pay a balance or
transaction in full by the specified date under a deferred interest
plan, the institution would have been permitted to charge the consumer
for interest accrued during the period the plan was in effect. As
discussed above, because current practices regarding the assessment of
deferred interest are prohibited by § \_\_.24, this exception has not
been adopted.

Second, under proposed § \_\_.26(b)(2), institutions would not have been
prohibited from adjusting finance charges following resolution of a
billing error dispute. For example, if after complying with the
requirements of 12 CFR 226.13 an institution determines that a consumer
owes all or part of a disputed amount, the institution would be
permitted to adjust the finance charge consistent with 12 CFR 226.13,
even if that requires computing finance charges based on balances in
billing cycles preceding the most recent billing cycle. The Agencies did
not receive any significant comment on this exception. Accordingly, the
Agencies have revised this exception for clarity and adopted it as
§ \_\_.25(b)(1).

Industry commenters requested two additional exceptions to the proposed
rule. First, they requested an exception when the date of a transaction
for which the consumer does not receive a grace period is in a different
billing cycle than the date on which that transaction is posted to the
account -- for example, if a consumer uses a convenience check for a
cash advance transaction (which is not typically subject to a grace
period) on the last day of a billing cycle, the check may not reach the
institution for posting to the account until the first day of the next
billing cycle or later. These commenters stated that the proposed rule
should not apply in this situation because the institution is entitled
to assess interest from the transaction date. Rather than creating an
additional exception, the Agencies have addressed this concern by
clarifying, as discussed above, that § \_\_.25(a) only applies to
interest charges imposed as a result of the consumer losing the grace
period. Accordingly, when a consumer is not eligible for a grace period
at the time of a transaction, the final rule does not prohibit the
institution from assessing interest from the date of the transaction.

Second, industry commenters requested an exception allowing adjustments
to finance charges when a consumer's payment is credited to the account
in one billing cycle but is returned for insufficient funds in the
subsequent billing cycle. This could occur, for example, when a
consumer's check is received and credited by the institution near the
end of a billing cycle but is returned to the institution for
insufficient funds early in the next billing cycle. The Agencies view
this situation as analogous to adjusting finance charges following
resolution of a billing error or other dispute, which is permitted under
§ \_\_.25(b)(1). Accordingly, the final rule adopts, in § \_\_.25(b)(2),
an exception permitting adjustments to finance charges as a result of
the return of a payment for insufficient funds.

**Other Issues**

[Implementation]{.underline}. As discussed in § VII of this
**SUPPLEMENTARY INFORMATION**, the effective date for § \_\_.25 is July
1, 2010. As of the effective date, this provision applies to existing as
well as new consumer credit card accounts and balances.

[Additional prohibitions considered]{.underline}. Consumer groups and a
member of Congress requested that the proposed rule be expanded to cover
two additional practices. First, they urged that, when a consumer who is
eligible for a grace period pays some but not all of the relevant
balance by the due date, the institution be prohibited from assessing
interest on the amount paid. For example, assume that the billing cycle
on a consumer credit card account starts on the first day of the month
and ends on the last day of the month and that the payment due date is
the twenty-fifth day of the month. Under the terms of the account, the
consumer will receive a grace period on purchases if the balance at the
end of a billing cycle is paid in full by the following payment due
date. The consumer is eligible for a grace period on a \$500 purchase
made on March 15. At the end of the March billing cycle (March 31), the
consumer's balance consists only of the \$500 purchase. The consumer
pays \$400 on the following due date (April 25), leaving a \$100
balance. Because the consumer did not pay the balance for the March
billing cycle in full on April 25, § \_\_.25(a) prohibits the
institution from charging interest on the \$500 purchase from the date
of purchase (March 15) to the end of the March billing cycle (March 31).
The commenters would also prohibit the institution from assessing any
interest on \$400 of the \$500 purchase during the April billing cycle
because the consumer paid that amount by the due date.

The Agencies, however, are not taking action on this issue at this time.
As an initial matter, elsewhere in today's **Federal Register**, the
Board has improved the disclosures under Regulation Z to assist
consumers in understanding that they must pay the entire balance by the
due date to receive the grace period.[^143] Furthermore, because TILA
does not require institutions to provide a grace period, the requested
prohibition could reduce the availability of such periods, which provide
substantial benefits to consumers. To the extent that specific practices
raise concerns regarding unfairness or deception under the FTC Act, the
Agencies plan to address those practices on a case-by-case basis through
supervisory and enforcement actions.

Second, many of the same commenters requested that, when a consumer who
has been carrying a balance from month to month -- and therefore has not
been receiving a grace period -- pays the balance stated on the most
recent periodic statement by the applicable due date, the institution be
prohibited from assessing interest on that balance in the period between
mailing or delivery of the statement and receipt of the consumer's
payment. This type of interest is sometimes referred to as "trailing
interest." For example, assume that a consumer who is not eligible for a
grace period receives a periodic statement reflecting a balance of
\$1,000 as of March 31 and a due date of April 25. The consumer mails a
payment of \$1,000, which is credited by the institution on April 25.
Ordinarily, because the consumer was not eligible for a grace period,
this payment will not be sufficient to pay off the balance in full
because interest will have accrued on the \$1,000 balance from April 1
through April 24. The commenters, however, would prohibit the assessment
of interest on the \$1,000 balance after March 31. The Agencies note
that, because an institution will not know at the time it sends a
periodic statement whether the consumer will pay the balance in full,
the requested prohibition would essentially require institutions to
waive subsequent interest charges for the subset of consumers who do so.
To the extent that specific practices raise concerns regarding
unfairness or deception under the FTC Act, the Agencies plan to address
those practices on a case-by-case basis through supervisory and
enforcement actions.

**Supplemental Legal Basis for This Section of the OTS Final Rule**

As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.25 supports
safety and soundness by reducing reputation risk that would occur from
using unfair balance computation methods. Section 535.25 also protects
consumers by providing them with fair balance computation methods on
their account so that they do not pay additional interest due to the
application of this balance computation method that testing shows few
understand. Consequently, HOLA serves as an independent basis for §
535.25.

**Section \_\_.26---Unfair Charging of Security Deposits and Fees for
the Issuance or Availability of Credit to Consumer Credit Card
Accounts**

[Summary.]{.underline} In the May 2008 Proposal, the Agencies proposed §
\_\_.27(a), which would have prohibited institutions from charging to a
consumer credit card account security deposits and fees for the issuance
or availability of credit during the twelve months after the account is
opened that, in the aggregate, constitute the majority of the credit
limit for that account. The Agencies also proposed § \_\_.27(b), which
would have prohibited institutions from charging to the account during
the first billing cycle security deposits and fees for the issuance or
availability of credit that total more than 25 percent of the credit
limit and would have required that if security deposits and fees for the
issuance or availability of credit total more than 25 percent but less
than the majority of the credit limit during the first year, the
institution must spread that amount equally over the eleven billing
cycles following the first billing cycle. Further, the Agencies proposed
§ \_\_.27(c), which would have defined "fees for the issuance or
availability of credit." [See]{.underline} 73 FR at 28925-28926.

Based on the comments received and further analysis, the Agencies have
revised proposed § \_\_.27(a) for clarity and adopted that provision as
§ \_\_.26(a).[^144] The Agencies have revised proposed § \_\_.27(b) to
permit security deposits and fees to be spread over no fewer than the
first six months, rather than the first year (as proposed). This
provision has been adopted as § \_\_.26(b).[^145]

In § \_\_.26(c), the Agencies have adopted a new provision prohibiting
institutions from evading § \_\_.26(a) and (b) by providing the consumer
with additional credit to fund the payment of security deposits and fees
for the issuance or availability of credit in excess of the amounts
permitted by §§ \_\_.26(a) and (b). The Agencies have also added
definitions to proposed § \_\_.27(c) and adopted that provision as §
\_\_.26(d).

[Background]{.underline}. Subprime credit cards often have substantial
fees related to the issuance or availability of credit. For example,
these cards may impose an annual fee and a monthly maintenance fee for
the card. In other cases, a security deposit may be charged to the
account. These cards may also impose multiple one-time fees when the
consumer opens the card account, such as an application fee and a
program fee. Those amounts are often billed to the consumer as part of
the first periodic statement and substantially reduce the amount of
credit that the consumer has available to make purchases or other
transactions on the account. For example, some subprime credit card
issuers assess \$250 in fees at account opening on accounts with credit
limits of \$300, leaving the consumer with only \$50 of available credit
with which to make purchases or other transactions. In addition, the
consumer will pay interest on the \$250 in fees until they are paid in
full.

The federal banking agencies have received many complaints from
consumers with respect to subprime credit cards. Consumers often stated
that they were not aware of how the high upfront fees would affect their
ability to use the card for its intended purpose of engaging in
transactions. In an effort to address these concerns, the Board's June
2007 and May 2008 Regulation Z Proposals included several proposed
amendments to the disclosure requirements for credit and charge cards
(which have been adopted in a revised form elsewhere in today's
**Federal Register**). Because, however, the Agencies were concerned
that disclosure alone was insufficient to protect consumers from unfair
practices regarding high-fee subprime credit cards, the May 2008
Proposal contained additional, substantive protections.

The Agencies received comments on the proposed rule from a wide range of
interested parties. The proposal received strong support from consumer
groups, several members of Congress, the FDIC, the OCC, two state
attorneys general, and a state consumer protection agency. These
commenters generally argued that high-fee subprime credit cards trap
consumers with low incomes or poor credit histories, causing those
consumers either to pay off the upfront fees by depleting their limited
resources or to default and further damage their credit records. In
particular, one consumer group stated that high-fee subprime credit
cards are unfair because: (1) the upfront fees impose an overly high
price for access to credit and significantly reduce available credit,
leading consumers to exceed their credit limit and incur additional
fees; (2) disclosures are insufficient because subprime consumers are
particularly vulnerable to predatory marketing practices and may have
limited educational or literacy skills; and (3) subprime consumers
generally have limited incomes and therefore cannot pay the upfront fees
within the grace period for the initial billing cycle, causing them to
incur interest charges. Many of these commenters urged the Agencies to
strengthen the proposed rule by, for example, lowering the thresholds
for security deposits and fees, applying those thresholds to all
security deposits and fees regardless of whether they are charged to the
account, and prohibiting the marketing of subprime credit cards as
credit repair products.

Some industry commenters also expressed support for the proposed rule,
stating that it was an appropriate use of the Agencies' rulemaking
authority under the FTC Act. In contrast, other issuers who specialize
in subprime credit cards strongly opposed the proposed rule. According
to these commenters, the large upfront fees and limited initial credit
availability that characterize high-fee subprime credit cards are
necessitated by the risk and expense of extending credit to consumers
who pose a greater risk of default than prime consumers. They asserted
that subprime credit card accounts have higher delinquencies, losses,
reserve requirements, and servicing costs than prime credit card
accounts.[^146] They further argued that, to the extent the proposal
would prevent issuers from protecting themselves against the risk of
loss, it would ultimately harm consumers because issuers would be forced
to reduce credit access and increase the price of credit. They also
asserted that high-fee subprime credit cards offer important benefits by
providing credit cards to consumers who could not otherwise obtain them
and by enabling consumers with limited or damaged credit records to
build positive credit histories and qualify for prime credit. Finally,
these commenters argued that any concerns regarding high-fee subprime
credit cards should be addressed through improved disclosures, such as
those proposed by the Board under Regulation Z.

Subprime credit card issuers received support from some state and
Congressional representatives. The Agencies also received comments from
thousands of individual consumers, who explained that high-fee subprime
credit cards were the only option available to them because of their
credit problems. These consumers expressed concern that they might have
fewer credit alternatives if the proposal were finalized. Finally, two
advocacy organizations expressed concern that the proposed rule would
result in reduced credit availability for low-income minority consumers.

**Legal Analysis**

The Agencies conclude that, based on the comments received and their own
analysis, it is an unfair act or practice under 15 U.S.C. 45(n) and the
standards articulated by the FTC to charge to a consumer credit card
account security deposits or fees for the issuance or availability of
credit that exceed the limits in the final rule.

[Substantial consumer injury]{.underline}. The Agencies conclude that
consumers incur substantial monetary injury when security deposits and
fees for the issuance or availability of credit are charged to a
consumer credit card account, both in the form of the charges themselves
and in the form of interest on those charges. Even in cases where the
institution provides a grace period, many consumers will be unable to
pay the charges in full during that grace period and will incur
interest. Indeed, many consumers who use high fee subprime cards
submitted comments explaining that they have very limited incomes.
Moreover, a large issuer of subprime cards commented that, while it
offers consumers the option of paying fees up front, most new
cardholders do not do so. Thus, as consumer advocates noted in their
comments, consumers who open a high-fee subprime credit card account are
unlikely to be able to pay down the upfront charges quickly. In
addition, when security deposits and fees for the issuance or
availability of credit are charged to the consumer's account, they
substantially diminish the value of that account by reducing the credit
available to the consumer for purchases or other transactions.[^147]

[Injury is not reasonably avoidable]{.underline}. In May 2008, the
Agencies stated that the Board's proposed disclosures under Regulation Z
did not appear to be sufficient, by themselves, to allow consumers to
reasonably avoid the injury caused by security deposits and fees that
consume most of the available credit at account opening. Specifically,
the Agencies expressed concern that high-fee subprime credit cards are
typically marketed to financially vulnerable consumers with limited
credit options and that these products have in the past been associated
with deceptive sales practices. Although several industry commenters
asserted that the disclosures in Regulation Z were sufficient to enable
consumers to avoid any injury, the Agencies conclude, for the reasons
discussed below, that consumers cannot, as a general matter, reasonably
avoid the injury caused by high-fee subprime credit cards.

In the May 2008 Proposal, the Agencies noted that high-fee subprime
credit cards are typically marketed to vulnerable consumers whose credit
histories or other characteristics prevent them from obtaining less
expensive credit card products.[^148] In support of its Credit Practices
Rule, the FTC suggested that, when most or all credit offers received by
a consumer contain particular terms, those terms may not be reasonably
avoidable.[^149] In addition, when evaluating whether a practice
violates the FTC Act, the FTC has considered whether that practice
targets consumers who are particularly vulnerable to unfair or deceptive
practices.[^150] Similarly, states have used statutes and regulations
prohibiting unfairness and deception to ensure that lenders do not
"exploit the lack of access of low-income individuals, the elderly, and
communities of color to mainstream banking institutions."[^151]

In response to the proposed rule, the Agencies received thousands of
comments from individual consumers who have used high-fee subprime
credit cards. These consumers frequently stated that, due to their
credit problems and limited incomes, high-fee subprime credit cards were
the only type of credit card that they could obtain. Many of these
consumers described themselves as elderly, living on limited incomes,
and/or having serious health problems. Accordingly, because high-fee
subprime credit cards are marketed to financially vulnerable consumers
who generally cannot obtain credit card products with less onerous
terms, the Agencies conclude that -- even with improved disclosures --
those consumers cannot, as a general matter, reasonably avoid the injury
caused by high upfront fees and low initial credit availability.

As discussed in the May 2008 Proposal, this conclusion is further
supported by the Agencies' concern that the Regulation Z disclosures
could be undermined by deceptive sales practices. In addition to taking
enforcement actions against issuers of high-fee subprime credit cards,
the OCC has found as a general matter that "solicitations and other
marketing materials used for \[high-fee subprime\] credit card programs
have not adequately informed consumers of the costs and other terms,
risks, and limitations of the product being offered" and that, "\[i\]n a
number of cases, disclosure problems associated with secured credit
cards and related products have constituted [deceptive]{.underline}
practices under the applicable standards of the FTC Act."[^152] The
Agencies believe that the amendments to Regulation Z published elsewhere
in today's **Federal Register** will reduce the risk of deception in
written solicitations. However, because of the vulnerable nature of
subprime consumers and the history of deceptive practices by some
subprime credit card issuers, the Agencies remain concerned that the
required disclosures could be undermined by, for example, deceptive
telemarketing practices.[^153]

[Injury is not outweighed by countervailing benefits]{.underline}. In
May 2008, the Agencies recognized that, in some cases, high-fee subprime
credit cards can provide access to credit to consumers who are unable to
obtain other credit card products. Nevertheless, the Agencies stated
that, once security deposits and fees for the issuance or availability
of credit consume a majority of the initial credit limit, the benefit to
consumers from access to credit appeared to be outweighed by the high
cost of paying for that credit. In order to minimize the impact on
access to credit, the Agencies tailored the proposed rule to allow
institutions to charge to the account security deposits and fees that
total less than a majority of the credit limit during the first year and
by allowing institutions to charge amounts totaling up to 25 percent of
the initial credit limit in the first billing cycle. In addition, the
Agencies clarified that security deposits and fees paid from separate
funds would not be affected by the proposal.

In response, industry commenters who opposed the rule primarily relied
on two arguments. First, they contended that, rather than increasing
access to credit, the restrictions in the proposed rule would reduce or
eliminate the availability of credit cards for subprime consumers.
Specifically, they argued that the cost of extending credit to subprime
consumers is substantially higher than the cost of extending credit to
prime consumers and that the proposed rule would limit subprime issuers'
ability to pass those higher costs on to consumers. In addition, they
argued that the proposed restrictions on the amount of security deposits
and fees that may be charged to the account in the first billing cycle
will actually increase issuer costs because subprime issuers will be
forced to make more credit available to consumers, which will increase
their cost of funds, their reserve requirements, and their losses. As a
result, they argued, subprime credit card issuers will be forced to
reduce costs by substantially reducing the amount of credit extended to
subprime consumers.

The Agencies have carefully considered the arguments presented by these
commenters but have concluded that, while the final rule may result in
some subprime consumers who are currently eligible for high-fee subprime
credit cards not having access to a credit card, this outcome does not
outweigh the benefits to subprime consumers generally of receiving
credit cards that provide a meaningful amount of available credit. The
Agencies recognize that credit cards enable consumers to engage in
certain types of transactions, such as making purchases by telephone or
online or renting a car or hotel room. As noted above, however, credit
lines for subprime credit card accounts are typically very low, meaning
that, once security deposits and fees have been charged to the account,
consumers receive little available credit with which to make purchases
until they pay off the deposits or fees. Currently, many subprime credit
card issuers assess fees that consume 75 percent or more of the credit
line at account opening. Thus, on an account with a \$400 credit limit,
a consumer may pay \$300 (plus interest charges) to obtain \$100 of
available credit. The benefit of receiving this relatively small amount
of available credit does not outweigh its high cost.

Some industry commenters suggested that, rather than focusing on the
amount of available credit at account opening, the Agencies should
consider the benefits to consumers who pay the upfront charges and then
have access to the entire credit line. As an initial matter, these
commenters did not provide information regarding how many consumers are
able to obtain access to the entire credit line or how long it takes
them to do so. Furthermore, as noted above, a large issuer of subprime
cards indicated that few new cardholders choose not to finance the
upfront fees, and many consumer commenters who use high fee subprime
cards explained that they have limited incomes. Therefore, it is
unlikely that consumers who open a high-fee subprime credit card account
will be able to pay down the upfront charges quickly. Moreover, as noted
above, consumers who have the resources to pay upfront charges may
receive more economic benefit from using those resources to obtain
secured credit card accounts instead of high-fee subprime credit cards.

Accordingly, the Agencies conclude that, when security deposits and fees
charged to a credit card account in the first year exceed the amount of
credit extended at account opening, the injury caused by the charges
outweighs the benefit to the consumer of receiving available credit.
Similarly, the Agencies conclude that, in order to ensure that consumers
receive a meaningful amount of available credit at account opening that
outweighs the injury, security deposits and fees can consume no more
than 25 percent of the available credit at account opening.[^154]

Although these restrictions will require issuers of high-fee subprime
credit cards to adjust their lending practices, the Agencies believe
that the final rule provides sufficient flexibility for these issuers to
continue offering credit cards to subprime consumers. Specifically,
subprime issuers may charge to the account in the first year security
deposits and fees totaling 50 percent of the initial credit limit and
may charge half of that total at account opening.[^155] In addition, the
Agencies have modified the proposal to permit issuers to spread deposits
and fees that constitute more than 25 percent of the initial credit
limit over the first six months rather than the first year. This change
is intended to better enable issuers to limit the risk from the early
default of new cardholders, but still ensure that consumers who obtain
these cards have meaningful access to credit. Furthermore, although
issuers are prohibited from evading the final rule by providing the
consumer with additional credit to finance additional fees, the final
rule does not limit issuers' ability to collect additional amounts if
the consumer can obtain those funds independently.

The second argument raised by industry commenters was that high-fee
subprime credit cards offer an opportunity for consumers with damaged or
limited credit histories to build or repair their credit records and
qualify for credit at prime rates. However, the data supplied by these
commenters indicates that most users of high-fee subprime credit cards
do not experience an increase in credit score. Specifically, a study of
subprime accounts performed by TransUnion (one of the three nationwide
consumer reporting agencies) indicates that, while approximately
37 percent of consumers experienced an increase in credit score during
the twelve months following the opening of a subprime credit card, the
other 63 percent experienced a drop or no change in credit score.[^156]
Similarly, a subprime credit card issuer stated that only 35 percent of
consumers who receive its low limit credit cards improve their credit
score within 24 months of account opening.[^157] The Agencies cannot
verify the accuracy of this data, nor can the Agencies verify that the
subset of consumers who did experience an increase in credit score did
so as a result of the use of a subprime credit card and not due to other
factors. Furthermore, even assuming for purposes of this discussion that
the data are accurate, they indicate that most consumers who use
subprime credit cards do not experience an increase in credit score. In
fact, it appears that the majority of the consumers in the sample
studied by TransUnion actually experienced a decrease in credit score
within twelve months of opening a subprime credit card account.[^158]

Accordingly, for the reasons discussed above, the Agencies conclude that
high-fee subprime credit cards do not produce benefits that outweigh the
injury to consumers.

[Public policy]{.underline}. For purposes of the unfairness analysis,
public policy is generally embodied in a statute, regulation, or
judicial decision.[^159] In the May 2008 Proposal, however, the Agencies
noted that the OCC has concluded in regulatory guidance that high-fee
subprime credit card accounts increase the risk of default and therefore
present concerns regarding the safety and soundness of financial
institutions.[^160] To the extent that this guidance constitutes public
policy, that policy weighs in favor of the restrictions in the final
rule. The OCC's guidance does not, however, serve as a primary basis for
the Agencies' unfairness determination.

**Supplemental Legal Basis for This Section of the OTS Final Rule**

As discussed above, HOLA provides authority for both safety and
soundness and consumer protection regulations. Section 535.26 supports
safety and soundness. The commenters described very high credit risks
associated with high-fee subprime credit cards. One estimated that at
least one-third of new high fee cardholders default and over 75 percent
of them default immediately, upon using 97 percent of their available
credit, paying no fees, and repaying no principal. The TransUnion study
also found that about 60 percent of subprime cardholders experience a
drop in their VantageScore, which suggests a continuing inability to pay
these obligations. Section 535.26 provides issuers with an incentive to
employ better underwriting in order to target customers who are less
likely to default. Consequently, it fosters the safe and sound operation
of the institutions that offer these products.

In this vein, it should be noted that the federal banking agencies have
agreed that subprime lending that is appropriately underwritten, priced
and administered can serve the goals of enhancing credit access for
borrowers with blemished credit histories.[^161] However, OTS has made
it clear that credit card issuers under its jurisdiction must have
well-defined credit approval criteria to ensure that underwriting
standards are appropriately and uniformly followed.[^162] OTS advises
all of its institutions that whether they use a judgmental process, an
automated scoring system, or a combination of both to make the credit
decision, it is important to have well-defined credit approval criteria
to ensure that underwriting standards are appropriately and uniformly
followed.[^163] Appropriate underwriting should reduce the costs of
default for issuers and consumers with subprime credit histories.

Moreover, as noted above, subprime cardholders now receive little usable
credit due to the current market practice of charging fees for the
issuance of credit in amounts that substantially exhaust the line.
Section 535.26 should alleviate some of the negative consequences
associated with this practice, including the creation of unmanageable
debt that consumers cannot repay. In particular, requiring issuers to
spread the payment of a portion of account opening fees over a number of
billing cycles should increase the likelihood that borrowers can repay
them. It is therefore consistent with guidance issued by the federal
banking agencies on the management of credit card lending.[^164] It is
also consistent with guidance issued by the OTS.[^165]

Given the high default rate and the unsecured nature of credit card
lending, OTS concludes that it is not a safe and sound practice for
savings associations to offer consumer credit cards that charge security
deposits and fees that do not comply with § 535.26.

With regard to consumer protection, § 535.26 is consistent with
regulating savings associations in a manner that protects consumers and
gives due consideration to best practices of thrift institutions
nationwide. As a result of this provision, consumers will be protected
from excessive security deposits and fees for the issuance or
availability of credit that diminish the value of the account by
reducing the credit available to the consumer for purchases or other
transactions. They will also be protected from incurring excessive cost
for credit cards that provide access to a very small amount of credit.
Issuers will have less incentive to make unsubstantiated claims that
these products facilitate credit repair. These benefits are particularly
important when it is recognized that the consumers most likely to
receive the protections provided by § 535.26 are those who are the most
vulnerable, including people who are elderly, live on limited incomes,
have serious health problems, or live with a combination of these
circumstances.

Consequently, HOLA serves as an independent basis for § 535.26.

**Final Rule**

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

[\_\_.26(a) Limitation for first year]{.underline}

Proposed § \_\_.27(a) would have prohibited institutions from charging
to the account security deposits and fees for the issuance or
availability of credit during the twelve months following account
opening if, in the aggregate, those fees constitute a majority of the
initial credit limit. The Agencies have revised this paragraph of the
proposed rule for clarity and adopted it as § \_\_.26(a).

Proposed comment 27(a)-1 clarified that the total amount of security
deposits and fees for the issuance or availability of credit constitutes
a majority of the initial credit limit if that total is greater than
half of the limit and provided an example. The Agencies adopt this
comment as comment 26(a)-1.

Proposed § \_\_.27(b) would have prohibited institutions from charging
to the account during the first billing cycle security deposits and fees
for the issuance or availability of credit that, in the aggregate,
constitute more than 25 percent of the initial credit limit. It would
have further required that any additional security deposits and fees be
spread equally among the eleven billing cycles following the first
billing cycle. Proposed comment 27(b)-1 clarified that, when dividing
amounts pursuant to § \_\_.27(b)(2), the institution may adjust amounts
by one dollar or less. Proposed comment 27(b)-2 provided an example of
the application of the rule.

As discussed above, the Agencies have adopted § \_\_.27(b) as §
\_\_.26(b) with modifications. The final rule provides that security
deposits and fees that constitute more than 25 percent of the initial
credit limit be charged to the account in equal portions in no fewer
than the five billing cycles immediately following the first billing
cycle. Institutions that wish to spread these deposits and fees over a
longer period may do so. This change is intended to better enable
issuers to limit the risk of early default by new cardholders, but still
ensure that consumers who obtain these cards have meaningful access to
credit. The Agencies have revised proposed comments 27(b)-1 and 27(b)-2
for consistency with the final rule and adopted those comments as
26(b)-1 and 26(b)-2, respectively.

[\_\_.26(c) Evasion prohibited]{.underline}

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

[\_\_.26(d) Definitions]{.underline}

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

Proposed comments 27(c)-1, -2, and -3 clarified the meaning of "fees for
the issuance or availability of credit." These comments were based on
similar commentary to 12 CFR 226.5a(b)(2), which was proposed by the
Board with its June 2007 Regulation Z Proposal. The Agencies have
revised the proposed commentary to § \_\_.26(d) for consistency with the
final Regulation Z commentary published by the Board elsewhere in
today's **Federal Register**. Specifically, proposed comment 27(c)-2 has
been revised to clarify that fees for providing additional cards to
primary cardholders (as opposed to authorized users) are fees for the
issuance or availability of credit. Otherwise, these comments are
redesignated as comments 26(d)-1, -2, and -3 and adopted as proposed.

**Other Issues**

[Implementation]{.underline}. As discussed in § VII of this
**SUPPLEMENTARY INFORMATION**, the effective date for § \_\_.26 is July
1, 2010. Although the Agencies particularly encourage institutions to
use their best efforts to conform their practices to this section of the
final rule sooner, institutions are not prohibited from charging
security deposits and fees for the issuance or availability that do not
comply with § \_\_.26 until the effective date. These provisions do not
affect security deposits and fees charged to consumer credit card
accounts prior to that date, even if some or all of the security
deposits and fees have not been paid in full as of the effective date.

[Advertising]{.underline}. Based on the record in this rulemaking, the
Agencies are not persuaded that, as a general matter, high-fee subprime
credit cards provide meaningful benefits to consumers as credit repair
tools. Notably, institutions that make marketing claims regarding the
use of subprime credit cards as a means to improve credit scores risk
violating the FTC Act's prohibition on deception if they cannot
substantiate their claims.[^166] Savings associations that cannot do so
are also at risk of violating the OTS rule against making inaccurate
representations in advertising.[^167]

**Other Proposals**

[Proposed § \_\_.25---Unfair Acts or Practices Regarding Fees for
Exceeding the Credit Limit Caused by Credit Holds]{.underline}

[Summary]{.underline}. In May 2008, the Agencies proposed § \_\_.25,
which would have prohibited institutions from assessing a fee or charge
for exceeding the credit limit on a consumer credit card account if the
credit limit would not have been exceeded but for a hold placed on any
portion of the available credit on the account that is in excess of the
actual purchase or transaction amount. [See]{.underline} 73 FR
28921-28922. The Agencies intended this provision to parallel proposed §
\_\_.32(b), which would have imposed identical restrictions with respect
to holds placed on available funds in a deposit account as a result of a
debit card transaction. [See]{.underline} [id]{.underline}. at
28931-32892. As discussed below, the Agencies are not taking action on
debit holds or credit holds at this time.

[Background]{.underline}. Although the Board's June 2007 Regulation Z
Proposal did not directly address over-the-credit-limit (OCL) fees, the
Board received comments from consumers, consumer groups, and members of
Congress expressing concern about the penalties imposed by creditors for
exceeding the credit limit. Specifically, commenters were concerned that
consumers may unknowingly exceed their credit limit and incur
significant rate increases and fees as a result.

As discussed in the May 2008 Proposal, the Agencies believed these
concerns were addressed by proposed § \_\_.24 to the extent that it
prohibited institutions from applying increased rates to outstanding
balances as a penalty for exceeding the credit limit. The Agencies were
concerned, however, about the imposition of OCL fees in connection with
credit holds. As further discussed below in § VI of this **SUPPLEMENTARY
INFORMATION**, some merchants place a temporary "hold" on an account
when a consumer uses a credit or debit card for a transaction in which
the actual purchase amount is not known at the time the transaction is
authorized. For example, when a consumer uses a credit card to obtain a
hotel room, the hotel often will not know the total amount of the
transaction at the time because that amount may depend on, for example,
the number of days the consumer stays at the hotel or the charges for
incidental services the hotel may provide to the consumer during the
stay (such as room service). Therefore, the hotel may place a hold on
the available credit on the consumer's account in an amount sufficient
to cover the expected length of the stay plus an additional amount for
potential purchases of incidentals. In these circumstances, the
institution may authorize the hold but the final amount of the
transaction will not be known until the hotel submits the actual
purchase amount for settlement.

Typically, the hold is kept in place until the transaction amount is
presented to the institution for payment and settled, which may take
place a few days after the original authorization. During this time
between authorization and settlement, the hold may remain in place on
the consumer's account. As discussed in the May 2008 Proposal, the
Agencies were concerned that consumers who were unfamiliar with credit
hold practices might inadvertently exceed the credit limit and incur an
OCL fee because they assumed that the available credit was reduced only
by the actual amount of the purchase.

[Comments received]{.underline}. Industry commenters stated that credit
holds do not typically reduce the amount of available credit on a
consumer credit card account (in contrast to debit holds, which do
reduce the amount of available funds in a deposit account). Some stated
that, for this reason, they did not object to the proposed rule, while
others argued that -- to the extent the provision would require any
changes to issuers' systems -- it would be unnecessarily burdensome
because credit holds are very unlikely to result in OCL fees.

The proposed rule was supported by consumer groups, members of Congress,
the FDIC, state attorneys general, and state consumer protection
agencies, although these commenters generally argued that the final rule
should go further in addressing the harm caused by OCL fees. Some of
these commenters argued that exceeding the credit limit should not be a
basis for loss of a promotional rate under proposed § \_\_.24(b)(2). As
discussed above with respect to § \_\_.24, the Agencies agree and the
final version of § \_\_.24(b)(2) does not permit this practice.

In addition, some of these commenters argued that institutions that
reduce the credit limit on a consumer credit card account should be
prohibited from penalizing consumers for exceeding that reduced limit.
The Agencies believe that these concerns are addressed by the Board's
revisions to Regulation Z, published elsewhere in today's **Federal
Register**. Specifically, 12 CFR 226.9(c)(2)(v) provides that, if a
creditor decreases the credit limit on an account, notice of the
decrease must be provided at least 45 days before an OCL fee or a
penalty rate can be imposed solely as a result of the consumer exceeding
the newly-decreased limit.

These commenters also urged the Agencies to take a variety of other
actions with respect to OCL fees, including prohibiting OCL fees unless
the account is over the credit limit at the end of the billing cycle,
prohibiting OCL fees when the institution approved the transaction that
put the account over the credit limit (or allowing consumers to direct
institutions not to honor such transactions), prohibiting OCL fees when
interest charges or other fees placed the account over the credit limit,
prohibiting multiple OCL fees based on a single transaction, and
prohibiting OCL fees that are not reasonably related to the
institution's cost. The Agencies, however, believe that the protections
provided elsewhere in Regulation Z and in this final rule --
particularly the prohibition on repricing existing balances as a penalty
for exceeding the credit limit -- provide substantial protections for
consumers who exceed their credit limit.

[Conclusion]{.underline}. The Agencies are not taking action on credit
holds or debit holds at this time. As discussed below in § VI of this
**SUPPLEMENTARY INFORMATION**, the Board has published proposed
amendments to Regulation E addressing debit holds elsewhere in today's
**Federal Register**. The Agencies will review information obtained
through that rulemaking to determine whether to take further action. In
addition, to the extent that specific practices involving debit or
credit holds raise concerns regarding unfairness or deception under the
FTC Act, the Agencies plan to address those practices on a case-by-case
basis through supervisory and enforcement actions.

[Proposed § \_\_.28---Deceptive Acts or Practices Regarding Firm Offers
of Credit]{.underline}

[Summary]{.underline}. In May 2008, the Agencies proposed § \_\_.28 to
address circumstances in which institutions make firm offers of credit
for consumer credit card accounts that contain a range of or multiple
annual percentage rates or credit limits because such offers appeared to
be deceptive. [See]{.underline} 72 FR at 28925-28927. When the rate or
credit limit that a consumer responding to such an offer will receive
depends on specific criteria bearing on creditworthiness, proposed §
\_\_.28 would have required that the institution disclose the types of
eligibility criteria in the solicitation. An institution would have been
permitted to use the following disclosure to meet these requirements:
"If you are approved for credit, your annual percentage rate and/or
credit limit will depend on your credit history, income, and debts."
Based on the comments and further analysis, the Agencies have concluded
that concerns regarding firm offers of credit containing a range of or
multiple annual percentage rates are adequately addressed by provisions
of Regulation Z published by the Board elsewhere in today's **Federal
Register**. Accordingly, as discussed below, the Agencies are not taking
action on this issue at this time.

[Background]{.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.[^168] One of the
permissible purposes set forth in the FCRA relates to prescreened firm
offers of credit or insurance.[^169] In a typical use of prescreening
for firm offers of credit, a creditor submits a request to a consumer
reporting agency for the contact information of consumers meeting
certain pre-established criteria, such as credit scores or a lack of
serious delinquencies. The creditor then sends offers of credit targeted
to those consumers, which state certain terms under which credit may be
provided. For example, a firm offer of credit may contain statements
regarding the annual percentage rate or credit limit that may be
provided.

The FCRA requires that a firm offer of credit state, among other things,
that (1) information contained in the consumer's credit report was used
in connection with the transaction; (2) the consumer received the firm
offer because the consumer satisfied the criteria for creditworthiness
under which the consumer was selected for the offer; and (3) if
applicable, the credit may not be extended if, after the consumer
responds to the offer, the consumer does not meet the criteria used to
select the consumer for the offer or any other applicable criteria
bearing on creditworthiness or does not furnish any required
collateral.[^170] The creditor may apply certain additional criteria to
evaluate applications from consumers that respond to the offer, such as
the consumer's income.[^171]

As discussed in the May 2008 Proposal, the Agencies were concerned that,
because firm offers of credit often state that consumers have been
''pre-selected'' for credit or make similar statements, consumers
receiving such offers may not understand that they are not necessarily
eligible for the lowest annual percentage rate and the highest credit
limit stated in the offer. Thus, in the absence of an affirmative
statement to the contrary, consumers could reasonably believe that they
could receive the lowest annual percentage rate and highest credit limit
stated in the offer even though that is not the case. Accordingly, the
Agencies proposed § \_\_.28.

[Comments received]{.underline}. Proposed § \_\_.28 was supported by
some industry commenters as well as some members of Congress, the FDIC,
and state attorneys general. Other industry commenters argued that the
Agencies' concerns regarding firm offers of credit were more
appropriately addressed under Regulation Z or the FCRA. Consumer groups,
some members of Congress, and a state consumer protection agency
criticized the proposed disclosure as ineffective and requested that the
Agencies take more substantive action, such as prohibiting institutions
from making firm offers of credit that do not state a specific annual
percentage rate or credit limit or making firm offers of credit to
consumers who are not eligible for the best terms stated in the offer.

[Conclusion]{.underline}. The Agencies believe that the Board's final
rules under Regulation Z (published elsewhere in today's **Federal
Register**) adequately address their concerns regarding firm offers of
credit that contain a range of or multiple annual percentage rates.
Specifically, the Board has adopted 12 CFR 226.5a(b)(1)(v) to address
circumstances in which a creditor is unable to state in a solicitation
the exact rate all consumers who respond to the solicitation will
receive because that rate depends on a subsequent evaluation of the
consumer's creditworthiness. This provision generally requires the
creditor to disclose in the Schumer Box provided with credit card
solicitations (including firm offers of credit) the specific rates or
the range of rates that could apply and to state that the rate for which
the consumer may qualify at account opening will depend on the
consumer's creditworthiness and other factors (if applicable).

After conducting consumer testing, the Board has also provided model
forms that can be used to disclose multiple rates or a range of rates.
[See]{.underline} App. G to 12 CFR 226, Samples G-10(B) and G-10(C). In
this testing, almost all participants understood that, when multiple
rates or a range of rates were provided in the Schumer Box, it meant
that the consumer's initial annual percentage rate would be determined
among those rates or within that range based on the consumer's credit
history and credit score. Accordingly, the Agencies believe that 12 CFR
226.5a(b)(1)(v) adequately addresses concerns that consumers will be
misled when firm offers state multiple or a range of annual percentage
rates.

Similarly, although Regulation Z does not require disclosure of the
credit limit in the Schumer Box, the Board's consumer testing indicates
that consumers are not misled by solicitations stating multiple credit
limits or a range of credit limits. Specifically, when a solicitation
did not state a specific credit limit, almost all participants
understood that the credit limit for which they would qualify depended
on their creditworthiness. In addition, when looking at statements that
the initial credit limit would be "up to \$2,500," most participants
understood that the limit they would receive might be lower than
\$2,500.[^172]

Accordingly, the Agencies are not taking action regarding firm offers of
credit at this time. To the extent that specific practices regarding
firm offers of credit raise concerns regarding unfairness or deception
under the FTC Act, the Agencies plan to address those practices on a
case-by-case basis through supervisory and enforcement actions. Further,
to the extent that individual consumers do not wish to receive firm
offers of credit, they can elect to be excluded from firm offer
lists.[^173]

**VI. Proposed Subpart Regarding Overdraft Services**

**Background**

Historically, if a consumer attempted to engage in a transaction that
would overdraw his or her deposit account, the consumer's depository
institution used its discretion on an ad hoc basis to determine whether
to pay the overdraft. If an overdraft was paid, the institution usually
imposed a fee on the consumer's account. In recent years, many
institutions have largely automated the overdraft payment process.
Automation is used to apply specific criteria for determining whether to
honor overdrafts and set limits on the amount of the coverage provided.

Overdraft services vary among institutions but often share certain
common characteristics. In general, consumers who meet the institution's
criteria are automatically enrolled in overdraft services.[^174] While
institutions generally do not underwrite on an individual account basis
when enrolling the consumer in the service, most institutions will
review individual accounts periodically to determine whether the
consumer continues to qualify for the service, and the amounts that may
be covered. Most institutions disclose to consumers that the payment of
overdrafts is discretionary, and that the institution has no legal
obligation to pay any overdraft.

In the past, institutions generally provided overdraft coverage only for
check transactions. In recent years, however, the service has been
extended to cover overdrafts resulting from non-check transactions,
including withdrawals at ATMs, automated clearinghouse (ACH)
transactions, debit card transactions at point-of-sale (POS),
pre-authorized automatic debits from a consumer's account,
telephone-initiated funds transfers, and online banking
transactions.[^175]

Institutions charge a flat fee each time an overdraft is paid,
regardless of the amount of the overdraft. Institutions commonly charge
the same amount for paying the overdraft as they would if they returned
the item unpaid.[^176] A daily fee also may apply for each day the
account remains overdrawn.

In the May 2008 Proposal, the Agencies proposed to establish a new
Subpart D to their respective FTC Act regulations which would adopt
rules prohibiting specific unfair acts or practices with respect to
overdraft services. One provision (discussed in more detail below) would
have prohibited institutions from assessing any fees on a consumer's
account in connection with an overdraft service, unless the consumer is
given notice and a reasonable opportunity to opt out of the service, and
the consumer does not opt out.[^177] The Agencies also proposed to
prohibit institutions from assessing an overdraft fee where the
overdraft would not have occurred but for a hold placed on funds that
exceeds the actual purchase or transaction amount.

Based on the comments received and further analysis, the Agencies are
not taking action regarding overdraft services or debit holds at this
time. As noted above, the Board has proposed rules regarding overdraft
services under Regulation E elsewhere in today's **Federal
Register**.[^178] The Agencies will review information obtained during
that rulemaking to determine whether to take further action.

**A. Proposed Section \_\_\_.32(a) -- Consumer Right to Opt Out**

The Agencies proposed in § \_\_.32(a) to prohibit institutions from
assessing any fees on a consumer's account in connection with an
overdraft service, unless the consumer is given notice and a reasonable
opportunity to opt out of the service, and the consumer does not opt
out. The proposed opt-out right would have applied to overdrafts
resulting from all methods of payment, including check, ACH
transactions, ATM withdrawals and debit card transactions (full
opt-out). In addition, the proposal would have required institutions to
provide consumers with the option of opting out of only those overdrafts
resulting from ATM withdrawals and debit card transactions at POS
(partial opt-out). In a separate proposal under TISA and Regulation DD,
the Board proposed additional amendments regarding the form, content,
and timing requirements for the opt-out notice.

[Comments received]{.underline}. The Agencies received approximately
1,500 comment letters on the overdraft services portion of the May 2008
Proposal. Banks, savings associations, credit unions, and industry trade
associations, generally, but not uniformly, opposed the proposed
requirement to provide consumers with the right to opt out of an
institution's payment of overdrafts. Industry commenters stated that the
cost of complying with the rule would far exceed any consumer benefits.
Rather than causing consumer harm, industry commenters asserted that
overdraft services provide consumers substantial benefits, particularly
with respect to check transactions. These industry commenters observed
that the payment of overdrafts for checks enables consumers to avoid
more significant injuries, such as merchant fees, negative credit
reports, and violations of bad check laws. Industry commenters and the
OCC stated that if the opt-out right applied to check transactions, more
checks would be returned unpaid. Industry commenters and the OCC also
noted a potential unintended consequence of the rule could be that
institutions would lengthen their availability schedules to the extent
permitted by the Board's Regulation CC, 12 CFR Part 229, to ensure that
a deposited check was written on good funds. As a result, consumers
would have to wait longer than they do today before gaining access to
deposited funds.

Industry commenters also raised a number of operational concerns
regarding the proposed partial opt-out for ATM and POS transactions.
These commenters noted that most systems may not be able to
differentiate POS debit card transactions from other types of debit card
transactions. Some industry commenters, however, argued that the opt-out
should be limited to ATM withdrawals and debit card transactions. These
commenters stated that the majority of consumer complaints about
overdraft fees arise in connection with debit card purchases in which
the amount of the overdraft fee is significantly higher than the amount
of the overdraft.

Finally, industry commenters believed that it was inappropriate to
address overdraft practices under the Agencies' FTC Act authority. In
particular, industry commenters disputed the suggestion that overdraft
services were unfair in light of the consumer benefits when overdrafts
are paid, such as the avoidance of merchant fees. Industry commenters
also argued that consumers could reasonably avoid overdraft fees even
without being given an opportunity to opt out by properly managing their
accounts. Lastly, industry commenters noted that the federal banking
agencies have not previously indicated that institutions' payment of
overdrafts pursuant to non-promoted overdraft services raise significant
supervisory concerns, and asserted that the Agencies' proposal would
subject institutions to potential litigation risks. Accordingly, many
industry commenters recommended that the Board address any concerns
about overdraft services under other regulatory authority, such as
Regulation E and Regulation DD.

Consumer groups, members of Congress, the FDIC, individual consumers,
and others supported the Agencies' proposal to prohibit institutions
from assessing fees for overdraft services, unless the consumer is given
notice and the opportunity to opt out. However, most of these commenters
argued that the rule should instead require institutions to obtain the
consumer's affirmative consent (that is, opt-in) before overdrafts could
be paid and fees assessed. These commenters also stated that overdrafts
are extensions of credit and should be subject to Regulation Z.
Specifically, they asserted that institutions should be required to
disclose the cost of an overdraft service as an annual percentage rate
to allow consumers to compare those costs with other forms of credit.

[Consumer testing]{.underline}. The Agencies noted in the May 2008
Proposal that, as part of the rulemaking process, the Board would
conduct consumer testing on a proposed opt-out form (set forth in the
accompanying May 2008 Regulation DD Proposal) to ensure that the notice
can be easily understood by consumers. After considering the comments
received in response to both proposals, Board staff worked with a
testing consultant, Macro International (Macro), to revise the proposed
model form and to create a short-form opt-out notice that would appear
on the periodic statement. In September 2008, Macro conducted two rounds
of one-on-one interviews with a diverse group of consumers.

In general, after reviewing the model disclosures, testing participants
generally understood the concept of overdraft coverage, and that they
would be charged fees if their institution paid their overdrafts.
Participants also appeared to understand that if they opted out of
overdraft coverage, this meant their checks would not be paid and they
could be charged fees by both their institution and by the
merchant.[^179]

During the first round of testing, Macro tested an opt-out form that
allowed consumers to opt out of the payment of overdrafts for all
transaction types, including checks and recurring debits. During both
rounds, virtually all of the participants indicated that they would not
opt out if their checks would be returned unpaid. However, when asked if
they would opt out if the choice was limited to opting out of overdrafts
in connection with ATM withdrawals and debit card purchases, half of the
participants indicated that they would consider doing so.

[Conclusion]{.underline}. Based on the comments received and further
analysis, the Board is publishing a proposal elsewhere in today's
**Federal Register** under Regulation E that would require that an
institution provide its consumers the right to opt out of the
institution's payment of ATM withdrawals and one-time debit card
transactions pursuant to the institution's overdraft service. The Board
is also proposing an alternative approach that would require an
institution to obtain a consumer's affirmative consent (that is, opt-in)
before the institution could pay overdrafts for ATM withdrawals and
one-time debit card transactions and assess a fee. Additional comments
received in response to the Agencies' May 2008 Proposal and the Board's
Regulation DD Proposal regarding the content, timing, and format of the
opt-out notice are further discussed in the Board's Regulation E
proposal. The Board also anticipates conducting further consumer testing
following its review of the comments received on the Regulation E
proposal.

Accordingly, the Agencies are not taking action regarding overdraft
services at this time. The Agencies will review information obtained
from the Board's rulemaking to determine whether to take further action.

**B. Proposed Section \_\_.32(b) -- Debit Holds**

When a consumer uses a debit card to make a purchase, a hold may be
placed on funds in the consumer's account to ensure that the consumer
has sufficient funds in the account when the transaction is presented
for settlement. This is commonly referred to as a "debit hold." During
the time the debit hold remains in place, which may be up to three days
after authorization, those funds may be unavailable for the consumer's
use for other transactions.

In some cases, the actual purchase amount is not known at the time the
transaction is authorized, such as when a consumer uses a debit card to
pay for gas at the pump or pay for a meal at a restaurant. Consequently,
a debit hold may be placed for an estimated amount which may exceed the
actual transaction amount. The consumer may engage in subsequent
transactions reasonably assuming that the account has only been debited
for the actual transaction amount. Because of the excess hold, however,
the consumer may incur overdraft fees for those subsequent transactions.

In May 2008, the Agencies proposed in § \_\_.32(b) to prohibit
institutions from assessing an overdraft fee where the overdraft would
not have occurred but for a hold placed on funds in the consumer's
account that exceeds the actual purchase or transaction amount. The
proposed prohibition was intended to enable consumers to avoid the
assessment of fees when the consumer would not have overdrawn his or her
account had the actual transaction amount been presented for payment in
a timely manner.

Consumer groups supported the proposed prohibition. However, they
recommended that the Agencies also address check holds and prohibit the
assessment of overdraft fees if a consumer has deposited funds that have
not yet cleared, but where the deposit would have been sufficient to
cover the overdraft. Alternatively, consumer groups urged the Board to
use its authority under the Expedited Funds Availability Act (EFAA) to
shorten the funds availability schedule for deposited items.

Industry commenters, however, opposed the debit hold proposal, stating
that it would present significant operational difficulties. For example,
industry commenters noted that institutions authorize transactions in
real time, taking into account transactions subject to a debit hold.
Because the actual purchase amount for certain transactions subject to a
debit hold will not be known until the transaction is presented for
payment, some industry commenters expressed concern that the rule would
require institutions to monitor accounts retroactively and manually
adjust transactions and fees that have posted to the account to
determine whether an overdraft was caused by an excess hold. Otherwise,
institutions would have to stop placing holds altogether which, industry
commenters argued, raised potential safety and soundness concerns.
Nonetheless, a few financial institution commenters stated that for fuel
purchases, they do not place holds beyond the \$1 pre-authorization
amount, and one large financial institution commenter stated that it
does not currently place holds of any amount on authorizations coming
from gas stations, hotels, or rental car companies.

Rather than using their FTC Act authority, industry commenters urged the
Agencies to use other existing regulatory authority. For example,
industry commenters recommended that the Board exercise its authority
under Regulation E to require merchants to disclose at the point-of-sale
when holds may be placed on debit card transactions.

As discussed above, the Board is proposing to address concerns about
debit holds pursuant to the Board's authority under the EFTA and
Regulation E in a separate proposal published elsewhere in today's
**Federal Register**. Accordingly, the Agencies are not taking action
regarding overdraft services at this time. The Agencies will review
information obtained from the Board's rulemaking to determine whether to
take further action.[^180]

**Other Overdraft Practices**

[Balance disclosures]{.underline}. The Agencies also noted their
concerns in the proposal regarding how consumer balances are disclosed.
In particular, the Agencies observed that consumers could be misled by
balance disclosures that include additional funds that the institution
may provide to cover an overdraft. The Board is addressing this issue in
the final rule under Regulation DD published contemporaneously in
today's **Federal Register**.

[Transaction clearing practices]{.underline}. The May 2008 Proposal also
noted the Agencies' concerns about the impact of transaction clearing
practices on the amount of overdraft fees that may be incurred by the
consumer. The February 2005 overdraft guidance recommends as a best
practice that institutions explain the impact of transaction clearing
policies to consumers. For example, institutions could disclose that
transactions may not be processed in the order in which they occurred
and that the order in which transactions are received by the institution
and processed can affect the total amount of overdraft fees incurred by
the consumer.[^181] In its Guidance on Overdraft Protection Programs,
the OTS also recommended as best practices: (1) clearly disclosing rules
for processing and clearing transactions; and (2) having transaction
clearing rules that are not administered unfairly or manipulated to
inflate fees.[^182]

The May 2008 Proposal did not propose any rules addressing transaction
clearing practices. Instead, the Agencies solicited comment on the
impact of requiring institutions to pay smaller-dollar items before
larger-dollar items when received on the same day for purposes of
assessing overdraft fees on a consumer's account. The Agencies also
solicited comment on how such a rule would impact an institution's
ability to process transactions on a real-time basis.

Industry commenters urged the Agencies not to engage in a rulemaking
relating to transaction clearing practices. First, they argued that
state law under the Uniform Commercial Code[^183] specifically provides
institutions flexibility in determining posting order.[^184] Second,
industry commenters stated that each transaction clearing method has
inherent flaws, and that most customers prefer high-to-low posting order
because it results in consumers' largest bills---typically their higher
priority payments---being paid first. Third, these commenters argued
that transaction clearing processes are more complex than high-to-low or
low-to-high decisions. Industry commenters stated, for example, that
institutions use a variety of other clearing methods based on different
processing capabilities, such as real-time processing or processing in
check number order. In addition, an institution may use a combination of
posting order methods based on the capabilities of its processing system
and the transaction type. For example, an institution may clear some
items in real-time and others on a high-to-low basis during batch
processing, depending on how the item is presented and depending on
applicable funds availability and payment decision requirements.
Industry commenters also expressed concern that requiring a particular
processing order would create significant litigation risk given the
complexity of items processing. Finally, industry commenters stated that
it would be technologically impracticable to permit a small subset of
consumers to opt in to a particular processing order and to treat their
transactions differently than other consumers' transactions.

Consumer groups and some members of Congress urged the Agencies to ban
institutions from engaging in manipulative clearing practices. In
particular, they asserted that institutions use transaction processing
order to maximize revenue from overdrafts because more overdraft fees
can be levied if largest debits are processed first and cause other
small debits to overdraw the account multiple times. They also argued
that the justification favoring high-to-low payment order because
higher-priority items are paid first is undermined by the fact that all
items are paid via the institution's overdraft protection program.

The Agencies are not addressing transaction processing order at this
time. The Agencies believe that it would be difficult to set forth a
bright-line rule that would clearly result in the best outcome for all
or most consumers. For example, requiring institutions to pay smaller
dollar items first may cause an institution to return unpaid a large
dollar nondiscretionary item, such as a mortgage payment, if there is an
insufficient amount of overdraft coverage remaining to cover the large
dollar item after the smaller items have been paid. The Agencies also
acknowledge the inherent complexity of payments processing and recognize
that mandating a particular posting order could create complications for
institutions seeking to move toward real-time transaction processing.

**VII. Effective Date**

The May 2008 Proposal solicited comment on whether the rules should
become effective one year after issuance or whether a different period
was appropriate. Although some industry commenters agreed that a
one-year period was appropriate, most urged the Agencies to allow 18 or
24 months due to the difficulty of redesigning systems and procedures to
comply with the rules. In contrast, some consumer advocates requested a
shorter period.

The final rule is effective on July 1, 2010. Compliance with the
provisions of the final rule is not required before the effective date.
Accordingly, the final rule and the Agencies' accompanying analysis
should have no bearing on whether or not acts or practices restricted or
prohibited under this rule are unfair or deceptive before the effective
date of this rule.

Unfair acts or practices can be addressed through case-by-case
enforcement actions against specific institutions, through regulations
applying to all institutions, or both. An enforcement action concerns a
specific institution's conduct and is based on all of the facts and
circumstances surrounding that conduct. By contrast, a regulation is
prospective and applies to the market as a whole, drawing bright lines
that distinguish broad categories of conduct.

Because broad regulations, such as those in the final rule, can require
large numbers of institutions to make major adjustments to their
practices, there could be more harm to consumers than benefit if the
regulations were effective earlier than the effective date. If
institutions were not provided a reasonable time to make changes to
their operations and systems to comply with the final rule, they would
either incur excessively large expenses, which would be passed on to
consumers, or cease engaging in the regulated activity altogether, to
the detriment of consumers. And because the Agencies find an act or
practice unfair only when the harm outweighs the benefits to consumers
or to competition, the implementation period preceding the effective
date set forth in the final rule is integral to the Agencies' decision
to restrict or prohibit certain acts or practices by regulation.

For these reasons, acts or practices occurring before the effective date
of the final rule will be judged on the totality of the circumstances
under applicable laws or regulations. Similarly, acts or practices
occurring after the rule's effective date that are not governed by these
rules will continue to be judged on the totality of the circumstances
under applicable laws or regulations.

Some industry commenters requested that, because existing accounts were
established with the expectation that institutions could engage in the
practices prohibited by the final rule, those accounts (or existing
balances on those accounts) be exempted from the final rule. The
Agencies recognize that, as discussed above with respect to specific
prohibitions, the final rule prohibits some long-standing practices that
have been expressly or implicitly permitted under state or federal law
or the guidance of the federal banking agencies. As noted above, the
final rule is not intended to suggest that these practices are unfair or
deceptive prior to the effective date. However, the Agencies do not
believe the requested exemption is necessary because institutions will
have sufficient time prior to the effective date to adjust their pricing
and other practices with respect to existing accounts and balances.
Indeed, prior to the effective date, institutions may change interest
rates on existing balances and take other actions that will be
prohibited once the final rule is effective. However, in light of the
significant nature of the changes required by the final rule (including
training staff), the Agencies anticipate that institutions will need to
begin the compliance process long before the effective date. Although
institutions are not required to comply with the final rule before the
effective date, the Agencies strongly encourage institutions to use
their best efforts to conform their practices to the final rule before
July 1, 2010.

**VIII. Regulatory Analysis**

[A. Regulatory Flexibility Act]{.underline}

[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. Under section 605(b) of the RFA, 5 U.S.C. 605(b), the
regulatory flexibility analysis otherwise required under section 604 of
the RFA is not required if an agency certifies, along with a statement
providing the factual basis for such certification, that the rule will
not have a significant economic impact on a substantial number of small
entities. The Board prepared an initial regulatory flexibility analysis
in connection with the May 2008 Proposal, which reached the preliminary
conclusion that the proposed rule would not have a significant economic
impact on a substantial number of small entities. [See]{.underline} 73
FR 28933-28934 (May 19, 2008). The Board received no comments
specifically addressing its initial regulatory flexibility analysis.
However, industry commenters generally stated that the overall proposal
would impose significant implementation costs and result in a loss of
revenue from interest charges and overdraft fees.

Based on the comments and further analysis, the Board has concluded that
the final rule will have a significant economic impact on a substantial
number of small entities. Accordingly, the Board has prepared the
following final regulatory flexibility analysis pursuant to section 604
of the RFA.

1\. [Succinct statement of the need for, and objectives of, the
rule]{.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 issuing regulations under the FTC Act
to protect consumers from specific unfair or deceptive acts or practices
regarding consumer credit card accounts. The Board's final rule will
amend Regulation AA.

The **SUPPLEMENTARY INFORMATION** above describes in detail the need
for, and objectives of, the final rule.

2\. [Summary of the significant issues raised by public comments in
response to the Board's initial analysis, the Board's assessment of such
issues, and a statement of any changes made as a result of such
comments]{.underline}. As discussed above, the Board's initial
regulatory flexibility analysis reached the preliminary conclusion that
the proposed rule would not have a significant economic impact on a
substantial number of small entities. [See]{.underline} 73 FR
28933-28934 (May 19, 2008). The Board received no comments specifically
addressing this analysis.

3\. [Description and estimate of the number of small entities to which
the final rule applies]{.underline}. The Board's final rule applies to
banks and their subsidiaries, except savings associations as defined in
12 U.S.C. 1813(b). Based on 2008 call report data, there are
approximately 709 banks with assets of \$175 million or less that offer
credit cards and are therefore required to comply with the Board's final
rule.

4\. [Description of the recordkeeping, reporting, and other compliance
requirements of the final rule]{.underline}. The final rule does not
impose any new recordkeeping or reporting requirements. The final rule
does, however, impose new compliance requirements.

Section 227.22 will require some small entities to extend the period of
time provided to consumers to make payments on consumer credit card
accounts. One commenter estimated that the cost of compliance at
\$30,000 per institution, although this cost will vary depending on the
size of the institution. Based on the comments, however, many credit
card issuers already send periodic statements 21 days in advance of the
payment due date, which constitutes a reasonable amount of time under
the rule. Indeed, a trade association representing community banks (many
of which are small entities under the RFA) stated in its comment that 90
percent of its members currently mail or deliver periodic statement more
than 21 days before the payment due date.

Section 227.23 will require small entities that provide consumer credit
card accounts with multiple balances at different rates to alter their
payment allocation systems and, in some cases, develop new systems for
allocating payments among different balances. The cost of such changes
will depend on the size of the institution and the composition of its
portfolio. Compliance with this provision will also reduce interest
revenue for small entities that currently allocate payments first to
balances with the lowest annual percentage rate. The economic impact,
however, will be mitigated to the extent that small entities adjust
other terms to compensate for the loss of revenue (such as by increasing
the dollar amount of fees and the annual percentage rates offered to
consumers when an account is opened).

Section 227.24 generally prohibits small entities from increasing annual
percentage rates, except in certain circumstances. This provision will
reduce interest revenue, although -- as noted above -- small entities
can mitigate the economic impact by increasing the dollar amount of
fees, increasing the annual percentage rates offered to consumers when
an account is opened, or otherwise adjusting account terms. In addition,
§ 227.24 permits small entities to increase the rates applicable to new
transactions after the first year and to increase the rates on
outstanding balances pursuant to an increase in an index and when the
consumer's payment has not been received within 30 days after the due
date.

Section 227.25 may require some small entities to change the way finance
charges are calculated. The Board understands, however, that few
institutions still use the prohibited method.

Section 227.26 will reduce the revenue that some small entities derive
from security deposits and fees. These costs, however, will be borne
only by those entities offering cards with security deposits and fees
that currently consume a majority of the credit limit.

Accordingly, the Board believes that, in the aggregate, the provisions
in its final rule will have a significant economic impact on a
substantial number of small entities.

5\. [Description of the steps the Board has taken to minimize the
significant economic impact on small entities consistent with the stated
objectives of the FTC Act]{.underline}. As discussed above in this
**SUPPLEMENTARY INFORMATION**, the Board has considered a wide variety
of alternatives and has concluded that the restrictions in the final
rule achieve the appropriate balance between providing effective
protections for consumers against unfair or deceptive acts or practices
(which are prohibited by the FTC Act) and minimizing the burden on
institutions that offer credit cards (including small entities). In the
May 2008 Proposal, the Board considered whether small entities should be
exempted from the proposed rules. The Board indicated, however, that
such an exemption would not be appropriate because the FTC Act neither
exempts small entities from the prohibition against engaging in unfair
or deceptive acts or practices nor provides the Board with authority to
create such an exemption. Furthermore, the Board noted that whether an
act or practice is unfair or deceptive should not depend on the size of
the institution. [See]{.underline} 73 FR at 28934. The Board did not
receive any comments regarding this preliminary conclusion. Accordingly,
the Board has not exempted small entities from the final rule.

The Board also believes that the final rule, where appropriate, provides
sufficient flexibility and choice for institutions, including small
entities. As such, any institution, regardless of size, may tailor its
operations to its individual needs and thereby mitigate to some degree
any burdens created by the final rule. For instance, although § 227.23
prohibits institutions from applying payments in excess of the minimum
payment first to the balance with the lowest interest rate, it allows
institutions to choose between two permissible allocation methods and
does not place any limitations on institutions' ability to allocate the
minimum payment. In addition, although § 227.24 generally prohibits
institutions from increasing the annual percentage rates on outstanding
balances, it provides reasonable exceptions and does not restrict the
ability of institutions to increase rates on future transactions after
the first year.

[OTS]{.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. For purposes of the RFA and OTS-regulated entities, a
"small entity" is a savings association with assets of \$175 million or
less. Under section 605(b) of the RFA, 5 U.S.C. 605(b), the regulatory
flexibility analysis otherwise required under section 604 of the RFA is
not required if an agency certifies, along with a statement providing
the factual basis for such certification, that the rule will not have a
significant economic impact on a substantial number of small entities.
OTS certified that the proposed rule would not have a significant
economic impact on a substantial number of small entities but prepared
an initial regulatory flexibility analysis in connection with the
May 2008 Proposal anyway. [See]{.underline} 73 FR 28934-28935 (May 19,
2008). OTS received no comments specifically addressing its initial
regulatory flexibility analysis.

OTS certifies that this final rule will not have a significant economic
impact on a substantial number of small entities. OTS is the primary
federal regulator for 817 federally- and state-chartered savings
associations. Of these 817 savings associations, only 116 report any
credit card assets. Of these 116, only 22 have assets of \$175 million
or less.

[NCUA]{.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. For purposes of the RFA and NCUA, a "small entity" is a
credit union with assets of \$10 million or less. Under section 605(b)
of the RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis
otherwise required under section 604 of the RFA is not required if an
agency certifies, along with a statement providing the factual basis for
such certification, that the rule will not have a significant economic
impact on a substantial number of small entities. NCUA certified that
the proposed rule would not have a significant economic impact on a
substantial number of small entities, but prepared an initial regulatory
flexibility analysis in connection with the May 2008 Proposal anyway.
[See]{.underline} 73 FR 28904, 28935 (May 19, 2008). NCUA received no
comments specifically addressing its initial regulatory flexibility
analysis.

Accordingly, NCUA certifies that this final rule will not have a
significant economic impact on a substantial number of small entities.
NCUA regulates approximately 5036 federal credit unions. Only 2427
federal credit unions report credit card assets. Of those federal credit
unions offering loan products, 2363 small federal credit unions offer
loans, and 425 small federal credit unions offer credit cards to
members.

[B. Paperwork Reduction Act]{.underline}

[Board]{.underline}: In accordance with the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board
has reviewed the final rule under the authority delegated to the Board
by the Office of Management and Budget (OMB). The collections of
information that are required by this proposed rule are found in 12 CFR
227.14 and 227.24(b)(2).

This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 4301 [et]{.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 final rule amends Regulation AA to prohibit
institutions from engaging in certain acts or practices in connection
with consumer credit card accounts. This proposal evolved from the
Board's June 2007 Regulation Z Proposal. This final rule is coordinated
with the Board's final rule under the Truth in Lending Act and
Regulation Z, which is published elsewhere in today's **Federal
Register**.

Under § 227.24(a) (Unfair acts or practices regarding increases in
annual percentage rates), banks are generally required to disclose at
account opening the annual percentage rates that will apply to the
account. In addition, under § 227.24(b)(3), banks must disclose in
advance any increase in the rate that applies to new transactions
pursuant to 12 CFR 226.9. The Board anticipates that banks will, with no
additional burden, incorporate the disclosure requirements under
§ 227.24(a) with the disclosure requirements regarding credit and charge
cards in Regulation Z, 12 CFR 226.5a and 226.6. Thus, in order to avoid
double-counting, the Board will account for the burden associated with
proposed Regulation AA § 227.24(a) under Regulation Z (OMB No.
7100--0199) §§ 226.5a and 226.6. Similarly, because the Board
anticipates that banks will, with no additional burden, incorporate the
disclosure requirement under § 227.24(b)(3) with the disclosure
requirements in Regulation Z, 12 CFR 226.9, the Board will account for
the burden associated with proposed Regulation AA § 227.24(b)(2) under
Regulation Z (OMB No. 7100--0199) § 226.9.

Under Regulation AA § 227.14(b) (Unfair and deceptive practices
involving cosigners), a clear and conspicuous disclosure statement shall
be given in writing to the cosigner prior to being obligated. The
disclosure statement must be substantively similar to the example
provided in § 227.14(b). The Board will also account for the burden
associated with Regulation AA § 227.14(b) under Regulation Z. The title
of the Regulation Z information collection will be updated to account
for this section of Regulation AA.

In May 2008, the Board proposed § 227.28, which would have prohibited
banks from engaging in certain marketing practices in relation to
prescreened firm offers of credit for consumer credit card accounts
unless a disclaimer sufficiently explained the limitations of the offer.
As discussed elsewhere in the **SUPPLEMENTARY INFORMATION**, the Board
has not taken action on proposed § 227.28 at this time because, among
other reasons, the disclosures required by Regulation Z will address the
Board's concerns. The burden increase of 1,808 hours associated with
proposed § 227.28 would have been accounted for under Regulation Z (OMB
No. 7100-0199) § 226.5a; however, it has been removed from the
Regulation Z burden estimate.

In May 2008, the Board proposed § 227.32, which would have provided that
a consumer could not be assessed a fee or charge for paying an overdraft
unless the consumer was provided with the right to opt out of the
payment of overdrafts and a reasonable opportunity to exercise that
right but did not do so. The Board stated that the burden associated
with proposed § 227.32 would be accounted for under Regulation DD (OMB
No. 7100-0271). However, as discussed elsewhere in the **SUPPLEMENTARY
INFORMATION**, the Board is not taking action on proposed § 227.32 at
this time.

[OTS and NCUA]{.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 requirements contained in this joint final rule have been
submitted by the OTS and NCUA to OMB for review and approval under
section 3507 of the PRA and section 1320.11 of OMB's implementing
regulations (5 CFR part 1320)**.** The review and authorization
information for the Board is provided earlier in this section along with
the Board's burden estimates. The collections of information that are
required by this final rule are found in 12 CFR \_\_.13 and \_\_.24.
Collections of information that were required by the proposed rule in §
\_\_.28 and § \_\_.32 are not included in the final rule.

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

[NCUA:]{.underline} Federal 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 the final rule, the
Agencies are incorporating their existing Credit Practices Rules, which
govern unfair or deceptive acts or practices involving consumer credit,
into new, more comprehensive rules that also address unfair or deceptive
acts or practices involving credit cards.

Under § \_\_.24(a) (Unfair acts or practices regarding increases in
annual percentage rates), institutions are generally required to
disclose at account opening the annual percentage rates that will apply
to the account. In addition, under § \_\_.24(b)(3), institutions must
disclose in advance any increase in the rate that applies to new
transactions pursuant to 12 CFR 226.9 in Regulation Z. The OTS and NCUA
anticipate that institutions would, with little additional burden,
incorporate the proposed disclosure requirement under § \_\_.24(a) with
the existing disclosure requirements regarding credit and charge cards
in Regulation Z, 12 CFR 226.5a, and 226.6. Similarly, the OTS and NCUA
anticipate that institutions will, with little additional burden,
incorporate the disclosure requirement under §\_\_.24(b)(3) with the
disclosure requirements in Regulation Z, 12 CFR 226.9.

Under the existing Credit Practices Rule, 12 CFR 535.3 (to be recodified
at 12 CFR 535.13) and 12 CFR 706.3, (to be recodified at 12 CFR 706.13)
both entitled "Unfair or deceptive cosigner practices," a clear and
conspicuous disclosure statement shall be given in writing to the
cosigner prior to being obligated. The disclosure statement must be
substantively similar to the example provided in the section of the
rule. Since this is not a new requirement, the OTS and NCUA, anticipate
little additional burden associated with this section of the rule.

In May 2008, the OTS, NCUA and the Board proposed § \_\_.28, which would
have prohibited financial institutions from engaging in certain
marketing practices in relation to prescreened firm offers of credit for
consumer credit card accounts unless a disclaimer sufficiently explained
the limitations of the offer. As discussed elsewhere in this
**SUPPLEMENTARY INFORMATION**, the Agencies are not taking action on
proposed § \_\_.28 at this time. The burden increases of 8,260 for OTS
and 50,360 for NCUA have been removed from the burden estimate.

In May 2008, the Agencies' proposed § \_\_.32, which would have provided
that a consumer could not be assessed a fee or charge for paying an
overdraft unless the consumer was provided with the right to opt out of
the payment of overdrafts and a reasonable opportunity to exercise that
right but did not do so. The OTS stated that the burden associated with
proposed § 535.32 would be 8,260 hours. OTS's burden estimate was based
on the effect of this rule on all of its institutions because they are
all depository institutions, most of which offer overdraft services. By
not including provisions on overdrafts, OTS's rule affects only the 116
OTS-supervised institutions that issue credit cards. The NCUA stated
that the burden associated with proposed § 706.32 would be 50,360 hours.
As discussed elsewhere in this **SUPPLEMENTARY INFORMATION**, the
Agencies are not taking action on proposed § \_\_.32 at this time.
Accordingly, the OTS and NCUA remove their respective burden increase.

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

[OTS]{.underline}:

Estimated number of respondents: 817

Estimated time for developing disclosures: 4 hours

Estimated time for training: 4 hours

Total estimated time per respondent: 8 hours

Total estimated annual burden: 6536 hours

[NCUA]{.underline}:

Estimated number of respondents: 5,036

Estimated time for developing disclosures: 4 hours

Estimated time for training: 4 hours

Total estimated time per respondent: 8 hours

Total estimated annual burden: 40,288 hours

[C. OTS Executive Order 12866 Determination]{.underline}

Executive Order 12866 requires federal agencies to prepare a regulatory
impact analysis for agency actions that are found to be "significant
regulatory actions." "Significant regulatory actions" include, among
other things, rulemakings that "have an annual effect on the economy of
\$100 million or more or adversely affect in a material way the economy,
a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, or tribal
governments or communities."[^185]

Based on the prediction of industry commenters, OTS anticipates that the
final rule will exceed the \$100 million threshold. However, OTS
believes that these estimates may overstate the actual costs borne by
institutions under OTS jurisdiction for a number of reasons. First,
OTS-supervised institutions account for only a small portion of the
entire credit card market. Second, several provisions included in the
proposed rulemaking are not being finalized at this time, which reduces
the overall economic impact of the final rule. Third, OTS-supervised
institutions already refrain from engaging in many of the practices
prohibited by this final rule. Issuing a rule to prevent institutions
from taking up these practices will help ensure that market conduct
standards remain high, but it will not cause significant economic impact
on these institutions.

OTS acknowledges that several provisions of the rules may carry
operational costs, although the general information provided by
commenters on this point does not permit the OTS to quantify such costs
with any precision. Moreover, commenter suggestions about the effect
that two provisions of the rule may have on the fee and interest income
may be overestimated. Notably, these suggestions blend the effects of
this rulemaking with those of a related Board rulemaking on Regulation
Z.

Further, given the continuing contraction in the economy since the May
2008 proposal and the close of the August 2008 comment period, OTS
anticipates that the economic effect on credit card issuers will be
lower than projected by commenters as the industry itself shrinks.[^186]

OTS has provided the Administrator of the Office of Management and
Budget\'s (OMB) Office of Information and Regulatory Affairs (OIRA) an
economic analysis. As required by Executive Order 12866, it addresses:
(1) the need for the regulatory action and how the rule meets that need,
(2) the costs and benefits of the rule and its consistency with a
statutory mandate that avoids interference with State, local and tribal
governments, (3) the benefits anticipated from the regulation, (4) the
costs anticipated from the regulation, and (5) alternatives to the
regulation.

1.  **[The need for the regulatory action and how the rule meets that
    need.]{.underline}**

The OTS final rule, like the rules issued by the Board and NCUA,
consists of five provisions intended to protect consumers from unfair
acts or practices with respect to consumer credit card accounts. The
identified unfair acts or practices inhibit or prevent a consumer from
accurately assessing the costs and benefits of their actions and thus
produce a market failure. The rule should permit cardholders to better
predict how their actions will affect their costs and benefits.
Presently, they cannot do so effectively.[^187] The final rule should
also promote the safe and sound operation of institutions that issue
credit cards by better aligning the interests of the financial markets
and consumers to ensure that credit card loans will be repaid.

[Regulatory Background]{.underline}

OTS issued an Advance Notice of Proposed Rulemaking on August 6, 2007,
requesting comment on possible changes to its rules under section 5 of
the FTC Act. [See]{.underline} 72 FR 43570 (OTS ANPR). OTS received
comments from consumers, the industry and Congress. Industry commenters
suggested that OTS should use guidance rather than rules, arguing OTS
would create an unlevel playing field for OTS-regulated institutions and
that uniformity among the federal banking agencies and the NCUA is
essential, and that the possible practices listed in the ANPR were
neither unfair nor deceptive under the FTC standards.

In contrast, the consumer commenters urged OTS to move ahead with a rule
that would combine the FTC's principles-based standards with
prohibitions on specific practices. They urged OTS to ban numerous
practices, including several practices addressed in the final rule, such
as "universal default" repricing, applying payments first to balances
with the lowest interest rate, and credit cards marketed at subprime
consumers that provide little available credit at account opening.

[The May 2008 Proposal]{.underline}

To address the issue of lack of uniformity if only OTS issued a rule,
and to best ensure that all entities that offer consumer credit card
accounts and overdraft services on deposit accounts are treated in a
like manner, the OTS, Board, and NCUA joined together to issue the May
2008 Proposal.[^188] This proposal was based on outreach conducted by
the Agencies, consumer testing and Congressional hearings.[^189] It was
accompanied by complementary proposals by the Board under Regulation Z
with respect to consumer credit card accounts and Regulation DD with
respect to deposit accounts.[^190]

[The Final Rule]{.underline}

A description of the five provisions in this final rule follows. It
includes observations about how each provision responds to a specific
unfair practice.

First, § 535.22 prohibits savings associations from treating a payment
as late for any purpose unless consumers have been provided a reasonable
amount of time to make that payment. The rule provides that 21 days is a
safe harbor. Consumers have complained that they encountered situations
where they did not have enough time to make payments and that this was
an unfair practice. This provision will prevent card issuers from
providing an insufficient time for consumers to make payments, and then
charging fees or increasing interest rates because the payment was late.
The largest issuers under OTS supervision already provide at least a 20
day period to pay.

Second, when an account has balances with different annual percentage
rates, § 535.23 requires savings associations to allocate amounts paid
in excess of the minimum payment using one of two specified methods:
either allocating the excess payment to the highest interest balance or
proportionately to all balances. This provision addresses the unfairness
that consumers experience when they accept low-rate promotional offers,
but do not appreciate that card issuers now allocate their payments to
minimize the benefits of the offer and maximize interest charges.

Third, § 535.24 prohibits savings associations from increasing the APR
during the first year unless the planned increase has been disclosed at
account opening, the APR varies with an index, the card holder fails to
pay within 30 days of the due date, or the card holder fails to comply
with a workout arrangement. After the first year, the rule also allows
savings associations to increase the annual percentage rate on
transactions that occur more than seven days after the institution
provides a notice of the APR increase under Regulation Z. This section
addresses the unfairness consumers experience when a creditor increases
interest rates at any time and for any reason, and where a creditor
applies a new rate to purchases that have already been made. The rule
will allow consumers to more accurately estimate their costs and to
predict the consequences of their decisions and actions.

Fourth, § 535.25 prohibits savings associations from using the practice
sometimes referred to as two-cycle billing, in which, as a result of the
loss of a grace period, a savings association imposes finance charges
based on balances associated with previous billing cycles. Research
conducted by the Board showed that consumers do not understand
disclosures that attempt to explain this billing practice. As a result,
consumers could not avoid cards that feature this practice. However,
this practice is now rare, especially for OTS-supervised issuers.

Fifth, to address concerns regarding subprime credit cards with high
fees and low credit limits, § 535.26 prohibits savings associations from
charging to the account security deposits and fees for the issuance or
availability of credit that constitute a majority of the initial credit
limit in the first year or more than 25 percent of the initial credit
limit in the first month. In addition the rule requires that if the fees
and security deposit charges exceed 25% of the available credit,
repayment would be spread over at least the first six months. These
cards impose multiple fees when the consumer opens the card account and
those amounts are billed to the consumer in the first statement. These
large initial billings substantially reduce the amount of credit that
the consumer has available on the card. For example, a card with a
credit line of \$250 may have only \$100 available after security
deposits or fees have been billed and consumers will pay interest on
these billings until they are paid in full. Consumers have complained
that they were not aware of how little available credit they would have
after the assessment of security deposits and fees. This rule prevents
this practice and provides that consumers will have a sizeable
percentage of the initial credit on the card available for use.

2\. **[The costs and benefits of the rule, consistency with statutory
mandate and non-interference with State, local and tribal
governments.]{.underline}**

[Costs and Benefits]{.underline}

Both the costs and the benefits of the rule are difficult to measure
with precision. As noted above, OTS has relied on cost projections
submitted by industry commenters, but has reduced these estimates where
they appear to be overstated. Benefits, such as protecting consumers
from unfairness, are more intangible and more difficult to quantify.
Moreover, the monetary costs and benefits of this rule have a net effect
in some important ways. The approach taken by the OTS with respect to
these issues is explained in subsequent sections of this statement.

[Consistency with Statutory Mandate and Non-interference with State,
Local and Tribal Governments]{.underline}

Section 18(f)(1) of the FTC Act provides that OTS (with respect to
savings associations), as well as the Board (with respect to banks) and
the NCUA (with respect to federal credit unions) are responsible for
prescribing "regulations defining with specificity \* \* \* unfair or
deceptive acts or practices, and containing requirements prescribed for
the purpose of preventing such acts or practices."[^191] The FTC Act
allocates responsibility for enforcing compliance with regulations
prescribed under section 18 with respect to savings associations, banks,
and federal credit unions among OTS, the Board, and NCUA, as well as the
OCC and FDIC.[^192] Consistent with the FTC Act, this final rule is
intended to prevent the unfair practices discussed more fully elsewhere
in the **SUPPLEMENTARY INFORMATION**.

Also, as discussed in the **SUPPLEMENTARY INFORMATION** that accompanied
the OTS August 6, 2007 ANPR,[^193] reflected in the proposed rule,[^194]
and explained in detail in the **SUPPLEMENTARY INFORMATION** to today's
issuance, HOLA serves as an independent basis for the final OTS final
rule. HOLA provides authority for both safety and soundness and consumer
protection regulations. Consistent with HOLA, this final rule is
intended to prevent unsafe and unsound practices and to protect
consumers as discussed more fully elsewhere in the **SUPPLEMENTARY
INFORMATION**.

Issuing the rule on an interagency basis is consistent with section 303
of the Riegle Community Development and Regulatory Improvement Act of
1994.[^195] Section 303(a)(3)[^196] directs the federal banking agencies
to work jointly to make uniform all regulations and guidelines
implementing common statutory or supervisory policies. Two federal
banking agencies---the Board and OTS---are primarily implementing the
same statutory provision, section 18(f) of the FTC Act, as is the NCUA.
Accordingly, the Agencies endeavored to finalize rules that are as
uniform as possible. This rule will have no undue not interference with
State, local, or tribal governments in the exercise of their
governmental functions. 

**3. [Benefits of the regulation ]{.underline}**

The most important benefit of the rule is that it will protect consumers
from certain practices that meet well established standards for
unfairness. In so doing, the rule will increase consumer confidence in
the financial system.

Since the rule was proposed in May 2008, exigent market circumstances
have arisen which necessitate immediate liquidity in consumer credit
cards. These circumstances are reflected in the announcement on November
25, 2008 of the Treasury Department and Federal Reserve Board Term
Asset-Backed Securities Loan Facility (TALF) program.[^197] This final
rule furthers liquidity in the consumer credit card market by providing
certainty to the industry, consumers, and other members of the public as
to rules governing such transactions in the future. In addition, OTS
anticipates that provisions of the final rule that are designed to
ensure greater safety and soundness for financial institutions may also
yield a beneficial economic result for the taxpayers who ultimately bear
the cost of a program such as the TALF, which will make and insure loans
backed by credit card securities.

However, because this rule provides more rationality and integrity to
the credit card system, its broader benefits are more qualitative than
quantitative. For example, the rule will promote more efficient
functioning of the economy by creating more transparency for consumers
as they make credit card agreements. Consumers currently are confused by
the complexity of credit card agreements, and are surprised by
unexpected terms. In several of the areas addressed by the rule,
disclosures have been inadequate to make the terms understandable.[^198]
Consequently, the clear standards set by this rule will promote more
efficient credit decisions by consumers.

The monetary costs and benefits of this rule have a net effect.
Particularly as a result of the payment allocation and retroactive rate
increase provisions, some card issuers will experience reduced revenues
and additional expenses, but the cost of credit will be substantially
reduced for many consumers. Moreover, the rule will create stability,
predictability, and standardization in the credit card market and its
receivables, and will help foster steady sources of funding that would
otherwise avoid some risk and uncertainty.

Another benefit of the rule is that it will create a uniform playing
field for credit card issuers, not only because the federal financial
regulators are issuing consistent rules, but also because of its
clarity. As the Board and the NCUA are simultaneously issuing virtually
identical rules governing credit card practices for other types of
federally insured financial institutions, the OTS final rule will ensure
that consistent rules apply among banks, federal credit unions, and
savings associations.

Significantly, issuers that have tried to provide better and clearer
terms for consumers will no longer face a competitive disadvantage for
doing so. Consumers will have more confidence in the credit card system
because of the uniform protections.[^199]

By substantially limiting behavioral risk pricing, the rule will foster
more efficient risk-based pricing by credit card issuers at the initial
underwriting stage. Consequently, this rule will improve credit risk
management. Issuer interest in assessing the cost of risk will be more
closely aligned with the consumer interest in taking on more credit and
being able to repay it.

Finally, because the rule clearly defines several examples of unfair
practices, the federal financial institution regulatory agencies will be
able to monitor and supervise the credit card market more efficiently.
Similarly, the reduced uncertainty will simplify issuer efforts to act
in compliance with the law.

4.  **[Anticipated costs of the regulation.]{.underline}**

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

> [Limited economic effect: several affected practices are
> uncommon]{.underline}

The majority of the practices covered by this rulemaking have been
included as a prophylactic measure to ensure that institutions do not
begin to use or expand the use of activities deemed unfair or deceptive.
Since most OTS-supervised institutions do not currently engage in these
practices, the costs of complying with the provisions of the final rules
are likely to be minimal.

[Unfair time to make payments]{.underline}. This section prohibits
treating a payment on a consumer credit card account as late for any
purpose unless consumers have been provided a reasonable amount of time
to make payment with 21 days serving as a safe harbor.

Although some commenters indicated that implementing this provision
would entail operational costs, OTS supervisory observations and
experience indicates that most savings associations generally mail or
deliver periodic statements to their customers at least 20 days before
the due date, including the ten largest.[^202] Therefore, a rule that
requires institutions to provide a reasonable amount of time to make
payment, such as by complying with the safe harbor for mailing or
delivering periodic statements to customers at least 21 days in advance
of the payment due date, should have insignificant or no economic impact
on institutions under OTS jurisdiction.

[Unfair balance computation method]{.underline}. OTS has adopted this
section substantially as proposed in May 2008. It prohibits institutions
from imposing finance charges on consumer credit card accounts based on
balances for days in billing cycles that precede the most recent billing
cycle. This rule is intended to prohibit the balance computation method
sometimes referred to as "two-cycle billing" or "double-cycle billing."
The final rule contains an added exception permitting adjustments to
finance charges following the return of a payment for insufficient
funds.

OTS notes that many institutions no longer use the two-cycle balance
computation method and very few institutions compute balances using any
method other than a single-cycle method and according to the Government
Accountability Office, of the six largest card issuers, only two used
the double-cycle billing method between 2003 and 2005.[^203] Because few
other institutions still use this practice,[^204] the prohibition on
two-cycle billing should not have a significant impact on institutions
under OTS jurisdiction.

[Unfair charging to the account of security deposits and fees for the
issuance or availability of credit]{.underline}. This section prohibits
institutions from charging high security deposits and fees for issuing a
credit card to the account's credit limit if those fees amounted to more
than half of the credit available over the first year. Further, those
fees cannot exceed 25% of the available credit in the first month; fees
above that limit would have to be spread out over at least the first 6
months.

This section does not apply to security deposits and fees for the
issuance or availability of credit that are not charged to the account,
[i.e.]{.underline}, not financed through the credit card, except to the
extent such an arrangement is a mere evasion of the prohibition.
Further, this provision does not set any ceiling on the amount of
security deposits and fees that may be charged to the account. Rather,
any limit is calculated as a percentage of the credit line (a majority
or 25%) and changes with the credit line. Since the rule does not limit
the credit line that a creditor may offer on high fee accounts, it
necessarily does not set a ceiling on the security deposits or fees,
either. The final rule contains a new paragraph (d) prohibiting evasions
of the section. The paragraph is modeled after the anti-evasion
provisions in Regulation Z.[^205]

Credit cards to which security deposits and high account opening related
fees are charged against the credit line are found predominately in the
subprime credit card market, [i.e.]{.underline}, the market that targets
borrowers with lower credit scores. Many of these consumers will incur
significantly lower fees as a result of this provision.

As noted above, savings associations have only a 3.5% share of the
credit card market generally.[^206] Subprime credit cards represent just
5% of all credit cards issued,[^207] and high fee cards represent only a
portion of the subprime market. Among OTS-supervised institutions, cards
of this type are rare. In fact, based on OTS supervisory observations
and experience, only two savings associations currently offer such cards
and those product lines are a small part of their business.

Based on one commenter's estimate, this provision of the rule would mean
these OTS-supervised subprime issuers would receive as much as
\$10,948,000 less revenue.[^208] This estimate is based on the rule as
it was proposed, with a repayment schedule spread over 12 months. The
final rule allows the repayment period to be shortened to six months.
This shorter time would mitigate some of the estimated lost revenue. The
commenter's estimate assumes that the issuers will experience higher
losses from making more credit available to consumers with blemished
credit histories, and it assumes that the issuers will make no changes
in the way that they acquire new accounts as a result of the rule.
However, with better underwriting, issuers should be able to target
customers who are less likely to default and thereby limit their losses.
Another strategy to limit loss would be to offer consumers smaller lines
of credit. In sum, the limited economic impact noted above may be
overstated.

[Economic effect that appears to trigger the requirements of Executive
Order 12866]{.underline}

This final rule contains two other sections with a greater economic
impact. One affects the way in which an institution allocates customer
payments among the customer's outstanding balances. The other specifies
the conditions under which an institution can raise the APR on
outstanding balances.

[Unfair payment allocations]{.underline}. A consumer may have multiple
balances on a consumer credit card account, each with a different
interest rate. Currently, most institutions allocate payments they
receive from a consumer by first covering fees and finance charges, then
allocating any remaining amount from the lowest APR balance to the
highest. In May 2008, OTS proposed this section in response to concerns
that, by following this practice, institutions were applying consumers'
payments in a way that inappropriately maximized interest charges on
consumer credit card accounts by not allocating payments to balances
that accrue interest at higher rates unless all balances are paid in
full. Commenters noted that some institutions would have to alter their
systems and in some cases develop new systems for allocating payments
among different balances, although the cost of such changes is not known
and will depend on the size of the institution and the composition of
its portfolio. Commenters further noted that this provision would
discourage promotional rate offers to consumers and would affect the
institutions' interest revenue. Finally, commenters predicted that
issuers would compensate by increasing costs or decreasing credit
available to consumers.

Based on the comments received and OTS's analysis, the final rule adopts
the general payment allocation rule as proposed with a few important
changes to reduce burden and cost to the industry. This section will
prohibit institutions from allocating payments above the minimum
required to the balance with the lowest rate first. It will allow
institutions to split such payments pro rata among the balances or to
allocate them to the balance with the highest rate first. The costs of
this rule are mitigated somewhat by providing institutions with
flexibility as to which of the allocation methods they choose. In
addition, by allowing institutions to have a general rule for allocating
payments to all balances, including promotional balances, the costs to
institutions have been reduced.

Due to concerns that this section as proposed could significantly reduce
or eliminate promotional rate offers, OTS has modified this provision.
For the most part, this is because commenters supplied data that
indicates that promotional rates provide an overall benefit to consumers
in addition to the marketing benefits that such rates provide to
institutions. Consequently, OTS believes that applying the general
allocation rule to promotional rate balances strikes the appropriate
balance by preserving promotional rate offers that provide substantial
benefits to consumers while prohibiting the most harmful payment
allocation practices. Accordingly, the final rule, unlike the proposal,
does not require payments above the minimum payment to be applied to
promotional rate balances last, after other balances are paid.

Commenters indicated that this provision may affect institutions'
interest revenue. Based on a projection for the total industry by a
group of credit card issuers representing 70% of outstanding balances,
the Board has estimated that this rule could result in an annual loss in
interest revenue of \$415 million.[^209] Savings associations currently
account for a 3.5 percent share of total credit card receivables.[^210]
The estimated loss of revenue for savings associations under this
provision could be as high as \$14,525,000.[^211] However, neither the
OTS nor the Board has the data necessary to quantify the economic impact
of this provision with specificity. Notably, the commenter did not
provide adequate information to validate its assertions.

It should also be noted that while this provision will significantly
reduce interest charges that consumers will pay, removing requirements
in the proposed rule regarding promotional rate balances will mitigate
this effect by reducing the estimated impact on interest revenue.
Moreover, to the extent that the payment allocation restrictions
included in the rule impose costs, institutions are likely to adjust
initial credit card terms to reflect those costs. If this occurs,
consumers will likely have a clearer initial disclosure of potential
costs with which to compare credit card offerings than they do now.
Their actual cost of credit will not be increased by low- to-high
balance payment allocation strategies implemented by institutions after
charges have been incurred.

[Unfair annual percentage rate increases]{.underline}. This section
generally prohibits institutions from increasing the annual percentage
rate on any balance the first year and on outstanding balances
thereafter. For new accounts, institutions would be prohibited from
increasing the APR during the first year unless the APR varies with an
index, the card holder fails to pay within 30 days of the due date, or
the card holder fails to comply with a workout arrangement. After the
first year, the rule also allows savings associations to increase the
annual percentage rate on transactions that occur more than seven days
after the institution provides a notice of the APR increase under
Regulation Z. Nothing in the final rule prohibits issuers from imposing
late charges or other sanctions short of increasing the APR.

The rule will not permit the institution to increase the APR on the
outstanding balances if the consumer defaults on other debt obligations.
This practice is sometimes referred to as "universal default." Based on
OTS supervisory observations and experience, none of the larger savings
associations practice universal default. The final rule will also
require issuers to adjust the manner in which they offer deferred
interest rate balances to ensure that consumers are not unfairly
surprised by the assessment of deferred interest.

A group of credit card issuers representing 70% of outstanding balances
submitted a comment which projected that the overall cost to the
industry of this provision of the rule as proposed would result in an
annual loss in interest revenue of 0.872 percent, or \$7.40 billion.
This analysis stated that banks will compensate for a loss in interest
revenue by increasing rates and/or decreasing available credit for
consumers. Even assuming this analysis is accurate, the OTS, Board, and
NCUA believe that the revisions to the proposed rule may decrease the
estimated impact on interest revenue by more than 70 percent (to an
annual loss of interest revenue of 0.242 percent, or approximately
\$2.05 billion) and, therefore, result in a proportionately lower impact
on consumers.[^212] However this lower projection may still be
overstated because some of the impact asserted by the commenter is
attributable to disclosure requirements of Regulation Z. These
Regulation Z requirements, implemented by the Board, require advance
notice to consumers of increased rates and delay implementation of
increased rates for 45 days.

Applying these estimates to institutions under OTS jurisdiction, this
provision of the final rule appears to have an economic impact on
savings associations that ranges from \$71.75 million (based on a
potential \$2.05 billion in loss of industry revenue) [^213] to \$259
million (based on loss of industry revenue of \$7.4 billion).[^214]

However, if such revenue is economically justified in a competitive
environment for the allocation of credit, then a likely longer-term
outcome will be that institutions will incorporate such economic factors
in the initial terms of credit card contracts. If that occurs, then
consumers will have clearer initial information than they currently have
on the comparative costs of credit card offerings. Consequently, the
short term disruptions to institutions caused by this rulemaking will
likely be addressed in the longer term by changes in disclosed credit
card account interest rates and fees, thus making it easier for
consumers to more easily compare and consider the costs and benefits of
different credit cards.

[Costs to consumers]{.underline}

Commenters have suggested that institutions will compensate for
potential losses in interest revenue by increasing credit card rates
and/or decreasing credit available to consumers. Even assuming this
assertion is accurate, OTS believes that the differences between the
proposed and final rules will lead to both a smaller loss of revenue for
issuers and decreased incentives for raising rates or limiting credit
offered to consumers. To the extent income to savings associations is
affected, the corresponding offset is an equally sized consumer benefit
of lower fees and interest payments. Although OTS is unable to estimate
its precise impact, OTS believes that many consumers will incur
significantly reduced interest charges as a result of the rule. As a
result, the economic effects of this rulemaking may result in transfers
from institutions to consumers, with an overall limited net effect.

[Costs to the Government]{.underline}

The costs to OTS from this rule are insignificant. OTS, like the other
federal financial regulators, conducts examinations of institutions on a
regular basis for safety, soundness and compliance with laws and
regulations. This rule will not add to that supervisory burden. To the
contrary, OTS anticipates that this rule, by clarifying some of the
prohibitions against unfair acts and practices in credit card lending
with bright line rules, will make the supervision of savings
associations more efficient, less time consuming, and less burdensome.

[Conclusion]{.underline}

Some predict that because of this rule, issuers will raise credit card
rates for consumers and lower credit limits. However, OTS believes that
many consumers will incur significantly reduced interest charges as a
result of the rule.

The costs to OTS from this rule are insignificant. In fact, this rule
will make supervision and enforcement more efficient, less time
consuming, and less burdensome.

The cost to savings associations is limited because of the small size of
the credit card market held by savings associations, the reduced impact
of this rule caused by the Agencies' decision not to finalize several
provisions, and the small number of institutions that presently employ
the practices prohibited in this rule. Although the revenue loss data
submitted by commenters has not been verified, the OTS has used it to
provide the most generous estimate of the costs of this rule. Based on
that data, the costs of this rule range between \$97,223,000 and
\$284,473,000.[^215]

5.  **[Why the final regulation is preferable to
    alternatives.]{.underline}**

> [Alternative A: OTS issues rule alone]{.underline}

In proposing this rule, OTS considered different approaches. As
suggested in the ANPR, one approach was for OTS to issue a rule under
either the FTC Act or as an expansion of OTS's Advertising rule that
would cover only OTS-supervised institutions.[^216] Industry commenters
responded that such an approach would create an unlevel playing field,
and put OTS-supervised institutions at a possible competitive
disadvantage. They argued that uniformity among the federal banking
agencies and the NCUA is essential for the efficient functioning of the
market. Consequently, the OTS has joined with the Board and NCUA to
issue rules applicable to all banks, federal credit unions, and savings
associations.[^217]

[Alternative B: Agencies issue rules that address a range of issues in a
variety of markets]{.underline}

In its ANPR, the OTS sought comment on whether it should attempt to
address a broad range of potentially unfair or deceptive practices
including those relating credit cards, residential mortgage lending,
gift cards, and deposit accounts.[^218] However, the May 2008 Proposal
focused on unfair and deceptive acts or practices involving credit cards
and overdraft services, which are generally provided only by depository
institutions such as banks, savings associations, and credit unions.
Targeting such practices fosters a level playing field and the efficient
functioning of the market.

[Alternative C: Agencies issue rules addressing all practices covered in
the May 2008 proposal]{.underline}

In the May 2008 Proposal, the Agencies proposed seven provisions under
the FTC Act regarding consumer credit card accounts and two provisions
regarding checking account overdraft services. These provisions were
intended to ensure that consumers were protected from harmful practices
that they could not reasonably avoid and have the ability to make
informed decisions about the use of credit card accounts and checking
accounts without being subjected to unfair or deceptive acts or
practices.

However, after considering the comments received, OTS has decided not to
address the practices covered by four of the proposed provisions in a
final rule at this time. These provisions concerned overdraft and
overlimit fees caused by holds, deceptive firm offers of credit, and a
provision that would have provided a mechanism for a consumer to opt out
of overdraft protection services.

The Board is issuing a proposal under Regulation E published elsewhere
in today's **Federal Register** to address overdraft and overlimit fees
caused by holds and a mechanism for a consumer to opt out of overdraft
protection services. OTS will determine whether to address these matters
in the future in light of further information that may be obtained
through the Board's Regulation E rulemaking. The Board is also
publishing a final rule under Regulation Z that will address firm offers
of credit containing a range of or multiple annual percentage rates. OTS
will also address unfair or deceptive acts or practices that are not
specifically included in today's final rule on a case-by-case basis.

[Alternative D: Agencies issue rules that address five unfair credit
card practices]{.underline}

There were more than 65,000 comments on the May 2008 Proposal, and the
overwhelming majority of these were from consumers. There were also
comments from the industry, members of Congress[^219] and other
governmental organizations. Based on the comments, outreach and
Congressional testimony, the Agencies concluded that the final rule
should contain five provisions.

[Time to make payments]{.underline}. Based on the comments of consumers
and on Congressional testimony, there were many instances of consumers
who received their statements just before the due date, and that the
consequence of late fees and higher interest was not avoidable. The
Agencies agreed that a consumer should have a reasonable time to pay. A
reasonable amount of time to pay may vary depending on the
circumstances, but if a consumer is to have the possibility of disputing
errors on the statement, that amount of time needs to be approximately
three weeks. That allows a week to receive the statement, a week to
review it, and a week for the payment to travel by mail. Shorter amounts
of time for mailing would cover the majority of consumers, but would not
adequately protect the small but significant number of consumers whose
delivery times are longer than average.

[Unfair payment allocation]{.underline}. This rule requires issuers to
allocate a consumer's payment over the required minimum to balances with
the highest interest first or proportionately to all balances. This
provision was a response to concerns that institutions applied
consumers' payments in a manner that inappropriately maximized interest
charges on consumer credit card accounts with balances at different
interest rates. Interest charges were maximized by applying payments to
balances with the lowest interest rate. The Agencies considered an
exception for promotional rate balances, so that they would not be paid
down and thereby lose the benefit of the promotional rate. However, the
Agencies decided not to pursue that alternative because it would
discourage promotional balance offers, and such offers are a significant
benefit to consumers. The Agencies also considered an exception for
deferred interest balances, but the need for this exception is negated
by the final rule's restriction on the manner in which deferred interest
rate balances are offered. The Agencies also considered using consumer
disclosures as an alternative to this rule. After extensive testing by
the Board, it became clear that consumers did not understand payment
allocation practices and could not make informed decisions on using
credit cards for different types of transactions.

[Unfair annual percentage rate increases]{.underline}. The rule will
prohibit credit card issuers from increasing interest rates during the
first year unless the planned increase has been disclosed at account
opening, the annual percentage rate varies with an index, the card
holder fails to pay within 30 days of the due date, or the card holder
fails to comply with a workout arrangement. After the first year, the
rule also allows card issuers to increase the annual percentage rate on
transactions that occur more than seven days after the institution
provides a notice of the annual percentage rate increase under
Regulation Z. This rule was a response to changes in credit card terms
that consumers either did not expect or could not avoid. Some changes in
terms were a response to a consumer's lowered credit score -- caused by
actions unrelated to the credit card account (universal default). Some
changes were a response to a payment that was late by a day (hair
trigger penalty repricing). Some changes in terms were based on a credit
card issuer's changed business circumstances (any time any reason
repricing). Consumer testing showed that many consumers did not
understand what factors, such as one late payment, can trigger penalty
pricing.

Many consumer commenters, as well as consumer groups, members of
Congress, the FDIC, two state attorneys general and a state consumer
protection agency supported the proposal to limit repricing except in
very limited situations. Some advocated providing the consumer with a
right to opt-out of interest rate increases.

The injury to consumers of having their interest rate increased
substantially is difficult for most consumers to avoid. There are
several circumstances that give rise to interest rate changes: market
conditions (unrelated to consumer behavior), consumer default on an
unrelated account, using a large proportion of the available credit, or
late payment or overlimit charges. It is only the last two that are
violations of the card agreement. Most consumers would not avoid the
rate increase because they would not expect it in the circumstances
described.

The Agencies considered, and rejected the alternative proposed by some
commenters to allow a consumer to "opt out" of the card relationship by
closing it and transferring the balance. This was not a good alternative
because it may not be possible for a consumer to close the card and
transfer the balance to a comparable rate card without paying a transfer
fee. The Agencies considered the impact on credit card issuers by
limiting this rule to apply to outstanding balances, not to new
purchases, except for the first year an account is open.

The Agencies considered requiring the use of disclosures to inform
consumers about the triggers for repricing. However, it was clear, based
on consumer testing, that consumers did not understand how the triggers
work, and consumers do not focus on the possibility of default at the
time they open accounts. More importantly, disclosures would not allow
consumers to avoid credit cards with this feature, since institutions
almost uniformly apply increased rates to prior transactions.

[Unfair balance computation method]{.underline}. The final rule
prohibits "double-cycle" billing -- charging interest on credit card
balances for the days preceding the most recent billing cycle. The
effect on a consumer is to lose the grace period for paying the full
balance when a consumer who normally pays in full pays less than the
full balance one month. This rule prohibits this practice because it is
so difficult for consumers to understand. The Agencies considered the
alternative of disclosures. However, after extensive consumer testing by
the Board, it became clear that it was not possible to disclose this
practice so that consumers could understand it.

[Unfair charging to the account of security deposits and fees for the
issuance or availability of credit]{.underline}. This rule prohibits a
credit card issuer from charging fees or security deposits to an account
that use up more than the majority of the available credit. If the fees
amount to more than 25% of the initial available credit, their repayment
must be spread out over at least six months. These cards are called high
fee accounts, or derogatorily, "fee-harvester cards."

The Agencies have received many complaints from consumers about these
cards from consumers who say they were not aware of how little available
credit they would have after the security deposit and fees were charged
to the card. Over 70 members of Congress, several states, the Federal
Deposit insurance Corporation and the Office of the Comptroller of the
Currency supported this provision. Many commenters wanted to add more
prohibitions to this rule, by lowering fee thresholds, prohibiting the
charging of security deposits to the cards, enhancing disclosure and
prohibiting the marketing of these cards and credit repair products.
Many industry commenters supported this rule.

However, some commenters who are in this business asserted that they
provide credit to consumers who would otherwise be unable to obtain it.
In an effort to balance the concerns of consumers and the subprime
credit card industry, the Agencies have limited the percentage of the
fees and security deposits that can be charged to the card. This limit
is no more than the majority. In addition, the rule will require issuers
to spread repayment over the first six months if the fees and security
deposits amount to more than 25 percent of the available credit. OTS
believes that its issuers will change their underwriting, or reduce
initial credit available, in response to this rule.

[D. OTS Executive Order 13132 Determination]{.underline}

OTS has determined that its portion of the rulemaking does not have any
federalism implications for purposes of Executive Order 13132. As
discussed in § IV of this **Supplementary Information,** OTS is removing
from codification 12 CFR 535.5. This section had allowed OTS to grant
state exemptions from OTS's Credit Practices Rule if state law affords a
greater or substantially similar level of protection. The FHLBB, OTS's
predecessor agency, had granted an exemption to the State or Wisconsin
for substantially equivalent provisions of the Wisconsin Consumer Act.
By removing this section, the exemption will cease to exist on July 1,
2010, the rule's effective date. As a result, state chartered savings
associations that had previously been exempt from complying with OTS's
Credit Practices Rule with regard to their Wisconsin operations but were
required to comply with equivalent provisions of the Wisconsin Consumer
Act, will now be required to comply with both OTS's Credit Practices
Rule and the equivalent provisions of the Wisconsin Consumer Act.

[E. NCUA Executive Order 13132 Determination]{.underline}

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

[F. OTS Unfunded Mandates Reform Act of 1995 Determinations]{.underline}

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of \$100
million or more (adjusted annually for inflation) in any one year. (The
inflation adjusted threshold is \$133 million or more.) If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
also requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule.

OTS has determined that this rule will not result in expenditures by
State, local, and tribal governments in excess of the threshold but may
result in expenditures by the private sector in excess of the threshold.
Accordingly, OTS has prepared a budgetary impact statement and addressed
the regulatory alternatives considered. This is discussed further in §
VIII.C. of this **Supplementary Information** ("OTS Executive Order
12866 Analysis").

[G. NCUA: The Treasury and General Government Appropriations Act,
1999---]{.underline}

[Assessment of Federal Regulations and Policies on Families]{.underline}

NCUA has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681
(1998).

**IX. Comments on Use of Plain Language**

Section 722 of the Gramm-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 invited comment on how to make the May 2008
Proposal easier to understand.

The Agencies received only one comment in response. A credit card issuer
suggested that the proposed rules prohibiting unfair or deceptive acts
or practices with respect to consumer credit card accounts would be
easier to understand if placed with the rules governing credit cards in
the Board's Regulation Z. As discussed above, however, the Agencies have
determined that the FTC Act is the appropriate authority for issuance of
the final rule.

**List of Subjects**

**12 CFR Part 227**

Banks, Banking, Credit, Intergovernmental relations, Trade practices.

**12 CFR Part 535**

Consumer credit, Consumer protection, Credit, Credit cards, Deception,
Intergovernmental relations, Savings associations, Trade practices,
Unfairness.

**12 CFR Part 706**

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

For the reasons discussed in the joint preamble, NCUA revises part 706
of Title 12 of the Code of Federal Regulations to read as follows:

**PART 706---UNFAIR OR DECEPTIVE ACTS OR PRACTICES**

**Subpart A---General Provisions**

Sec.

706.1 Authority, purpose, and scope.

706.2-706.10 \[Reserved\]

**Subpart B--Consumer Credit Practices**

706.11 Definitions.

706.12 Unfair credit contract provisions.

706.13 Unfair or deceptive cosigner practices.

706.14 Unfair late charges.

706.15-706.20 \[Reserved\]

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

706.21 Definitions.

706.22 Unfair time to make payment.

706.23 Unfair allocation of payments.

706.24 Unfair increases in annual percentage rates.

706.25 Unfair balance computation method.

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

Appendix to Part 706 -- Official Staff Commentary

Authority: 15 U.S.C. 57a.

**§ 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) (§ 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 or deceptive acts or practices in violation of section 5(a)(1) of
the Federal Trade Commission Act, 15 U.S.C. 45(a)(1). Subparts B and C
define and contain requirements prescribed for the purpose of preventing
specific unfair or deceptive acts or practices of federal credit unions.
The prohibitions in subparts B and C do not limit NCUA's authority to
enforce the FTC Act with respect to any other unfair or deceptive acts
or practices.

\(c\) [Scope]{.underline}. This part applies to federal credit unions.

**§§ 706.2 -- 706.10 \[Reserved\]**

**Subpart B--Consumer Credit Card Account Practices Rule**

**§ 706.11 Definitions.**

For purposes of this subpart, the following definitions apply:

[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, and who applies
for or is extended [consumer credit.]{.underline}

[Consumer credit]{.underline} means credit extended to a natural person
member for personal, family, or household purposes. It includes consumer
loans; educational loans; unsecured loans for real property alteration,
repair or improvement, or for the equipping of real property; overdraft
loans; and credit cards. It also includes loans secured by liens on real
estate and chattel liens secured by mobile homes and leases of personal
property to consumers that may be considered the functional equivalent
of loans on personal security but only if the federal credit union
relies substantially upon other factors, such as the general credit
standing of the borrower, guaranties, or security other than the real
estate or mobile home, as the primary security for the loan.

[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.

[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.**

It is an unfair act or practice for a federal credit union, directly or
indirectly, to enter into a consumer credit obligation that constitutes
or contains, or to enforce in a consumer credit obligation the federal
credit union purchased, any of the following provisions:

\(a\) [Confession of judgment.]{.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).

**§ 706.13 Unfair or deceptive cosigner practices.**

\(a\) [Prohibited deception.]{.underline} It is a deceptive act or
practice for a federal credit union, directly or indirectly in
connection with the extension of credit to consumers, to misrepresent
the nature or extent of cosigner liability to any person.

\(b\) [Prohibited unfairness.]{.underline} It is an unfair act or
practice for a federal credit union, directly or indirectly in
connection with the extension of credit to consumers, to obligate a
cosigner unless the cosigner is informed, before becoming obligated, of
the nature of the cosigner's liability.

\(c\) [Disclosure requirement.]{.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 (c)(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:

\(i\) The federal credit union's 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.

**§ 706.14 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 a federal credit union, directly or indirectly, to levy
or collect any delinquency charge on a payment, when the only
delinquency is attributable to late fees or delinquency charges assessed
on earlier installments and the payment is otherwise a full payment for
the applicable period and is paid on its due date or within an
applicable grace period.

\(b\) [Collecting a debt defined.]{.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.

**§§ 706.15 -- 706.20 \[Reserved\]**

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

**§ 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.

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

\(a\) [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.

\(b\) [Compliance with general rule]{.underline}. (1) [Establishing
compliance]{.underline}. A federal credit union must be able to
establish that it has complied with paragraph (a) of this section.

\(2\) [Safe harbor]{.underline}. A federal credit union complies with
paragraph (a) of this section if it has adopted reasonable procedures
designed to ensure that periodic statements specifying the payment due
date are mailed or delivered to consumers at least 21 days before the
payment due date.

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

**§ 706.23 Unfair allocation of payments.**

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

\(a\) [High-to-low method.]{.underline} The amount paid by the consumer
in excess of the required minimum periodic payment is allocated first to
the balance with the highest annual percentage rate and any remaining
portion to the other balances in descending order based on the
applicable annual percentage rate.

\(b\) [Pro rata method]{.underline}. The amount paid by the consumer in
excess of the required minimum periodic payment is allocated among the
balances in the same proportion as each balance bears to the total
balance.

**§ 706.24 Unfair increases in annual percentage rates.**

\(a\) [General rule]{.underline}. At account opening, a federal credit
union must disclose the annual percentage rates that will apply to each
category of transactions on the consumer credit card account. A federal
credit union must not increase the annual percentage rate for a category
of transactions on any consumer credit card account except as provided
in paragraph (b) of this section.

\(b\) [Exceptions]{.underline}. The prohibition in paragraph (a) of this
section on increasing annual percentage rates does not apply where an
annual percentage rate may be increased pursuant to one of the
exceptions in this paragraph.

\(1\) [Account opening disclosure exception]{.underline}. An annual
percentage rate for a category of transactions may be increased to a
rate disclosed at account opening upon expiration of a period of time
disclosed at account opening.

\(2\) [Variable rate exception]{.underline}. An annual percentage rate
for a category of transactions that varies according to an index that is
not under the federal credit union's control and is available to the
general public may be increased due to an increase in the index.

\(3\) [Advance notice exception]{.underline}. An annual percentage rate
for a category of transactions may be increased pursuant to a notice
under 12 CFR 226.9(c) or (g) for transactions that occur more than seven
days after provision of the notice. This exception does not permit an
increase in any annual percentage rate during the first year after the
account is opened.

\(4\) [Delinquency exception]{.underline}. An annual percentage rate may
be increased due to the federal credit union not receiving the
consumer's required minimum periodic payment within 30 days after the
due date for that payment.

\(5\) [Workout arrangement exception]{.underline}. An annual percentage
rate may be increased due to the consumer's failure to comply with the
terms of a workout arrangement between the federal credit union and the
consumer, provided that the annual percentage rate applicable to a
category of transactions following any such increase does not exceed the
rate that applied to that category of transactions prior to commencement
of the workout arrangement.

\(c\) [Treatment of protected balances]{.underline}. For purposes of
this paragraph, "protected balance" means the amount owed for a category
of transactions to which an increased annual percentage rate cannot be
applied after the rate for that category of transactions has been
increased pursuant to paragraph (b)(3) of this section.

\(1\) [Repayment]{.underline}. A federal credit union must provide the
consumer with one of the following methods of repaying a protected
balance or a method that is no less beneficial to the consumer than one
of the following methods:

\(i\) An amortization period of no less than five years, starting from
the date on which the increased rate becomes effective for the category
of transactions; or

\(ii\) A required minimum periodic payment that includes a percentage of
the protected balance that is no more than twice the percentage required
before the date on which the increased rate became effective for the
category of transactions.

\(2\) [Fees and charges]{.underline}. A federal credit union must not
assess any fee or charge based solely on a protected balance.

**§ 706.25 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
balances on a consumer credit card account based on balances for days in
billing cycles that precede the most recent billing cycle as a result of
the loss of any time period provided by the federal credit union within
which the consumer may repay any portion of the credit extended without
incurring a finance charge.

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

\(1\) Adjustments to finance charges as a result of the resolution of a
dispute under 12 CFR 226.12 or 12 CFR 226.13; or

\(2\) Adjustments to finance charges as a result of the return of a
payment for insufficient funds.

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

\(a\) [Limitation for first year]{.underline}. During the first year, a
federal credit union must not charge to a consumer credit card account
security deposits and fees for the issuance or availability of credit
that in total constitute a majority of the initial credit limit for the
account.

\(b\) [Limitations for first billing cycle and subsequent billing
cycles]{.underline}. (1) [First billing cycle]{.underline}. During the
first billing cycle, the federal credit union must not charge to a
consumer credit card account security deposits and fees for the issuance
or availability of credit that in total constitute more than 25 percent
of the initial credit limit for the account.

\(2\) [Subsequent billing cycles]{.underline}. Any additional security
deposits and fees for the issuance or availability of credit permitted
by paragraph (a) of this section must be charged to the account in equal
portions in no fewer than the five billing cycles immediately following
the first billing cycle.

\(c\) [Evasion prohibited]{.underline}. A federal credit union must not
evade the requirements of this section by providing the consumer
additional credit to fund the payment of security deposits and fees for
the issuance or availability of credit that exceed the total amounts
permitted by paragraphs (a) and (b) of this section.

\(d\) [Definitions]{.underline}. For purposes of this section, the
following definitions apply:

\(1\) [Fees for the issuance or availability of credit]{.underline}
means:

\(i\) Any annual or other periodic fee that may be imposed for the
issuance or availability of a consumer credit card account, including
any fee based on account activity or inactivity; and

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

\(2\) [First billing cycle]{.underline} means the first billing cycle
after a consumer credit card account is opened.

\(3\) [First year]{.underline} means the period beginning with the date
on which a consumer credit card account is opened and ending twelve
months from that date.

\(4\) [Initial credit limit]{.underline} means the credit limit in
effect when a consumer credit card account is opened.

**Appendix to Part 706---Official Staff Commentary**

**Subpart A---General Provisions for Consumer Protection Rules**

Section 706.1---Authority, Purpose, and Scope

1(c) Scope

1\. [Penalties for noncompliance]{.underline}. Administrative
enforcement of the rule for federal credit unions may involve actions
under section 206 of the Federal Credit Union Act (12 U.S.C. 1786),
including cease-and-desist orders requiring that actions be taken to
remedy violations and civil money penalties.

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

Section 706.22---Unfair Time To Make Payment

22(a) General Rule

1\. [Treating a payment as late for any purpose]{.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 federal credit
union. Under § 706.22(b)(2), a federal credit union provides a
reasonable amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements specifying the
payment due date are mailed or delivered to consumers at least 21 days
before the payment due date.

22(b) Compliance with General Rule

1\. [Reasonable procedures]{.underline}. A federal credit union is not
required to determine the specific date on which periodic statements are
mailed or delivered to each consumer. A federal credit union provides a
reasonable amount of time to make a payment if it has adopted reasonable
procedures designed to ensure that periodic statements are mailed or
delivered to consumers no later than a certain number of days after the
closing date of the billing cycle and adds that number of days to the
21-day period in § 706.24(b)(2) when determining the payment due date.
For example, if a federal credit union has adopted reasonable procedures
designed to ensure that periodic statements are mailed or delivered to
consumers no later than three days after the closing date of the billing
cycle, the payment due date on the periodic statement must be no less
than 24 days after the closing date of the billing cycle.

2\. [Payment due date]{.underline}. For purposes of § 706.22(b)(2),
"payment due date" means the date by which a federal credit union
requires the consumer to make the required minimum periodic payment in
order to avoid being treated as late for any purpose, except as provided
in § 706.22(c).

3\. [Example of alternative method of compliance]{.underline}. Assume
that, for a particular type of consumer credit card account, a federal
credit union only provides periodic statements electronically and only
accepts payments electronically, consistent with applicable law and
regulatory guidance. Under these circumstances, the federal credit union
could comply with § 706.22(a) even if it does not provide periodic
statements 21 days before the payment due date consistent with
§ 706.22(b)(2).

Section 706.23---Unfair Allocation of Payments

1\. [Minimum periodic payment]{.underline}. Section 706.23 addresses the
allocation of amounts paid by a consumer in excess of the minimum
periodic payment required by a federal credit union. Section 706.23 does
not limit or otherwise address a federal credit union's ability to
determine, consistent with applicable law and regulatory guidance, the
amount of the required minimum periodic payment or how that payment is
allocated. A federal credit union may, but is not required to, allocate
the required minimum periodic payment consistent with the requirements
in § 706.23 to the extent consistent with other applicable law or
regulatory guidance.

2\. [Adjustments of one dollar or less permitted]{.underline}. When
allocating payments, a federal credit union may adjust amounts by one
dollar or less. For example, if a federal credit union is allocating
\$100 pursuant to § 706.23(b) among balances of \$1,000, \$2,000, and
\$4,000, the federal credit union may apply \$14 to the \$1,000 balance,
\$29 to the \$2,000 balance, and \$57 to the \$4,000 balance.

3\. [Applicable balances and annual percentage rates]{.underline}.
Section 706.23 permits a federal credit union to allocate an amount paid
by the consumer in excess of the required minimum periodic payment based
on the balances and annual percentage rates on the date the preceding
billing cycle ends, on the date the payment is credited to the account,
or on any day between those two dates. For example, assume that the
billing cycles for a consumer credit card account start on the first day
of the month and end on the last day of the month. On the date the March
billing cycle ends, March 31, the account has a purchase balance of
\$500 at a variable annual percentage rate of 10% and a cash advance
balance of \$200 at a variable annual percentage rate of 13%. On April
1, the rate for purchases increases to 13% and the rate for cash
advances increases to 15% consistent with § 706.24(b)(2). On April 15,
the purchase balance increases to \$700. On April 25, the federal credit
union credits to the account \$400 paid by the consumer in excess of the
required minimum periodic payment. Under § 706.23, the federal credit
union may allocate the \$400 based on the balances in existence and
rates in effect on any day from March 31 through April 25.

4\. [Use of permissible allocation methods]{.underline}. A federal
credit union is not prohibited from changing the allocation method for a
consumer credit card account or from using different allocation methods
for different consumer credit card accounts, so long as the methods used
are consistent with § 706.23. For example, a federal credit union may
change from allocating to the highest rate balance first pursuant to §
706.23(a) to allocating pro rata pursuant to § 706.23(b) or vice versa.
Similarly, a federal credit union may allocate to the highest rate
balance first pursuant to § 706.23(a) on some of its accounts and
allocate pro rata pursuant to § 706.23(b) on other accounts.

5\. [Claims or defenses under Regulation Z, 12 CFR
226.12(c)]{.underline}. When a consumer has asserted a claim or defense
against the card issuer pursuant to 12 CFR 226.12(c), a federal credit
union must allocate consistent with 12 CFR 226.12 comment 226.12(c)-4.

6\. [Balances with the same annual percentage rate]{.underline}. When
the same annual percentage rate applies to more than one balance on an
account and a different annual percentage rate applies to at least one
other balance on that account, § 706.23 does not require that a federal
credit union use any particular method when allocating among the
balances with the same annual percentage rate. Under these
circumstances, a federal credit union may treat the balances with the
same rate as a single balance or separate balances. [See]{.underline}
comments 23(a)-1.iv and 23(b)-2.iv.

23(a) High-to-Low Method

1\. [Examples]{.underline}. For purposes of the following examples,
assume that none of the required minimum periodic payment is allocated
to the balances discussed, unless otherwise stated.

i\. Assume that a consumer's account has a cash advance balance of \$500
at an annual percentage rate of 15% and a purchase balance of \$1,500 at
an annual percentage rate of 10% and that the consumer pays \$800 in
excess of the required minimum periodic payment. A federal credit union
using this method would allocate \$500 to pay off the cash advance
balance and then allocate the remaining \$300 to the purchase balance.

ii\. Assume that a consumer's account has a cash advance balance of
\$500 at an annual percentage rate of 15% and a purchase balance of
\$1,500 at an annual percentage rate of 10% and that the consumer pays
\$400 in excess of the required minimum periodic payment. A federal
credit union using this method would allocate the entire \$400 to the
cash advance balance.

iii\. Assume that a consumer's account has a cash advance balance of
\$100 at an annual percentage rate of 15%, a purchase balance of \$300
at an annual percentage rate of 13%, and a \$600 protected balance on
which the 10% annual percentage rate cannot be increased pursuant to §
706.24. If the consumer pays \$500 in excess of the required minimum
periodic payment, a federal credit union using this method would
allocate \$100 to pay off the cash advance balance, \$300 to pay off the
purchase balance, and \$100 to the protected balance.

iv\. Assume that a consumer's account has a cash advance balance of
\$500 at an annual percentage rate of 15%, a purchase balance of \$1,000
at an annual percentage rate of 12%, and a transferred balance of
\$2,000 that was previously at a discounted annual percentage rate of 5%
but is now at an annual percentage rate of 12%. Assume also that the
consumer pays \$800 in excess of the required minimum periodic payment.
A federal credit union using this method would allocate \$500 to pay off
the cash advance balance and allocate the remaining \$300 among the
purchase balance and the transferred balance in the manner the federal
credit union deems appropriate.

23(b) Pro Rata Method

1\. [Total balance]{.underline}. A federal credit union may, but is not
required to, deduct amounts paid by the consumer's required minimum
periodic payment when calculating the total balance for purposes of §
706.23(b)(3). [See]{.underline} comment 23(b)-2.iii.

2\. [Examples]{.underline}. For purposes of the following examples,
assume that none of the required minimum periodic payment is allocated
to the balances discussed, unless otherwise stated, and that the amounts
allocated to each balance are rounded to the nearest dollar.

i\. Assume that a consumer's account has a cash advance balance of \$500
at an annual percentage rate of 15% and a purchase balance of \$1,500 at
an annual percentage rate of 12% and that the consumer pays \$555 in
excess of the required minimum periodic payment. A federal credit union
using this method would allocate 25% of the amount (\$139) to the cash
advance balance and 75% of the amount (\$416) to the purchase balance.

ii\. Assume that a consumer's account has a cash advance balance of
\$100 at an annual percentage rate of 15%, a purchase balance of \$300
at an annual percentage rate of 13%, and a \$600 protected balance on
which the 10% annual percentage rate cannot be increased pursuant to §
706.24. If the consumer pays \$130 in excess of the required minimum
periodic payment, a federal credit union using this method would
allocate 10% of the amount (\$13) to the cash advance balance, 30% of
the amount (\$39) to the purchase balance, and 60% of the amount (\$78)
to the protected balance.

iii\. Assume that a consumer's account has a cash advance balance of
\$300 at an annual percentage rate of 15% and a purchase balance of
\$600 at an annual percentage rate of 13%. Assume also that the required
minimum periodic payment is \$50 and that the federal credit union
allocates this payment first to the balance with the lowest annual
percentage rate, the \$600 purchase balance. If the consumer pays \$300
in excess of the \$50 minimum payment, a federal credit union using this
method could allocate based on a total balance of \$850, consisting of
the \$300 cash advance balance plus the \$550 purchase balance after
application of the \$50 minimum payment. In this case, the federal
credit union would apply 35% of the \$300 (\$105) to the cash advance
balance and 65% of that amount (\$195) to the purchase balance. In the
alternative, the federal credit union could allocate based on a total
balance of \$900, which does not reflect the \$50 minimum payment. In
that case, the federal credit union would apply one-third of the \$300
excess payment (\$100) to the cash advance balance and two-thirds
(\$200) to the purchase balance.

iv\. Assume that a consumer's account has a cash advance balance of
\$500 at an annual percentage rate of 15%, a purchase balance of \$1,000
at an annual percentage rate of 12%, and a transferred balance of
\$2,000 that was previously at a discounted annual percentage rate of
5%, but is now at an annual percentage rate of 12%. Assume also that the
consumer pays \$800 in excess of the required minimum periodic payment.
A federal credit union using this method would allocate 14% of the
excess payment (\$112) to the cash advance balance and allocate the
remaining 86% (\$688) among the purchase balance and the transferred
balance in the manner the federal credit union deems appropriate.

Section 706.24---Unfair Increases in Annual Percentage Rates

1\. [Relationship to Regulation Z, 12 CFR part 226]{.underline}. A
federal credit union that complies with the applicable disclosure
requirements in Regulation Z, 12 CFR part 226, has complied with the
disclosure requirements in § 706.24. [See]{.underline} 12 CFR 226.5a,
226.6, 226.9. For example, a federal credit union may comply with the
requirement in § 706.24(a) to disclose at account opening the annual
percentage rates that will apply to each category of transactions by
complying with the disclosure requirements in 12 CFR 226.5a regarding
applications and solicitations and the requirements in 12 CFR 226.6
regarding account-opening disclosures. Similarly, in order to increase
an annual percentage rate on new transactions pursuant to
§ 706.24(b)(3), a federal credit union must comply with the disclosure
requirements in 12 CFR 226.9(c) or (g). However, nothing in § 706.24
alters the requirements in 12 CFR 226.9(c) and (g) that creditors
provide consumers with written notice at least 45 days prior to the
effective date of certain increases in the annual percentage rates on
open-end (not home-secured) credit plans.

24(a) General Rule

1\. [Rates that will apply to each category of
transactions]{.underline}. Section 706.24(a) requires federal credit
unions to disclose, at account opening, the annual percentage rates that
will apply to each category of transactions on the account. A federal
credit union cannot satisfy this requirement by disclosing at account
opening only a range of rates or that a rate will be "up to" a
particular amount.

2\. [Application of prohibition on increasing rates]{.underline}.
Section 706.24(a) prohibits federal credit unions from increasing the
annual percentage rate for a category of transactions on any consumer
credit card account unless specifically permitted by one of the
exceptions in § 706.24(b). The following examples illustrate the
application of the rule:

i\. Assume that, at account opening on January 1 of year one, a federal
credit union discloses that that the annual percentage rate for
purchases is a non-variable rate of 1% and will apply for six months.
The federal credit union also discloses that, after six months, the
annual percentage rate for purchases will be a variable rate that is
currently 9% and will be adjusted quarterly by adding a margin of
8 percentage points to a publicly-available index not under the federal
credit union's control. Finally, the federal credit union discloses that
the annual percentage rate for cash advances is the same variable rate
that will apply to purchases after six months. The payment due date for
the account is the twenty-fifth day of the month and the required
minimum periodic payments are applied to accrued interest and fees but
do not reduce the purchase and cash advance balances.

A. On January 15, the consumer uses the account to make a \$2,000
purchase and a \$500 cash advance. No other transactions are made on the
account. At the start of each quarter, the federal credit union adjusts
the variable rate that applies to the \$500 cash advance consistent with
changes in the index, pursuant to § 706.24(b)(2). All required minimum
periodic payments are received on or before the payment due date until
May of year one, when the payment due on May 25 is received by the
federal credit union on May 28. The federal credit union is prohibited
by § 706.24 from increasing the rates that apply to the \$2,000
purchase, the \$500 cash advance, or future purchases and cash advances.
Six months after account opening, July 1, the federal credit union
applies the previously-disclosed variable rate determined using an
8-point margin pursuant to § 706.24(b)(1). Because no other increases in
rate were disclosed at account opening, the federal credit union may not
subsequently increase the variable rate that applies to the \$2,000
purchase and the \$500 cash advance, except due to increases in the
index pursuant to § 706.24(b)(2). On November 16, the federal credit
union provides a notice pursuant to 12 CFR 226.9(c) informing the
consumer of a new variable rate that will apply on January 1 of year
two, calculated using the same index and an increased margin of
12 percentage points. On January 1 of year two, the federal credit union
increases the margin used to determine the variable rate that applies to
new purchases to 12 percentage points pursuant to § 706.24(b)(3). On
January 15 of year two, the consumer makes a \$300 purchase. The federal
credit union applies the variable rate determined using the 12-point
margin to the \$300 purchase but not the \$2,000 purchase.

B. Same facts as above, except that the required minimum periodic
payment due on May 25 of year one is not received by the federal credit
union until June 30 of year one. Because the federal credit union
received the required minimum periodic payment more than 30 days after
the payment due date, § 706.24(b)(4) permits the federal credit union to
increase the annual percentage rate applicable to the \$2,000 purchase,
the \$500 cash advance, and future purchases and cash advances. However,
the federal credit union must first comply with the notice requirements
in 12 CFR 226.9(g). Thus, if the federal credit union provided a 12 CFR
226.9(g) notice on June 25 stating that all rates on the account would
be increased to a non-variable penalty rate of 15%, the federal credit
union could apply that 15% rate beginning on August 9, to all balances
and future transactions.

ii\. Assume that, at account opening on January 1 of year one, a federal
credit union discloses that that the annual percentage rate for
purchases will increase as follows: a non-variable rate of 3% for six
months; a non-variable rate of 8% for an additional six months; and
thereafter a variable rate that is currently 13% and will be adjusted
monthly by adding a margin of 5 percentage points to a
publicly-available index not under the federal credit union's control.
The payment due date for the account is the fifteenth day of the month
and the required minimum periodic payments are applied to accrued
interest and fees but do not reduce the purchase balance. On January 15,
the consumer uses the account to make a \$1,500 purchase. Six months
after account opening, July 1, the federal credit union begins accruing
interest on the \$1,500 purchase at the previously-disclosed 8%
non-variable rate pursuant to § 706.24(b)(1). On September 15, the
consumer uses the account for a \$700 purchase. On November 16, the
federal credit union provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable rate that will apply on January
1 of year two, calculated using the same index and an increased margin
of 8 percentage points. One year after account opening, January 1 of
year two, the federal credit union begins accruing interest on the
\$2,200 purchase balance at the previously-disclosed variable rate
determined using a 5-point margin pursuant to § 706.24(b)(1). Because
the variable rate determined using the 8-point margin was not disclosed
at account opening, the federal credit union may not apply that rate to
the \$2,200 purchase balance. Furthermore, because no other increases in
rate were disclosed at account opening, the federal credit union may not
subsequently increase the variable rate that applies to the \$2,200
purchase balance, (except due to increases in the index pursuant to
§ 706.24(b)(2). The federal credit union may, however, apply the
variable rate determined using the 8-point margin to purchases made on
or after January 1 of year two pursuant to § 706.24(b)(3).

iii\. Assume that, at account opening on January 1 of year one, a
federal credit union discloses that the annual percentage rate for
purchases is a variable rate determined by adding a margin of 6
percentage points to a publicly-available index outside of the federal
credit union's control. The federal credit union also discloses that, to
the extent consistent with § 706.24 and other applicable law, a
non-variable penalty rate of 15% may apply if the consumer makes a late
payment. The due date for the account is the fifteenth of the month. On
May 30 of year two, the account has a purchase balance of \$1,000. On
May 31, the creditor provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer of a new variable rate that will apply on July 16
for all purchases made on or after June 8, calculated by using the same
index and an increased margin of 8 percentage points. On June 7, the
consumer makes a \$500 purchase. On June 8, the consumer makes a \$200
purchase. On June 25, the federal credit union has not received the
payment due on June 15, and provides the consumer with a notice pursuant
to 12 CFR 226.9(g) stating that the penalty rate of 15% will apply as of
August 9, to all transactions made on or after July 2. On July 4, the
consumer makes a \$300 purchase.

A. The payment due on June 15 of year two is received on June 25. On
July 17, § 706.24(b)(3) permits the federal credit union to apply the
variable rate determined using the 8-point margin to the \$200 purchase
made on June 8 but does not permit the federal credit union to apply
this rate to the \$1,500 purchase balance. On August 9, § 706.24(b)(3)
permits the federal credit union to apply the 15% penalty rate to the
\$300 purchase made on July 4, but does not permit the federal credit
union to apply this rate to the \$1,500 purchase balance, which remains
at the variable rate determined using the 6-point margin, or the \$200
purchase, which remains at the variable rate determined using the
8-point margin.

B. Same facts as above, except the payment due on September 15 of year
two is received on October 20. Section 706.24(b)(4) permits the federal
credit union to apply the 15% penalty rate to all balances on the
account and to future transactions because it has not received payment
within 30 days after the due date. However, in order to apply the 15%
penalty rate to the entire \$2,000 purchase balance, the federal credit
union must provide an additional notice pursuant to 12 CFR 226.9(g).
This notice must be sent no earlier than October 16, which is the first
day the account became more than 30 days' delinquent.

C. Same facts as paragraph A above, except the payment due on June 15 of
year two is received on July 20. Section 706.24(b)(4) permits the
federal credit union to apply the 15% penalty rate to all balances on
the account and to future transactions because it has not received
payment within 30 days after the due date. Because the federal credit
union provided a 12 CFR 226.9(g) notice on June 24 stating the 15%
penalty rate, the federal credit union may apply the 15% penalty rate to
all balances on the account as well as any future transactions on
August 9, without providing an additional notice pursuant to
12 CFR 226.9(g).

24(b) Exceptions

24(b)(1) Account Opening Disclosure Exception

1\. [Prohibited increases in rate]{.underline}. Section § 706.24(b)(1)
permits an increase in the annual percentage rate for a category of
transactions to a rate disclosed at account opening upon expiration of a
period of time that was also disclosed at account opening. Section
706.24(b)(1) does not permit application of increased rates that are
disclosed at account opening but are contingent on a particular event or
occurrence or may be applied at the federal credit union's discretion.
The following examples illustrate rate increases that are not permitted
by § 706.24(a):

i\. Assume that a federal credit union discloses at account opening on
January 1 of year one that a non-variable rate of 8% applies to
purchases, but that all rates on an account may be increased to a
non-variable penalty rate of 15% if a consumer's required minimum
periodic payment is received after the payment due date, which is the
fifteenth of the month. On March 1, the account has a \$2,000 purchase
balance. The payment due on March 15 is not received until March 20.
Section 706.24 does not permit the federal credit union to apply the 15%
penalty rate to the \$2,000 purchase balance. However, pursuant to
§ 706.24(b)(3), the federal credit union could provide a 12 CFR 226.9(c)
or (g) notice on November 16, informing the consumer that, on January 1
of year two, the 15% rate (or a different rate) will apply to new
transactions.

ii\. Assume that a federal credit union discloses at account opening on
January 1 of year one that a non-variable rate of 5% applies to
transferred balances but that this rate will increase to a non-variable
rate of 15% if the consumer does not use the account for at least \$200
in purchases each billing cycle. On July 1, the consumer transfers a
balance of \$4,000 to the account. During the October billing cycle, the
consumer uses the account for \$150 in purchases. Section 706.24 does
not permit the federal credit union to apply the 15% rate to the \$4,000
transferred balance. However, pursuant to § 706.24(b)(3), the federal
credit union could provide a 12 CFR 226.9(c) or (g) notice on November
16 informing the consumer that, on January 1 of year two, the 15% rate,
or a different rate, will apply to new transactions.

iii\. Assume that a federal credit union discloses at account opening on
January 1 of year one that interest on purchases will be deferred for
one year, although interest will accrue on purchases during that year at
a non-variable rate of 15%. The federal credit union further discloses
that, if all purchases made during year one are not paid in full by the
end of that year, the federal credit union will begin charging interest
on the purchase balance and new purchases at 15% and will retroactively
charge interest on the purchase balance at a rate of 15% starting on the
date of each purchase made during year one. On January 1 of year one,
the consumer makes a purchase of \$1,500. No other transactions are made
on the account. On January 1 of year two, \$500 of the \$1,500 purchase
remains unpaid. Section 706.24 does not permit the federal credit union
to reach back to charge interest on the \$1,500 purchase from January 1
through December 31 of year one. However, the federal credit union may
apply the previously-disclosed 15% rate to the \$500 purchase balance
beginning on January 1 of year two pursuant to § 706.24(b)(1).

2\. [Loss of grace period]{.underline}. Nothing in § 706.24 prohibits a
federal credit union from assessing interest due to the loss of a grace
period to the extent consistent with § 706.25.

3\. [Application of rate that is lower than disclosed rate]{.underline}.
Section 706.24(b)(1) permits an increase in the annual percentage rate
for a category of transactions to a rate disclosed at account opening
upon expiration of a period of time that was also disclosed at account
opening. Nothing in § 706.24 prohibits a federal credit union from
applying a rate that is lower than the disclosed rate upon expiration of
the period. However, if a lower rate is applied to an existing balance,
the federal credit union cannot subsequently increase the rate on that
balance unless it has provided the consumer with advance notice of the
increase pursuant to 12 CFR 226.9(c). Furthermore, the federal credit
union cannot increase the rate on that existing balance to a rate that
is higher than the increased rate disclosed at account opening. The
following example illustrates the application of this rule:

i\. Assume that, at account opening on January 1 of year one, a federal
credit union discloses that a non-variable annual percentage rate of 5%
will apply to purchases for one year and discloses that, after the first
year, the federal credit union will apply a variable rate that is
currently15% and is determined by adding a margin of 10 percentage
points to a publicly-available index not under the federal credit
union's control. On December 31 of year one, the account has a purchase
balance of \$3,000.

A. On November 16 of year one, the federal credit union provides a
notice pursuant to 12 CFR 226.9(c) informing the consumer of a new
variable rate that will apply on January 1 of year two, calculated using
the same index and a reduced margin of 8 percentage points. The notice
further states that, on July 1 of year two, the margin will increase to
the margin disclosed at account opening, 5 percentage points. On July 1
of year two, the federal credit union increases the margin used to
determine the variable rate that applies to new purchases to 10
percentage points and applies that rate to any remaining portion of the
\$3,000 purchase balance pursuant to § 706.24(b)(1).

B. Same facts as above, except that the federal credit union does not
send a notice on November 16 of year one. Instead, on January 1 of year
two, the federal credit union lowers the margin used to determine the
variable rate to 8 percentage points and applies that rate to the
\$3,000 purchase balance and to new purchases. 12 CFR 226.9 does not
require advance notice in these circumstances. However, unless the
account becomes more than 30 days' delinquent, the federal credit union
may not subsequently increase the rate that applies to the \$3,000
purchase balance except due to increases in the index pursuant to
§ 706.24(b)(2).

24(b)(2) Variable Rate Exception

1\. [Increases due to increase in index]{.underline}. Section
706.24(b)(2) provides that an annual percentage rate for a category of
transactions that varies according to an index that is not under the
federal credit union's control and is available to the general public
may be increased due to an increase in the index. This section does not
permit a federal credit union to increase the annual percentage rate by
changing the method used to determine a rate that varies with an index,
such as by increasing the margin, even if that change will not result in
an immediate increase.

2\. [External index]{.underline}. A federal credit union may increase
the annual percentage rate if the increase is based on an index or
indices outside the federal credit union's control. A federal credit
union may not increase the rate based on its own prime rate or cost of
funds. A federal credit union is permitted, however, to use a published
prime rate, such as that in the [Wall]{.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.

3\. [Publicly available]{.underline}. The index or indices must be
available to the public. A publicly-available index need not be
published in a newspaper, but it must be one the consumer can
independently obtain, by telephone, for example, and use to verify the
rate applied to the outstanding balance.

4\. [Changing a non-variable rate to a variable rate]{.underline}.
Section 706.24 generally prohibits a federal credit union from changing
a non-variable annual percentage rate to a variable rate because such a
change can result in an increase in rate. However, § 706.24(b)(1)
permits a federal credit union to change a non-variable rate to a
variable rate if the change was disclosed at account opening.
Furthermore, following the first year after the account is opened,
§ 706.24(b)(3) permits a federal credit union to change a non-variable
rate to a variable rate with respect to new transactions, after
complying with the notice requirements in 12 CFR 226.9(c) or (g).
Finally, § 706.24(b)(4) permits a federal credit union to change a
non-variable rate to a variable rate if the required minimum periodic
payment is not received within 30 days of the payment due date, after
complying with the notice requirements in 12 CFR 226.9(g).

5\. [Changing a variable annual percentage rate to a non-variable annual
percentage rate]{.underline}. Nothing in § 706.24 prohibits a federal
credit union from changing a variable annual percentage rate to an equal
or lower non-variable rate. Whether the non-variable rate is equal to or
lower than the variable rate is determined at the time the federal
credit union provides the notice required by 12 CFR 226.9(c). For
example, assume that on March 1 a variable rate that is currently 15%
applies to a balance of \$2,000 and the federal credit union sends a
notice pursuant to 12 CFR 226.9(c) informing the consumer that the
variable rate will be converted to a non-variable rate of 14% effective
April 17. On April 17, the federal credit union may apply the 14%
non-variable rate to the \$2,000 balance and to new transactions even if
the variable rate on March 2 or a later date was less than 14%.

6\. [Substitution of index]{.underline}. A federal credit union may
change the index and margin used to determine the annual percentage rate
under § 706.24(b)(2) if the original index becomes unavailable, as long
as historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and margin
will produce a rate similar to the rate that was in effect at the time
the original index became unavailable. If the replacement index is newly
established and therefore does not have any rate history, it may be used
if it produces a rate substantially similar to the rate in effect when
the original index became unavailable.

24(b)(3) Advance Notice Exception

1\. [First year after the account is opened]{.underline}. A federal
credit union may not increase an annual percentage rate pursuant to §
706.24(b)(3) during the first year after the account is opened. This
limitation does not apply to accounts opened prior to July 1, 2010.

2\. [Transactions that occur more than seven days after notice
provided]{.underline}. Section 706.24(b)(3) generally prohibits a
federal credit union from applying an increased rate to transactions
that occur within seven days after provision of the 12 CFR 226.9(c) or
(g) notice. This prohibition does not, however, apply to transactions
that are authorized within seven days after provision of the 12 CFR
226.9(c) or (g) notice but are settled more than seven days after the
notice was provided.

3\. [Examples]{.underline}.

i\. Assume that a consumer credit card account is opened on January 1 of
year one. On March 14 of year two, the account has a purchase balance of
\$2,000 at a non-variable annual percentage rate of 5%. On March 15, the
federal credit union provides a notice pursuant to 12 CFR 226.9(c)
informing the consumer that the rate for new purchases will increase to
a non-variable rate of 15% on May 1. The notice further states that the
5% rate will apply for six months until November 1, and states that
thereafter the federal credit union will apply a variable rate that is
currently15% and is determined by adding a margin of 10 percentage
points to a publicly-available index that is not under the federal
credit union's control. The seventh day after provision of the notice is
March 22 and, on that date, the consumer makes a \$200 purchase. On
March 24, the consumer makes a \$1,000 purchase. On May 1,
§ 706.24(b)(3) permits the federal credit union to begin accruing
interest at 15% on the \$1,000 purchase made on March 24. The federal
credit union is not permitted to apply the 15% rate to the \$2,200
purchase balance as of March 22. After six months, November 2, the
federal credit union may begin accruing interest on any remaining
portion of the \$1,000 purchase at the previously-disclosed variable
rate determined using the 10-point margin.

ii\. Same facts as above except that the \$200 purchase is authorized by
the federal credit union on March 22 but is not settled until March 23.
On May 1, § 706.24(b)(3) permits the federal credit union to start
charging interest at 15% on both the \$200 purchase and the \$1,000
purchase. The federal credit union is not permitted to apply the 15%
rate to the \$2,000 purchase balance as of March 22.

iii\. Same facts as in paragraph i above, except that on September 17 of
year two, which is 45 days before expiration of the 18% non-variable
rate, the federal credit union provides a notice pursuant to 12 CFR
226.9(c) informing the consumer that, on November 2, a new variable rate
will apply to new purchases and any remaining portion of the \$1,000
balance, calculated by using the same index and a reduced margin of
10 percentage points. The notice further states that, on May 1 of year
three, the margin will increase to the margin disclosed at account
opening, 12 percentage points. On May 1 of year three, § 706.24(b)(3)
permits the federal credit union to increase the margin used to
determine the variable rate that applies to new purchases to 12
percentage points and to apply that rate to any remaining portion of the
\$1,000 purchase as well as to new purchases. [See]{.underline} comment
24(b)(1)-3. The federal credit union is not permitted to apply this rate
to any remaining portion of the \$2,200 purchase balance as of March 22.

24(b)(5) Workout Arrangement Exception

1\. [Scope of exception]{.underline}. Nothing in § 706.24(b)(5) permits
a federal credit union to alter the requirements of § 706.24 pursuant to
a workout arrangement between a consumer and the federal credit union.
For example, a federal credit union cannot increase an annual percentage
rate pursuant to a workout arrangement unless otherwise permitted by §
706.24. In addition, a federal credit union cannot require the consumer
to make payments with respect to a protected balance that exceed the
payments permitted under § 706.24(c).

2\. [Variable annual percentage rates]{.underline}. If the annual
percentage rate that applied to a category of transactions prior to
commencement of the workout arrangement varied with an index consistent
with § 706.24(b)(2), the rate applied to that category of transactions
following an increase pursuant to § 706.24(b)(5) must be determined
using the same formula, index and margin.

3\. [Example]{.underline}. Assume that, consistent with § 706.24(b)(4),
the margin used to determine a variable annual percentage rate that
applies to a \$5,000 balance is increased from 5 percentage points to 15
percentage points. Assume also that the federal credit union and the
consumer subsequently agree to a workout arrangement that reduces the
margin back to 5 points on the condition that the consumer pay a
specified amount by the payment due date each month. If the consumer
does not pay the agreed-upon amount by the payment due date, the federal
credit union may increase the margin for the variable rate that applies
to the \$5,000 balance up to 15 percentage points. 12 CFR 226.9 does not
require advance notice of this type of increase.

24(c) Treatment of Protected Balances

1\. [Protected balances]{.underline}. Because rates cannot be increased
pursuant to § 706.24(b)(3) during the first year after account opening,
§ 706.24(c) does not apply to balances during the first year. Instead,
the requirements in § 706.24(c) apply only to "protected balances,"
which are amounts owed for a category of transactions to which an
increased annual percentage rate cannot be applied after the rate for
that category of transactions has been increased pursuant to §
706.24(b)(3). For example, assume that, on March 15 of year two, an
account has a purchase balance of \$1,000 at a non-variable rate of 12%
and that, on March 16, the federal credit union sends a notice pursuant
to 12 CFR 226.9(c) informing the consumer that the rate for new
purchases will increase to a non-variable rate of 15% on May 2. On March
20, the consumer makes a \$100 purchase. On March 24, the consumer makes
a \$150 purchase. On May 2, § 706.24(b)(3) permits the federal credit
union to start charging interest at 15% on the \$150 purchase made on
March 24 but does not permit the federal credit union to apply that 15%
rate to the \$1,100 purchase balance as of March 23. Accordingly, §
706.24(c) applies to the \$1,100 purchase balance as of March 23 but not
the \$150 purchase made on March 24.

24(c)(1) Repayment

1\. [No less beneficial to the consumer]{.underline}. A federal credit
union may provide a method of repaying the protected balance that is
different from the methods listed in § 706.24(c)(1) so long as the
method used is no less beneficial to the consumer than one of the listed
methods. A method is no less beneficial to the consumer if the method
amortizes the protected balance in five years or longer or if the method
results in a required minimum periodic payment that is equal to or less
than a minimum payment calculated consistent with § 706.24(c)(1)(ii).
For example, a federal credit union could increase the percentage of the
protected balance included in the required minimum periodic payment from
2% to 5% so long as doing so would not result in amortization of the
protected balance in less than five years. Alternatively, a federal
credit union could require a consumer to make a minimum payment that
amortizes the protected balance in less than five years so long as the
payment does not include a percentage of the balance that is more than
twice the percentage included in the minimum payment before the
effective date of the increased rate. For example, a federal credit
union could require the consumer to make a minimum payment that
amortizes the protected balance in four years so long as doing so would
not more than double the percentage of the balance included in the
minimum payment prior to the effective date of the increased rate.

2\. [Lower limit for required minimum periodic payment]{.underline}.
If the required minimum periodic payment under § 706.24(c)(1)(i) or (ii)
is less than the lower dollar limit for minimum payments established in
the cardholder agreement before the effective date of the rate increase,
the federal credit union may set the minimum payment consistent with
that limit. For example, if at account opening the cardholder agreement
stated that the required minimum periodic payment would be either the
total of fees and interest charges plus 1% of the total amount owed or
\$20, whichever is greater, the federal credit union may require the
consumer to make a minimum payment of \$20 even if doing so would pay
off the protected balance in less than five years or constitute more
than 2% of the protected balance plus fees and interest charges.

[Paragraph 24(c)(1)(i)]{.underline}

1\. [Amortization period starting from date on which increased rate
becomes effective]{.underline}. Section 706.24(c)(1)(i) provides for an
amortization period for the protected balance of no less than five
years, starting from the date on which the increased annual percentage
rate becomes effective. A federal credit union is not required to
recalculate the required minimum periodic payment for the protected
balance if, during the amortization period, that balance is reduced as a
result of the allocation of amounts paid by the consumer in excess of
the minimum payment consistent with § 706.23 or any other practice
permitted by these rules and other applicable law.

2\. [Amortization when applicable annual percentage rate is
variable]{.underline}. If the annual percentage rate that applies to the
protected balance varies with an index consistent with § 706.24(b)(2),
the federal credit union may adjust the interest charges included in the
required minimum periodic payment for that balance accordingly in order
to ensure that the outstanding balance is amortized in five years. For
example, assume that a variable rate that is currently 10% applies to a
protected balance and that, in order to amortize that balance in five
years, the required minimum periodic payment must include a specific
amount of principal plus all accrued interest charges. If the 10%
variable rate increases due to an increase in the index, the federal
credit union may increase the required minimum periodic payment to
include the additional interest charges.

[Paragraph 24(c)(1)(ii)]{.underline}

1\. [Required minimum periodic payment on other balances]{.underline}.
Section 706.24(c)(1)(ii) addresses the required minimum periodic payment
on the protected balance. Section 706.24(c)(1)(ii) does not limit or
otherwise address the federal credit union's ability to determine the
amount of the required minimum periodic payment for other balances.

2\. [Example]{.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 account has a purchase
balance of \$2,000 at an annual percentage rate of 10% and a cash
advance balance of \$500 at an annual percentage rate of 15% and that
the federal credit union increases the rate for purchases to 15%, but
does not increase the rate for cash advances. Under § 706.24(c)(1)(ii),
the federal credit union may require the consumer to pay fees and
interest plus 2% of the \$2,000 purchase balance.
Section 706.24(c)(1)(ii) does not prohibit the federal credit union from
increasing the required minimum periodic payment for the cash advance
balance.

24(c)(2) Fees and Charges

1\. [Fee or charge based solely on the protected balance]{.underline}. A
federal credit union is prohibited from assessing a fee or charge based
solely on balances to which § 706.24(c) applies. For example, a federal
credit union is prohibited from assessing a monthly maintenance fee that
would not be charged if the account did not have a protected balance. A
federal credit union is not, however, prohibited from assessing fees
such as late payment fees or fees for exceeding the credit limit even if
such fees are based in part on the protected balance.

Section 706.25---Unfair Balance Computation Method

25(a) General Rule

1\. [Two-cycle method prohibited]{.underline}. When a consumer ceases to
be eligible for a time period provided by the federal credit union
within which the consumer may repay any portion of the credit extended
without incurring a finance charge, a grace period, the federal credit
union is prohibited from computing the finance charge using the
so-called two-cycle average daily balance computation method. This
method calculates the finance charge using a balance that is the sum of
the average daily balances for two billing cycles. The first balance is
for the current billing cycle, and is calculated by adding the total
balance, including or excluding new purchases and deducting payments and
credits, for each day in the billing cycle, and then dividing by the
number of days in the billing cycle. The second balance is for the
preceding billing cycle.

2\. [Examples]{.underline}.

i\. Assume that the billing cycle on a consumer credit card account
starts on the first day of the month and ends on the last day of the
month. The payment due date for the account is the twenty-fifth day of
the month. Under the terms of the account, the consumer will not be
charged interest on purchases if the balance at the end of a billing
cycle is paid in full by the following payment due date. The consumer
uses the credit card to make a \$500 purchase on March 15. The consumer
pays the balance for the February billing cycle in full on March 25. At
the end of the March billing cycle, March 31, the consumer's balance
consists only of the \$500 purchase and the consumer will not be charged
interest on that balance if it is paid in full by the following due
date, April 25. The consumer pays \$400 on April 25, leaving a \$100
balance. The federal credit union may charge interest on the \$500
purchase from the start of the April billing cycle, April 1, through
April 24 and interest on the remaining \$100 from April 25 through the
end of the April billing cycle, April 30. The federal credit union is
prohibited, however, from reaching back and charging interest on the
\$500 purchase from the date of purchase, March 15 to the end of the
March billing cycle, March 31.

ii\. Assume the same circumstances as in the previous example except
that the consumer does not pay the balance for the February billing
cycle in full on March 25 and therefore, under the terms of the account,
is not eligible for a time period within which to repay the \$500
purchase without incurring a finance charge. With respect to the \$500
purchase, the federal credit union may charge interest from the date of
purchase, March 15, through April 24 and interest on the remaining \$100
from April 25 through the end of the April billing cycle, April 25.

Section [706]{.underline}.26 -- Unfair Charging of Security Deposits and
Fees for the Issuance or Availability of Credit to Consumer Credit Card
Accounts

26(a) Limitation for First Year

1\. [Majority of the credit limit]{.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
§ 706.26(a), a federal credit union may charge to the account security
deposits and fees for the issuance or availability of credit totaling no
more than \$250 during the first year (consistent with § 706.26(b)).

26(b) Limitations for First Billing Cycle and Subsequent Billing Cycles

1\. [Adjustments of one dollar or less permitted]{.underline}. When
dividing amounts pursuant to § 706.26(b)(2), a federal credit union may
adjust amounts by one dollar or less. For example, if a federal credit
union is dividing \$87 over five billing cycles, the federal credit
union may charge \$18 for two months and \$17 for the remaining three
months.

2\. [Examples]{.underline}.

i\. Assume that a consumer credit card account opened on January 1 has
an initial credit limit of \$500. Assume also that the billing cycles
for this account begin on the first day of the month and end on the last
day of the month. Under § 706.26(a), the federal credit union may charge
to the account no more than \$250 in security deposits and fees for the
issuance or availability of credit during the first year after the
account is opened. If it charges \$250, the federal credit union may
charge up to \$125 during the first billing cycle. If it charges \$125
during the first billing cycle, it may then charge no more than \$25 in
each of the next five billing cycles. If it chooses, the federal credit
union may spread the additional security deposits and fees over a longer
period, such as by charging \$12.50 in each of the ten billing cycles
following the first billing cycle.

ii\. Same facts as above except that on July 1 the federal credit union
increases the credit limit on the account from \$500 to \$750. Because
the prohibition in § 706.26(a) is based on the initial credit limit of
\$500, the increase in credit limit does not permit the federal credit
union to charge to the account additional security deposits and fees for
the issuance or availability of credit, such as a fee for increasing the
credit limit.

26(c) Evasion Prohibited

1\. [Evasion]{.underline}. Section 706.26(c) prohibits a federal credit
union from evading the requirements of this section by providing the
consumer with additional credit to fund the consumer's payment of
security deposits and fees that exceed the total amounts permitted by
§§ 706.26(a) and (b). For example, assume that on January 1 a consumer
opens a consumer credit card account with an initial credit limit of
\$400 and the federal credit union charges to that account \$100 in fees
for the issuance or availability of credit. Assume also that the billing
cycles for the account coincide with the days of the month and that the
federal credit union will charge \$20 in fees for the issuance or
availability of credit in the February, March, April, May, and June
billing cycles. The federal credit union violates § 706.26(c) if it
provides the consumer with a separate credit product to fund additional
security deposits or fees for the issuance or availability of credit.

2\. [Payment with funds not obtained from the federal credit
union]{.underline}. A federal credit union does not violate § 706.26(c)
if it requires the consumer to pay security deposits or fees for the
issuance or availability of credit using funds that are not obtained,
directly or indirectly, from the federal credit union. For example, a
federal credit union does not violate § 706.26(c) if a \$400 security
deposit paid by a consumer to obtain a consumer credit card account with
a credit line of \$400 is not charged to a credit account provided by
the federal credit union or its affiliate.

26(d) Definitions

1\. [Membership fees]{.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. Issuing a card to each primary
cardholder, not authorized users, is considered a basic membership
privilege and fees for additional cards, beyond the first card on the
account, are fees for the issuance or availability of credit. Thus, a
fee to obtain an additional card on the account beyond the first card,
so that each cardholder would have his or her own card, is a fee for the
issuance or availability of credit even if the fee is optional; that is,
if the fee is charged only if the cardholder requests one or more
additional cards.

3\. [One-time fees]{.underline}. Non-periodic fees related to opening an
account, such as application fees or one-time membership or
participation fees, are fees for the issuance or availability of credit.
Fees for reissuing a lost or stolen card, statement reproduction fees,
and fees for late payment or other violations of the account terms are
examples of fees that are not fees for the issuance or availability of
credit.

\[THIS SIGNATURE PAGE RELATES TO THE NOTICE OF PROPOSED RULEMAKING
TITLED "UNFAIR OR DECEPTIVE ACTS OR PRACTICES."\]

By the National Credit Union Administration Board, on December 18, 2008.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Mary F. Rupp\
Secretary of the Board

\[FR Doc. \_\_-\_\_\_\_\_ Filed \_\_\_\_\_\]

Billing Codes 6210-01-P (33%), 6720-01-P (33%), 7535-01-U (33%)

[^1]: As discussed below, the Agencies have relied in part on the
    Board's consumer testing in determining that certain practices are
    unfair under the FTC Act. The results of this consumer testing are
    set forth in the reports prepared by the Board's testing consultant.
    The initial report was posted on the Board's public website along
    with the June 2007 Regulation Z Proposal. [See]{.underline} Design
    and Testing of Effective Truth in Lending Disclosures (May 16, 2007)
    (available at
    http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf).
    Two supplemental reports have been posted on the Board's public
    website along with the final rules under Regulation Z, which are
    published elsewhere in today's **Federal Register**.
    [See]{.underline} Design and Testing of Effective Truth in Lending
    Disclosures: Findings from Qualitative Consumer Research (Dec. 15,
    2008); Design and Testing of Effective Truth in Lending Disclosures:
    Findings from Experimental Study (Dec. 15, 2008).

[^2]: [See]{.underline}, [e.g.]{.underline}, Am. Bankers Assoc., [Likely
    Impact of Proposed Credit Card Legislation: 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]{.underline}

    [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/stillborrowing.pdf); Nat'l Consumer Law
    Ctr., [Fee-Harvesters: Low-Credit, High-Cost Cards
    Bleed]{.underline}

    [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 (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]: On September 23, 2008, the U.S. House of Representatives passed
    the Credit Cardholders' Bill of Rights Act of 2008 (H.R. 5244),
    which addresses consumer protection issues regarding credit cards.
    [See]{.underline} [also]{.underline} The Credit Card Accountability,
    Responsibility and Disclosure Act, S. 3252, 110th Cong. (July 10,
    2008); The Credit Card Reform Act of 2008, S. 2753, 110th Cong.
    (Mar. 12, 2008); The Stop Unfair Practices in Credit Cards Act of
    2007, H.R. 5280, 110th Cong. (Feb. 7, 2008); The Stop Unfair
    Practices in Credit Cards Act of 2007, S. 1395, 110th Cong. (May 15,
    2007); The Universal Default Prohibition Act of 2007, H.R. 2146,
    110th Cong. (May 3, 2007); The Credit Card Accountability
    Responsibility and Disclosure Act of 2007, H.R. 1461, 110th Cong.
    (Mar. 9, 2007).

[^5]: Some commenters on the May 2008 Proposal expressed concern that
    the proposed rules would place institutions subject to the final
    rule at a competitive disadvantage in relation to FTC-regulated
    entities. As discussed in detail below, the Board has published
    elsewhere in today's **Federal Register** a proposal regarding
    overdraft services using its authority under the Electronic Fund
    Transfer Act (EFTA) and Regulation E. These proposed rules would
    apply to state-chartered credit unions providing overdraft services.
    Furthermore, because FTC-regulated entities represent a small
    percentage of the market for consumer credit card accounts, the
    Agencies believe that any competitive disadvantage is unlikely to be
    significant. In addition, although the final rule does not apply to
    FTC-regulated entities, those entities are still subject to the FTC
    Act.

[^6]: The FTC Act refers to OTS's predecessor agency, the Federal Home
    Loan Bank Board (FHLBB), rather than to OTS. However, in section
    3(e) of HOLA, Congress transferred this rulemaking power of the
    FHLBB, among others, to the Director of OTS. 12 U.S.C. 1462a(e). The
    FTC Act refers to "savings and loan institutions" in some provisions
    and "savings associations" in other provisions. Although "savings
    associations" is the term currently used in the HOLA,
    [see]{.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.

[^7]: Some commenters suggested that the proposed rules were not
    supported by sufficient evidence and that the Agencies should follow
    the rulemaking procedures for the FTC under the FTC Act, which
    include the requirement to hold informal hearings at which
    interested parties may submit their positions and rebut the
    positions of others. 15 U.S.C. 57a(c). As the commenters
    acknowledge, this process applies only to the FTC. The Agencies
    believe that the comment process provides a robust opportunity for
    interested parties to express their views and provide relevant
    information. This is confirmed by the unprecedented number of
    comment letters received by the Agencies in response to the proposed
    rules. In many cases, the data and other information necessary to
    make informed judgments regarding the proposed rules is in the
    possession of the institutions to which the rules would apply.
    Although institutions generally consider this data proprietary, some
    have chosen to submit certain information to the Agencies for
    consideration as part of the public record. The Agencies have
    carefully considered all public information in issuing the final
    rule.

[^8]: [See]{.underline}, [e.g.]{.underline}, Testimony of Randall S.
    Kroszner, Governor, Board of Governors of the Federal Reserve
    System, before the H. Comm. on Financial Services (June 13, 2007);
    Testimony of Sandra F. Braunstein before the H. Subcomm. on Fin.
    Instits. & Consumer Credit (Mar. 27, 2007); Letter from Ben S.
    Bernanke, Chairman, Board of Governors of the Federal Reserve
    System, to the Hon. Barney Frank (Mar. 21, 2006); Letter from Alan
    Greenspan, Chairman, Board of Governors of the Federal Reserve
    System, to the Hon. John J. LaFalce (May 30, 2002).

[^9]: Industry commenters and the OCC raised concerns that, because many
    of the practices prohibited by the proposed rules are widely used,
    determinations by the Agencies that those practices are unfair or
    deceptive under the FTC Act could lead to litigation under similar
    state laws.  As discussed below in § VII of this **SUPPLEMENTARY
    INFORMATION**, the Agencies do not intend these rules to apply to
    acts or practices preceding the effective date and have determined
    that, prior to the effective date, the prohibited practices are not
    unfair under the FTC Act.

[^10]: [See]{.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 Rule, 49 FR
    at 7743; FTC Policy Statement on Unfairness at 3 & n.12.

[^18]: [See]{.underline} [Am. Fin. Servs. Assoc. v. FTC]{.underline},
    767 F.2d 957, 978-83 (DC Cir. 1985) ("In essence, petitioners ask
    the court to limit the FTC's exercise of its unfairness authority to
    situations involving deception, coercion, or withholding of material
    information. \* \* \* \[D\]espite considerable controversy over the
    bounds of the FTC's authority, neither Congress nor the FTC has seen
    fit to delineate the specific 'kinds' of practices which will be
    deemed unfair within the meaning of section 5.").

[^19]: [See]{.underline} FTC Policy Statement on Unfairness at 3.

[^20]: [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.

[^21]: [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.").

[^22]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    7740 [et]{.underline} [seq]{.underline}.; [see]{.underline}
    [also]{.underline} [Am. Fin. Servs. Assoc.]{.underline}, 767 F.2d at
    978-83 (upholding the FTC's analysis).

[^23]: One commenter stated that the following language from the FTC
    Policy Statement on Unfairness suggested that complexity alone is
    not sufficient to make injury unavoidable: "A seller's failure to
    present complex technical data on his product may lessen a
    consumer's ability to choose . . . but may also reduce the initial
    price he must pay for the article." FTC Policy Statement on
    Unfairness at 3. The Agencies note that the FTC included this
    example in its discussion of whether injury is outweighed by
    countervailing benefits, not whether the injury is reasonably
    avoidable.

[^24]: [See]{.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]{.underline} [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.").

[^25]: [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).

[^26]: [See]{.underline} FTC Public Comment on OTS--2007--0015, at 8
    (citing Preservation of Consumers' Claims and Defenses, Statement of
    Basis and Purpose, 40 FR 53506, 53523 (Nov. 18, 1975) (codified at
    16 CFR 433)); [see]{.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.").

[^27]: [See]{.underline} 15 U.S.C. 45(n); Board and FDIC, Unfair or
    Deceptive Acts or Practices by State-Chartered Banks at 3-4 ("Public
    policy, as established by statute, regulation, or judicial decisions
    may be considered with all other evidence in determining whether an
    act or practice is unfair.").

[^28]: [See]{.underline}, [e.g.]{.underline}, FTC Policy Statement on
    Unfairness at 5 (stating that public policy "should be clear and
    well-established" and "should be declared or embodied in formal
    sources such as statutes, judicial decisions, or the Constitution as
    interpreted by the court \* \* \*").

[^29]: Several commenters urged the Agencies to consider the safety and
    soundness of financial institutions either under the countervailing
    benefits prong or as public policy. To the extent that these
    commenters raised specific safety and soundness concerns, those
    concerns are addressed below.

[^30]: 15 U.S.C. 57a(f)(1) (third sentence).

[^31]: FTC Policy Statement on Deception.

[^32]: [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}.

[^33]: [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).

[^34]: As noted above, the Board, FDIC, and OCC have issued guidance
    generally adopting these standards for purposes of enforcing the FTC
    Act's prohibition on unfair or deceptive acts or practices. As with
    the unfairness standard, comments on OTS's ANPR addressing this
    issue overwhelmingly urged the OTS to adopt the same deception
    standard as the FTC.

[^35]: [See]{.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).

[^36]: [See]{.underline} [FTC v. Kraft, Inc.]{.underline}, 970 F.2d 311,
    319 (7th Cir. 1992); [QT, Inc.]{.underline}, 448 F. Supp. 2d at 958.

[^37]: FTC Policy Statement on Deception at 3.

[^38]: [Id]{.underline}.

[^39]: [Id]{.underline}. at 2, 6--7.

[^40]: [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).

[^41]: [See]{.underline} [Am. Fin. Servs. Assoc.]{.underline}, 767 F.2d
    at 988--89 ([citing]{.underline} [Jacob Siegel Co. v.
    FTC]{.underline}, 327 U.S. 608, 612--13 (1946)).

[^42]: [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).

[^43]: [See]{.underline} 12 CFR part 227, subpart B (Board); 12 CFR 535
    (OTS); 12 CFR 706 (NCUA).

[^44]: The Board, OTS, and NCUA have placed these rules in,
    respectively, parts 227, 535, and 706 of title 12 of the Code of
    Federal Regulations. For each reference, the discussion in this
    **SUPPLEMENTARY INFORMATION** uses the shared numerical suffix of
    each agency's rule. For example, § \_\_.1 will be codified at 12 CFR
    227.1 by the Board, 12 CFR 535.1 by OTS, and 12 CFR 706.1 by NCUA.

[^45]: [See]{.underline}, [e.g.]{.underline}, 12 CFR 563.161(a) (OTS
    management and financial policies rule).

[^46]: See 12 CFR 560.30 and Endnote 6.

[^47]: As stated in [Fid. Fed. Sav. & Loan Ass'n v. de la
    Cuesta]{.underline}, 458 U.S. 141, 144-45 (1982):

    > The \[FHLBB\], an independent federal regulatory agency, was
    > formed in 1932 and thereafter was vested with plenary authority to
    > administer \[HOLA\].... Section 5(a) of the HOLA ...empowers the
    > Board, "under such rules and regulations as it may prescribe, to
    > provide for the organization, incorporation, examination,
    > operation, and regulation of associations to be known as 'Federal
    > Savings and Loan Associations.'" Pursuant to this authorization,
    > the \[FHLBB\] has promulgated regulations governing "the powers
    > and operations of every Federal savings and loan association from
    > its cradle to its corporate grave." [People v. Coast Federal
    > Savings and Loan Ass'n]{.underline}, 98 F. Supp. 311, 316 (S.D.
    > Cal. 1951).

    [Accord]{.underline} [Conference of Federal Savings and Loan
    Associations v. Stein]{.underline}, 604 F.2d 1256, 1260 (9th Cir.
    1979), [aff'd mem.]{.underline}, 445 U.S. 921 (1980) (recognizing
    the "pervasive" and "broad" regulatory control of the FHLBB over
    federal savings associations granted by HOLA).

[^48]: 12 CFR 563.27.

[^49]: 12 CFR 560.33, 12 CFR 560.34, and 12 CFR 560.35.

[^50]: 12 CFR part 528.

[^51]: 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).

[^52]: Longstanding OTS and NCUA complaint procedures are available to
    consumers and the public at www.ots.treas.gov and www.ncua.gov.

[^53]: The provision requiring consideration of requests for exemption
    from rules promulgated under the FTC Act applies only to the FTC.
    [See]{.underline} 12 U.S.C. 57a(g).

[^54]: The Board and the FTC have granted exemptions to Wisconsin, New
    York, and California. 51 FR 24304 (July 3, 1986) (FTC exemption for
    Wisconsin); 51 FR 28238 (Aug. 7, 1986) (FTC exemption for New York);
    51 FR 41763 (Nov. 19, 1986) (Board exemption for Wisconsin); 52 FR
    2398 (Jan. 22, 1987) (Board exemption for New York); 53 FR 19893
    (June 1, 1988) (FTC exemption for California); 53 FR 29233 (Aug. 3,
    1988) (Board exemption for California). The Federal Home Loan Bank
    Board ("FHLBB"), OTS's predecessor agency, granted an exemption to
    Wisconsin. 51 FR 45879 (Dec. 23, 1986). The NCUA has not granted any
    exemptions.

[^55]: [See]{.underline} Prohibited Consumer Credit Practices; Request
    for Exemption by State of Wisconsin, 51 FR 45879 (Dec. 23, 1986)
    ("It is well established that the \[FHLBB\] has exclusive authority
    to regulate all aspects of the operations of federally chartered
    associations under section 5 of \[HOLA\]. [See]{.underline},
    [e.g.]{.underline}, 12 CFR 545.2. Federally chartered associations
    will therefore continue to be subject to the rule rather than the
    Wisconsin Act, and the \[FHLBB\] will continue to examine them for
    compliance with the Rule.").

[^56]: [See]{.underline} Testimony of Adam J. Levitin, Assoc. Prof. of
    Law, Georgetown Univ. Law Ctr. before the H. Subcomm. on Fin.
    Instits. & Consumer Credit at 13-14 (Mar. 13, 2008) (cited by
    several commenters).

[^57]: [See]{.underline} GAO Report at 32-33.

[^58]: [See]{.underline} Consumer Data Industry Ass'n, [Credit Reporting
    Resource Guide]{.underline} 6-6 (2006).

[^59]: [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).

[^60]: [See]{.underline} Public Policy Institute of Cal., [California's
    Digital Divide]{.underline} (June 2008) ("Whites, blacks, and Asians
    currently have similarly high rates of computer and Internet use.
    Latinos have the lowest rates by far (computers 58%, Internet
    48%).") (available at
    http://www.ppic.org/content/pubs/jtf/JTF_DigitalDivideJTF.pdf).

[^61]: In addition, multiple safe harbors providing longer or shorter
    periods of time depending on how the consumer receives periodic
    statements or makes payments would not be operationally feasible
    because an institution will not know in advance what method a
    consumer will use. For example, a consumer might review their
    periodic statement online one month but wait for the statement to
    arrive by mail the next. Similarly, a consumer might pay
    electronically one month and by mail the next.

[^62]: [See]{.underline} 12 CFR 226.10(b)(2)(ii) (providing that a
    reasonable cut-off time for payments received by mail would be 5
    p.m. on the payment due date at the location specified by the
    creditor for the receipt of such payments); 12 CFR 226.10(d)
    (providing that, if the due date for payments is a day on which the
    creditor does not receive or accept payments by mail, the creditor
    may not treat a payment received by mail the next business day as
    late for any purpose).

[^63]: 12 CFR 560.33.

[^64]: The Board also tested whether, given the opportunity, consumers
    could select how amounts paid in excess of the minimum would be
    allocated using a payment coupon. Most participants, however, were
    not able to understand the effects of payment allocation
    sufficiently to apply payments in a manner that minimized interest
    charges.

[^65]: After the May 2008 Proposal, the Board conducted additional
    testing of consumers' ability to understand payment allocation
    disclosures and select how excess payments would be allocated. This
    testing, however, produced similar results to those discussed above.

[^66]: In the May 2008 Proposal, the Agencies considered whether other
    practices specifically related to promotional rate and deferred
    interest balances were unfair. As discussed below, based on the
    comments and further analysis, § \_\_.23 does not include the
    provisions specifically addressing those practices. To the extent
    that specific practices raise concerns regarding unfairness or
    deception under the FTC Act, the Agencies plan to address those
    practices on a case-by-case basis through supervisory and
    enforcement actions.

[^67]: [See]{.underline} Exhibit 1, Table 1 to Comment from Oliver I.
    Ireland, Morrison Foerster LLP (Aug. 7, 2008) ("Argus Analysis")
    (presenting results of analysis by Argus Information & Advisory
    Services, LLC of historical data for consumer credit card accounts
    believed to represent approximately 70 percent of all outstanding
    consumer credit card balances).

[^68]: [See]{.underline} N.Y. City Dept. of Consumer Affairs,
    [Neighborhood Financial Services Study: An Analysis of Supply and
    Demand in Two N.Y. City Neighborhoods]{.underline} at 6 (June 2008)
    (available at
    http://www.nyc.gov/html/ofe/downloads/pdf/NFS_ExecSumm.pdf).

[^69]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    at 7743; FTC Policy Statement on Unfairness at 3.

[^70]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    7740 [et]{.underline} [seq]{.underline}.; [see]{.underline}
    [also]{.underline} [Am. Fin. Servs. Assoc.]{.underline}, 767 F.2d at
    978-83 (upholding the FTC's analysis).

[^71]: [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)).

[^72]: For this reason, the Board has removed the proposed disclosure
    regarding payment allocation under Regulation Z, as discussed
    elsewhere in today's **Federal Register**.

[^73]: [See]{.underline} Exhibit 1, Table 1 to Argus Analysis (combining
    the predictions for "Revolvers" in the rows labeled "Change in
    Payment Allocation" and "Grace Period Requirement for Retail
    Transactions").

[^74]: As discussed in greater detail below, the Argus Analysis assumes
    that institutions will adjust to the restrictions in the proposed
    rules by increasing interest rates, decreasing credit limits,
    eliminating credit for consumers with low credit scores, or some
    combination of the three. This analysis ignores other potential
    adjustments, such as increasing fee revenue (including the
    assessment of annual fees) and developing improved underwriting
    techniques that will reduce losses and the need to engage in
    repricing when a consumer violates the account terms.

[^75]: The Argus Analysis estimated that proposed § \_\_.23 will reduce
    interest revenue by 0.125 percent. Accordingly, for purposes of this
    discussion, the Agencies assumed that, consistent with the Argus
    Analysis, the increase in interest rates attributable to proposed
    § \_\_.23 would be 120 percent of the reduction in interest revenue
    (0.125 x 1.2 = 0.15). The Agencies also assumed that the reduction
    in credit limits attributable to proposed § \_\_.23 would be
    proportionate to the overall reduction predicted by the Argus
    Analysis. Thus, because the estimated revenue loss attributable to
    proposed § \_\_.23 (0.125) is 7.6% of the overall estimated revenue
    loss predicted by the Argus Analysis (1.637), the Agencies assumed
    that the reduction in credit limits attributable to proposed §
    \_\_.23 would be 7.6% of the overall reduction of \$2,029 predicted
    by the Argus Analysis (\$2,029 x 0.076 = \$155). The Agencies were
    not able to estimate the potential impact on credit availability for
    consumers with FICO scores below 620 but, given the limited
    estimated impact of proposed § \_\_.23 on rates and credit limits,
    it appears this impact would not be substantial.

[^76]: As discussed in greater detail in § VII of this **SUPPLEMENTARY
    INFORMATION**, the Agencies anticipate that, prior to the effective
    date, some institutions may respond to the restrictions in § \_\_.23
    by, for example, adjusting interest rates on existing balances or
    reducing credit limits.

[^77]: [See]{.underline} Exhibit 4a, Table 3b to Argus Analysis.

[^78]: As noted above, the Argus Analysis stated that, as a result of
    proposed § \_\_.23, institutions could lose 0.125 percent of their
    annual interest revenue on revolving credit card accounts.
    [See]{.underline} Exhibit 1, Table 1 to Argus Analysis. This figure
    appears to be based on the equal share method, which -- according to
    the Argus Analysis -- would have the least impact of any of the
    proposed methods on interest revenue. [See]{.underline} Exhibit 1,
    Table 3a to Argus Analysis (column labeled "New Payment Allocation
    Method," row labeled "Equal"). Although the final rule does not
    permit use of the equal share method, the Argus Analysis estimates
    that the impact of the pro rata method (which is permitted) would
    only be two one-hundredths of a percent (0.002) higher.
    [See]{.underline} [id]{.underline}. (column labeled "New Payment
    Allocation Method," row labeled "Proportional"). Furthermore, the
    0.125 figure also includes an estimated 0.014 loss in interest
    revenue attributable to proposed § \_\_.23(b)(2), which the Agencies
    have not adopted. [See]{.underline} Exhibit 1, Table 1 to Argus
    Analysis. Thus, assuming the Argus Analysis is accurate, the overall
    impact of the final rule on interest revenue should be less than the
    proposal.

[^79]: As discussed below, the Agencies have revised the proposed remedy
    for this unfair practice by allowing only two allocation methods for
    excess payments: high-to-low and pro rata allocation. Unlike the
    proposal, the final rule would not permit institutions to split
    excess payments equally among the balances or to allocate using a
    method that is no less beneficial to consumers than one of the
    listed methods because the Agencies have determined that these
    methods would not provide benefits to consumers that outweigh the
    injury addressed by this final rule.

[^80]: [See]{.underline} Testimony of Julie L. Williams, Chief Counsel &
    First Senior Deputy Controller, OCC before H. Subcomm. on Fin.
    Instits. & Consumer Credit at 10-11 (Apr. 17, 2008) (available at
    http://www.house.gov/apps/list/hearing/financialsvcs_dem/williams041708.pdf);
    [see]{.underline} [also]{.underline} OCC Advisory Letter 2004-10
    (Sept. 14, 2004) (available at
    http://www.occ.treas.gov/ftp/advisory/2004-10.doc).

[^81]: 15 U.S.C. 45(n).

[^82]: [See]{.underline}, [e.g.]{.underline}, FTC Policy Statement on
    Unfairness at 5 (stating that public policy "should be clear and
    well-established" and "should be declared or embodied in formal
    sources such as statutes, judicial decisions, or the Constitution as
    interpreted by the court \* \* \*").

[^83]: [See]{.underline} Exhibit 7, Table 1c to Argus Analysis (column
    labeled "Overall").

[^84]: The Agencies note that, according to the Argus Analysis, the pro
    rata method will result in a greater loss in annual interest revenue
    than the equal share method. [See]{.underline} Exhibit 1, Table 3a
    to Argus Analysis (column labeled "New Payment Allocation Method,"
    rows labeled "Proportional" and "Equal"). Thus, assuming this data
    is accurate, the pro rata method will result in lower interest
    charges for consumers than the equal share method.

[^85]: [See]{.underline} proposed comment 23(a)-1, 73 FR at 28944.

[^86]: One commenter requested that proposed § \_\_.23 be revised to
    permit excess payments to be allocated first to interest and fees.
    The Agencies do not believe such a change is necessary because, to
    the extent that an institution wishes to recover interest and fees,
    those amounts can (and often are) included in the required minimum
    periodic payment.

[^87]: Because the final rule does not permit institutions to use a
    payment allocation method that is no less beneficial to consumers
    than one of the listed methods, the Agencies have omitted proposed
    comments 23(a)-1 and -2, which clarified the meaning of this aspect
    of the proposal. Similarly, because the final rule does not permit
    institutions to allocate equal portions of the excess payment to
    each balance, the Agencies have omitted proposed comment 23(a)(2)-1,
    which provided examples of that allocation method.

[^88]: [See]{.underline} Exhibit 7, Tables 1b and 2 to Argus Analysis.

[^89]: [See]{.underline} [id]{.underline}.

[^90]: [See]{.underline} prior versions of 12 CFR 226.9(c)(1); 12 CFR
    226.9 comment 226.9(c)(1)--3.

[^91]: [See]{.underline} prior version of 12 CFR 226.9 comment
    226.9(c)--1.

[^92]: [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").

[^93]: [See]{.underline} proposed 12 CFR 226.9(c), (g), 72 FR at
    33056--33058, 73 FR at 28891. Elsewhere in today's **Federal
    Register**, the Board has adopted a revised version of this
    proposal.

[^94]: [See]{.underline} proposed 12 CFR 226.7(b)(11)(i)(C), 72 FR at
    33053. Elsewhere in today's **Federal Register**, the Board has
    adopted a revised version of this proposal.

[^95]: [See]{.underline} Exhibit 1, Table 1 to Argus Analysis (estimated
    annualized interest lost for rows labeled "30+DPD Penalty Trigger,"
    "CIT Repricing," and "Non 30+ DPD Penalty Triggers"). The Argus
    Analysis indicates that some portion of this total is attributable
    to the requirement in Regulation Z, 12 CFR 226.9, that creditors
    provide 45 days' advance notice of most rate increases.

[^96]: For this reason, consumers must be informed at account opening of
    the rates that will apply to each category of transactions on the
    account.

[^97]: [See]{.underline}, [e.g.]{.underline}, Statement of Janet Hard
    before S. Perm. Subcomm. on Investigations, [Hearing on Credit Card
    Practices]{.underline}: [Unfair Interest Rate Increases]{.underline}
    (Dec. 4, 2007) (available at
    http://www.senate.gov/\~govt-aff/index.cfm?Fuseaction=Hearings.Detail&HearingID=509).

[^98]: Indeed, several credit card issuers stated in their comments
    that, rather than relying solely on credit scores to increase rates,
    they use proprietary underwriting systems that examine a wide range
    of criteria. Because those criteria are not available to the public,
    consumers cannot be reasonably expected to know what behavior will
    cause their issuer to increase the rate on their account.

[^99]: [See]{.underline} 15 U.S.C. 1681i.

[^100]: [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]{.underline}: [Unfair Interest Rate Increases]{.underline}
    at 5 (Dec. 4, 2007) (available at
    http://hsgac.senate.gov/public/\_files/STMTHammondsBOA.pdf).

[^101]: [See]{.underline} GAO Credit Card Report at 25.

[^102]: [See]{.underline} [also]{.underline} 73 FR at 28927-28933
    (discussing unfairness concerns regarding overdraft services and
    debit holds).

[^103]: [See]{.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]{.underline}: [Macroeconomic Factors]{.underline}, 27 J.
    of Econ. & Finance 75, 83 (2003) (finding "conclusive evidence that
    unemployment is critical in determining delinquency");
    [Fitch]{.underline}: [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).

[^104]: [See]{.underline} GAO Report at 32-33 (finding that, in 2005,
    11% of active accounts were being assessed a penalty interest rate,
    35% had been assessed a late fee, and 13% had been assessed a fee
    for exceeding the credit limit); Exhibit 6, Tables 1a to Argus
    Analysis (stating that a total of 15.6% of accounts were repriced as
    a penalty from March 2007 through February 2008). One credit card
    issuer cited data showing that its consumers tend to make payments
    close to the due date, which -- it argued -- indicates that
    consumers are able to reasonably avoid late payment. This same data,
    however, indicated that a significant number of payments are
    received after the due date.

[^105]: Some industry commenters noted that the Board's consumer testing
    indicated that consumers have a general understanding that their
    rate would change if they violated the account terms by, for
    example, paying late. This does not, however, mean that consumers
    can, as a general matter, reasonably avoid such violations.

[^106]: [See]{.underline} Sumit Agarwal [et]{.underline}
    [al]{.underline}., Stimulus and Response: The Path from Naivete to
    Sophistication in the Credit Card Market (Aug. 20, 2006) (available
    at
    http://www.iue.it/FinConsEU/ResearchActivities/BehavioralApproachesMay2007/Driscoll.pdf).

[^107]: Some commenters argued that the Board's existing or proposed
    Regulation Z disclosures or state laws allowing consumers to opt out
    of rate increases by closing the account enable consumers to
    reasonably avoid injury. These arguments are addressed below in the
    Agencies' discussion of public policy. In particular, the Agencies
    note that disclosure will not enable consumers to select a credit
    card that does not reprice because institutions almost uniformly
    reserve the right to increase rates at any time and for any reason.
    [See]{.underline}* *Statement for FTC Credit Practices Rule, 48 FR
    at 7746. In addition, some commenters criticized the May 2008
    Proposal for failing to explain why injury was reasonably avoidable
    for each of the proposed exceptions in proposed § \_\_.24(b). As
    discussed below, the exceptions in § \_\_.24(b) are not based on a
    conclusion that the injury is reasonably avoidable as a general
    matter but instead on a determination that allowing repricing in
    those circumstances ensures that the costs of prohibiting rate
    increases on outstanding balances do not outweigh the benefits.

[^108]: Many of these commenters relied on the GAO Credit Card Report,
    which states that data reported by six top issuers indicated that,
    in 2005, about 80% of active accounts were assessed rates of less
    than 20% (with more than 40% receiving rates of 15% or less).
    [See]{.underline} GAO Credit Card Report at 5. However, as noted by
    consumer groups, this data also indicated that approximately 11% of
    active accounts were charged rates over 25%. [See]{.underline}
    [id]{.underline}. at 32.

[^109]: [See]{.underline} above discussion regarding the benefits of
    promotional rates in relation to § \_\_.23 (payment allocation).

[^110]: [See]{.underline} Consumer Data Industry Ass'n, [Credit
    Reporting Resource Guide]{.underline} 6-6 (2006).

[^111]: [See]{.underline} Exhibit 5, Tables 1a and 1b to Argus Analysis
    (row labeled "Mar-07" containing twelve-month outcome duration). The
    Argus Analysis categorized an account as a loss if it became 90 or
    more days' delinquent, charged off, or bankrupt. [Id]{.underline}.

[^112]: [See]{.underline} Argus Analysis at 3; Exhibit 1, Table 1 to
    Argus Analysis.

[^113]: [See]{.underline} Argus Analysis at 4; Exhibit 1, Tables 7 -- 11
    to Argus Analysis.

[^114]: [See]{.underline} Exhibit 1, Table 1 to Argus Analysis
    (combining the predictions for "Revolvers" in the rows labeled
    "30+DPD Penalty Trigger," "CIT Repricing," and "Non 30+DPD Penalty
    Triggers").

[^115]: As noted above, the Argus Analysis estimated that proposed §
    \_\_.24 and proposed 12 CFR 226.9 would reduce interest revenue by
    1.514 percent. Accordingly, the Agencies assumed that, consistent
    with the Argus Analysis, the increase in interest rates attributable
    to proposed § \_\_.24 and proposed 12 CFR 226.9 would be 120 percent
    of the reduction in interest revenue (1.514 x 1.2 = 1.817). The
    Agencies also assumed that the reduction in credit limits
    attributable to proposed § \_\_.24 and proposed 12 CFR 226.9 would
    be proportionate to the overall reduction predicted by the Argus
    Analysis. Thus, because the estimated revenue loss attributable to
    proposed § \_\_.24 and proposed 12 CFR 226.9 (1.514) is 92.4% of the
    overall estimated revenue loss (1.637), the Agencies assumed that
    the reduction in credit limits attributable to proposed § \_\_.24
    and proposed 12 CFR 226.9 would be 92.4% of the overall reduction of
    \$2,029 predicted by the Argus Analysis (\$2,029 x 0.924 =
    \$1,874.26). The Agencies were not able to estimate the potential
    impact on credit availability for consumers with FICO scores below
    620 but, because proposed § \_\_.24 and proposed 12 CFR 226.9
    accounted for 92.4% of the estimated revenue loss, the Agencies
    assumed the reduction in available credit for these consumers would
    be substantial.

[^116]: As discussed above with respect to § \_\_.23 and in greater
    detail below in § VII of this **SUPPLEMENTARY INFORMATION**,
    the Agencies anticipate that, prior to the effective date, some
    institutions may respond to the restrictions in proposed § \_\_.24
    and proposed 12 CFR 226.9 by, for example, adjusting interest rates
    on existing balances, increasing fees, or reducing credit limits.

[^117]: [See]{.underline} Argus Analysis at 7; Exhibit 6, Tables 1a and
    3a to Argus Analysis (totaling the percentage of accounts repriced
    as a penalty and as a change-in-terms from March 2007 through
    February 2008).

[^118]: In other words, if, according to the Argus Analysis, roughly 22%
    of consumers currently experience a rate increase averaging 8
    percentage points each year and all consumers will experience a
    1.817-point increase in interest rate as a result of the proposed
    rules, then the proposed rules will prevent 22% of consumers from
    incurring a net increase of 6.183 points (8 minus 1.817) while the
    other 78% may experience an increase of 1.817. Although some portion
    of the 22 percent are presumably accounts that become 30 days'
    delinquent and thus would still be repriced, the comments indicate
    that this portion is relatively small.

[^119]: The Agencies also note that, while the estimated impact on
    interest rates and credit availability is a prediction regarding
    potential future events, the average eight percentage point increase
    appears to reflect the harm that is currently imposed on consumers.
    Accordingly, the Agencies believe that the latter figure is entitled
    to greater weight.

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

[^121]: [See]{.underline} 15 U.S.C. 45(n).

[^122]: [See]{.underline}, [e.g.]{.underline}, Testimony of Julie L.
    Williams, Chief Counsel & First Senior Deputy Controller, OCC before
    H. Subcomm. on Fin. Instits. & Consumer Credit at 5 (Apr. 17, 2008);
    Board of Governors of the Federal Reserve System, Report to Congress
    on Credit Scoring and Its Effects on the Availability and
    Affordability of Credit at O5 (Aug. 2007) (available at
    http://www.federalreserve.gov/boarddocs/RptCongress/creditscore/creditscore.pdf);
    Testimony of John C. Dugan, Comptroller of the Currency, OCC, before
    the H. Subcomm. on Fin. Instits. & Consumer Credit at 21-24 (June 7,
    2007) (available at
    http://www.house.gov/apps/list/hearing/financialsvcs_dem/htdugan060707.pdf);
    OTS Handbook on Credit Card Lending § 218 (2006) (available at
    http://files.ots.treas.gov/422064.pdf); OCC Advisory Letter 2004-10,
    at 3 (Sept. 14, 2004); OCC Handbook, Rating Credit Risk (Apr. 2001)
    (available at http://www.occ.treas.gov/handbook/RCR.pdf).

[^123]: The GAO's 2005 analysis of 28 popular credit cards, for example,
    identified only one that did not reprice outstanding balances to a
    default rate. [See]{.underline} GAO Report at 24. Furthermore, the
    comments from industry on the May 2008 Proposal generally stated
    that all or almost all credit card issuers reprice outstanding
    balances. Thus, as the FTC concluded with respect to its Credit
    Practices Rule, the prevalence of a contractual provision indicates
    that harm caused by that provision is not reasonably avoidable.
    [See]{.underline}* *Statement for FTC Credit Practices Rule, 48 FR
    at 7746.

[^124]: [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."); [see]{.underline}, [e.g.]{.underline}, Angela
    Littwin, [Beyond Usury]{.underline}: [A Study of Credit-Card Use and
    Preference Among Low-Income Consumers]{.underline}, 80 Tex. L. Rev.
    451, 467--478, 494 (2008) ("Issuers currently compete on the basis
    of interest rates, but because this competition focuses on initial
    interest rates and not on the total amount that consumers will pay,
    it fails to give sufficient decision-making information either to
    consumers who literally do not understand the events that trigger
    higher interest rates and fees or to consumers who underestimate the
    likelihood that they will be faced with these rates and fees.");
    Shane Frederick, [et]{.underline} [al]{.underline}., [Time
    Discounting and Time Preference]{.underline}: [A Critical
    Review]{.underline}, 40 J. Econ. Literature 351, 366--67 (2002); Ted
    O'Donoghue & Matthew Rabin, [Doing It Now or Later]{.underline}, 89
    Am. Econ. Rev. 103, 103, 111 (1999). Some industry commenters argued
    that, under the FTC Policy Statement on Unfairness, a finding of
    unfairness is not appropriate when the institutions did not
    [create]{.underline} an obstacle to the free exercise of consumer
    decision-making. In fact, the FTC Policy Statement on Unfairness
    states (at 3) that the proper analysis is whether the institution
    "unreasonably creates [or takes advantage of]{.underline} an
    obstacle to the free exercise of consumer decision-making."
    (Emphasis added.)

[^125]: [See]{.underline} 12 CFR 226.9(c)(2) and (g).

[^126]: [See]{.underline}, [e.g.]{.underline}, Ala. Code § 5-20-5; 5
    Del. Code § 952; Off. Code of Ga. § 7-5-4; Nev. Rev. Stat. §
    97A.140; S.D. Codified Laws § 54-11-10; Utah Code § 70C-4-102.

[^127]: At that time, commenters urged that the opt-out right not apply
    when the rate increase was due to a violation of the account terms.
    As the Agencies noted in May 2008, such a right would not address
    the injury to consumers whose rates were increased due to a
    violation of the account terms that was not reasonably avoidable.
    The Agencies understand the commenters on this proposal to urge that
    the opt-out right be given in all circumstances. This suggestion,
    however, does not alter the Agencies' conclusion that an opt-out
    right would not effectively address the injury to consumers.

[^128]: As some commenters noted, a consumer who cannot obtain a lower
    rate elsewhere and wants continued access to a credit card account
    could rationally choose not to reject application of an increased
    rate to an outstanding balance if rejection meant closing the
    account. In the scenario, however, the consumer cannot reasonably
    avoid injury.

[^129]: The Agencies also noted in May 2008 that providing consumers
    with notice and a means to exercise an opt-out right
    ([e.g.]{.underline}, a toll-free telephone number) would create
    additional costs and burdens for institutions.

[^130]: GAO Credit Card Report at 26--27.

[^131]: One institution stated that half of the consumers who called its
    customer service with questions regarding an opt-out notice
    exercised that right, although it is unclear what percentage of all
    affected consumers this subset comprised.

[^132]: [See]{.underline} 12 CFR 226.9(c)(2) and (g).

[^133]: The example provided in proposed comment 24(b)(3)--1 has been
    removed. Instead, examples of the application of this exception are
    provided in comment 24(a)-1.

[^134]: [See]{.underline} 12 CFR 226.9(g).

[^135]: [See]{.underline} 12 CFR 226.5a(b)(1)(iv); comment 5a(b)(1)-5;
    App. G-10(B) and G-10(C).

[^136]: [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).

[^137]: For example, an institution might require a minimum periodic
    payment that is the greater of \$20 or the total of 1% of the amount
    owed plus interest and fees.

[^138]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    at 7743; FTC Policy Statement on Unfairness at 3.

[^139]: [See]{.underline} Statement for FTC Credit Practices Rule, 49 FR
    7740 [et]{.underline} [seq]{.underline}.; [see]{.underline}
    [also]{.underline} [Am. Fin. Servs. Assoc.]{.underline}, 767 F.2d at
    978-83 (upholding the FTC's analysis).

[^140]: Although several industry commenters on the May 2008 Proposal
    argued that disclosure would enable consumers to choose a credit
    card with a different balance computation method, those commenters
    did not provide any evidence that refutes the Board's consumer
    testing.

[^141]: As discussed elsewhere in today's **Federal Register**, the
    Board has not deleted the two-cycle method from the list in 12
    CFR 226.5a(g) because the prohibition in § \_\_.25 does not apply to
    all credit card issuers.

[^142]: [See]{.underline} Statement of Emmett J. Rice, Member, Board of
    Governors of the Federal Reserve System before the S. Subcomm. on
    Fin. Instits. (May 21, 1986).

[^143]: [See]{.underline} 12 CFR 226.5a(b)(5) comment 5a(b)(5)-1 ("The
    card issuer must state any conditions on the applicability of the
    grace period. An issuer that offers a grace period on all purchases
    and conditions the grace period on the consumer paying his or her
    outstanding balance in full by the due date each billing cycle, or
    on the consumer paying the outstanding balance in full by the due
    date in the previous and/or the current billing cycle(s) will be
    deemed to meet these requirements by providing the following
    disclosure, as applicable: 'Your due date is \[at least\] \_\_\_
    days after the close of each billing cycle. We will not charge you
    interest on purchases if you pay your entire balance by the due date
    each month.'").

[^144]: As discussed above, the Agencies are not taking action on
    proposed § \_\_.25 at this time. Accordingly, proposed § \_\_.26 and
    § \_\_.27 have been adopted as § \_\_.25 and § \_\_.26,
    respectively.

[^145]: For purposes of this discussion, products that currently charge
    security deposits and fees for the issuance or availability of
    credit that exceed the amounts permitted by the final rule are
    referred to as "high-fee subprime credit cards."

[^146]: One subprime credit card issuer stated that approximately 30% of
    its consumers charge off without paying all or part of the balance
    due. The same issuer stated that the delinquency rate for subprime
    credit card accounts is approximately 20% (versus 4-5% for prime
    accounts) and that reserve requirements for such accounts can be up
    to 56% of outstanding balances (versus as little as 8% for prime
    credit card issuers). Finally, this issuer stated that subprime
    consumers contact their issuers an average of once or twice a month
    (versus once per year for prime consumers).

[^147]: [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).

[^148]: For a consumer who has sufficient funds, a secured credit card
    account is generally a more beneficial product than a high-fee
    subprime credit card. Secured credit cards generally require the
    consumer to provide a cash collateral deposit that is equal to the
    credit line for the account. For example, in order to obtain a
    credit line of \$300, a consumer would be required to deposit \$300
    with the lender. Generally, the consumer can receive the deposit
    back if the account is closed with no outstanding balance. In some
    cases, these deposits earn interest. [See]{.underline} OTS
    Examination Handbook, Asset Quality, Section 218 Credit Card Lending
    at § 218.3 (May 2006). The final rule does not limit issuers'
    ability to offer secured credit cards. Indeed, by restricting the
    financing of security deposits and fees, the final rule may
    encourage issuers to expand secured credit card offerings.

[^149]: [See]{.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)).

[^150]: [See]{.underline} FTC Trade Regulation Rule; Funeral Industry
    Practices, 47 FR 42260, 42262 (Sept. 24, 1982) (stating finding by
    the FTC's Presiding Offer "that the funeral transaction has several
    characteristics which place the consumer in a disadvantaged
    bargaining position . . . , leave the consumer vulnerable to unfair
    and deceptive practices, and cause consumers to have little
    knowledge of legal requirements \[and\] available alternatives . . .
    ."); [In the Matter of Travel King, Inc.]{.underline}, 86 F.T.C. 715
    (Sept. 30, 1975), paragraphs 7 and 8 (alleging that "\[p\]eople who
    are seriously ill, and their families, are vulnerable to the
    influence of respondents' promotions \[regarding 'psychic surgery'\]
    which held out tantalizing hope which the medical profession, by
    contrast, cannot offer").

[^151]: [United Companies Lending Corp. v. Sargeant,]{.underline} 20 F.
    Supp. 2d 192, 203 (D. Mass. 1998) (upholding a state regulation that
    limited the rates and other terms of certain subprime mortgage loans
    in order to "prevent\[\] lenders from exploiting the financial
    vacuum created by redlining").

[^152]: OCC Advisory Letter 2004-4, at 2-3 (emphasis in original);
    [see]{.underline} [also]{.underline} [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).

[^153]: [See]{.underline}, [e.g.]{.underline}, [People v. Applied Card
    Sys., Inc.]{.underline}, 805 N.Y.S.2d 175, 178 (App. Div. 2005)
    (finding that credit card marketing materials sent to consumers who
    were otherwise unable to qualify for credit "did not represent an
    accurate estimation of a consumer's credit limit" and that, "at all
    times, it appeared that the confusion was purposely fostered by
    \[the defendant's\] telemarketers.").

[^154]: Some issuers and members of Congress recommended that the
    Agencies endorse a "Code of Fair Practices" instead of finalizing
    the rule. These practices include enhanced disclosure, offering
    consumers the option to pay fees up front, not assessing interest on
    fees posted to the account, a commitment to report account payment
    experience to credit reporting agencies, and offering consumers the
    opportunity to cancel the card after receiving disclosures. Several
    of these "best practices" have essentially been codified by the
    Board's amendments to Regulation Z elsewhere in today's **Federal
    Register**. For example, creditors will be required to disclose the
    impact of security deposits and fees for the issuance or
    availability of credit on the amount of available credit the
    consumer will receive at account opening.  [See]{.underline} 12 CFR
    226.5a(b)(14). In addition, the Board has clarified the
    circumstances under which a consumer who has received
    account-opening disclosures (but has not yet used the account or
    paid a fee) may reject the plan and not be obligated to pay upfront
    fees. [See]{.underline} 12 CFR 226.5(b)(1)(iv). As discussed above,
    few consumers considering high fee subprime cards are likely to have
    the resources to pay the amount of fees currently assessed "up
    front." Moreover, while the Agencies support accurate credit
    reporting, the rulemaking record discussed below indicates that the
    majority of high fee subprime cardholders do not improve their
    credit scores. Finally, while forbearance from charging interest on
    fees would provide some benefit to consumers, that benefit is
    outweighed by the harm that consumers experience from the high fees
    themselves.

[^155]: Notably, the final rule does not place any limit on the dollar
    amount of security deposits and fees that may be charged to the
    account. Instead, the amount of deposits and fees that an issuer may
    charge to the account is tied to the credit limit, which the issuer
    determines.

[^156]: [See]{.underline} TransUnion Summary of Results for CEAC
    Coalition ("TransUnion Summary") at 4 (dated July 2008) (attached to
    comment letter from the Political and Economic Research Council
    (PERC) (dated Aug. 4, 2008)).

[^157]: This same issuer also stated that, on average, only 22.5% of
    these consumers receive a higher limit card within 24 months, which
    -- it asserted -- is higher than the industry average of 20%.

[^158]: [See]{.underline} TransUnion Summary at 6.

[^159]: [See]{.underline}, [e.g.]{.underline}, FTC Policy Statement on
    Unfairness at 5.

[^160]: [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.")

[^161]: Interagency Expanded Guidance for Subprime Lending Programs
    (Feb. 2, 2001).

[^162]: OTS Examination Handbook, Asset Quality, Section 218 Credit Card
    Lending, at § 218.5 (May 2006).

[^163]: [Id]{.underline}.

[^164]: [See]{.underline} Interagency Guidance, Credit Card Lending,
    Account Management and Loss Allowance Guidance, OTS, Examination
    Handbook, Asset Quality, Credit Card Lending, Appendix A.

[^165]: OTS Examination Handbook, Asset Quality, Section 218 Credit Card
    Lending, p. 218.10 (May 2006). Notably, OTS has recognized the risks
    to safety and soundness of subprime lending by requiring more
    intensive risk management and capital for institutions that engage
    in subprime lending. [Id]{.underline}. at § 218.4. These risks are
    particularly pronounced in the current economic environment, in
    which credit card charge-offs have increased. [See]{.underline}
    Federal Reserve Board Statistical Release, Charge-off and
    Delinquency Rates, 3rd Q 2008 (available at:
    http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm).

[^166]: [See]{.underline} FTC Policy Statement Regarding Advertising
    Substantiation, 49 FR 30999 (Aug. 2, 1984); [see also]{.underline}
    [FTC v. QT, Inc.,]{.underline} 448 F. Supp. 2d. 908, 959-960 (N.D.
    Ill. 2006) (substantiation policy used in federal litigation as
    guidance for the court), [aff'd]{.underline}, 512 F.3d 858 (7th Cir.
    2008).

[^167]: [See]{.underline} 12 CFR 563.27.

[^168]: [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).

[^169]: [See]{.underline} 15 U.S.C. 1681b(c); [see]{.underline}
    [also]{.underline} 15 U.S.C. 1681a(l) (defining "firm offer of
    credit or insurance").

[^170]: [See]{.underline} 15 U.S.C. 1681m(d)(1); [see]{.underline}
    [also]{.underline} 16 CFR 642.1--642.4 (Prescreen Opt-Out Notice
    Rule).

[^171]: [See]{.underline}, [e.g.]{.underline}, 15 U.S.C. 1681a(l).

[^172]: In the May 2008 Proposal, the Agencies noted that prior consumer
    testing by the Board indicated that consumers who read solicitations
    that did not state a specific credit limit generally understood that
    the limit they would receive depended on their creditworthiness.
    This testing did not, however, specifically focus on firm offers of
    credit that contain statements that the consumer has been selected
    for the offer. Accordingly, after the May 2008 Proposal, the Board
    conducted additional testing using such an offer, which produced
    similar results.

[^173]: 12 U.S.C. 1681b(e).

[^174]: These criteria may include whether the account has been open a
    certain number of days, whether the account is in "good standing,"
    and whether deposits are regularly made to the account.

[^175]: According to the FDIC's Study of Bank Overdraft Programs (FDIC
    Study), nearly 70 percent of banks surveyed implemented their
    automated overdraft program after 2001. In addition, 81 percent of
    banks surveyed that operate automated programs allow overdrafts to
    be paid at ATMs and POS debit card terminals. [See]{.underline} FDIC
    Study of Bank Overdraft Programs 8, 10 (Nov. 2008) (hereinafter,
    [FDIC Study]{.underline}) (available at:
    http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf).
    [See also]{.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., at 72 (2007) (hereinafter,
    [Overdraft Protection Hearing]{.underline}) (available at
    http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml)
    (stating that as recently as 2004, 80 percent of banks still
    declined ATM and debit card transactions without charging a fee when
    account holders did not have sufficient funds in their account).

[^176]: [See]{.underline} [Bank Fees: Federal Banking Regulators Could
    Better Ensure That Consumers Have Required Disclosure Documents
    Prior to Opening Checking or Savings Accounts]{.underline}, GAO
    Report 08-281, at 14 (Jan. 2008) (reporting that the average cost of
    overdraft and insufficient funds fees was just over \$26 per item in
    2007). [See also]{.underline} [Bankrate 2008 Checking Account
    Study]{.underline}, posted October 27, 2008 (available at:
    http://www.bankrate.com/brm/news/chk/chkstudy/20081027-bounced-check-fees-a1.asp?caret=2)
    (reporting an average overdraft fee of approximately \$29 per item).

[^177]: As noted above, the Board also separately published a proposal
    under its authority under TISA and Regulation DD setting forth
    requirements regarding the form, content and timing for the opt-out
    notice. 73 FR 28739 (May 19, 2008).

[^178]: The proposed provisions under Regulation DD regarding the form,
    content and timing of delivery for the opt-out notice are not
    included in that final rule, but instead are included with certain
    revisions in the Regulation E proposal. Both rulemakings are
    published elsewhere in today's **Federal Register**.

[^179]: [See]{.underline} [Review and Testing of Overdraft
    Notices]{.underline}, Macro International (Dec. 8, 2008).

[^180]: Additional comments received on the proposed FTC Act debit hold
    provision are discussed in more detail in the Board's Regulation E
    proposal where relevant.

[^181]: 70 FR at 8431; 70 FR at 9132.

[^182]: 70 FR at 8431.

[^183]: U.C.C. § 4-303. The commentary to § 4-303 states that any
    posting order is permitted because (1) it is impossible to state a
    rule that would be fair in all circumstances, and (2) a drawer
    should have sufficient funds on deposit at all times, he or she
    should thus be indifferent as to posting order.

[^184]: [See also]{.underline} OCC Interp. Letter No. 916 (May 22,
    2001).

[^185]: [See]{.underline} 58 FR 51735 (October 4, 1993), as amended.

[^186]: [See]{.underline} National Bureau of Economic Research,
    [Determination of the December 2007 Peak in Economic
    Activity]{.underline} (Dec.1, 2008) (available at:
    http://wwwdev.nber.org/dec2008.html).

[^187]: "Although they work well for many consumers, credit card plans
    have become more complex. The greater complexity has reduced
    transparency in credit card pricing and increased the risk that
    consumers will not understand key terms that affect the cost of
    using the account. The Federal Reserve has used consumer testing to
    make great strides in developing improved disclosures under the
    Truth in Lending Act. However, based on our review of consumers\'
    response to the Board\'s recent regulatory initiative, it seems
    clear that improved disclosures alone cannot solve all of the
    problems consumers face in trying to manage their credit card
    accounts." Statement by Federal Reserve Board Chairman Ben S.
    Bernanke (May 2, 2008) (available at:
    http://www.federalreserve.gov/newsevents/press/bcreg/bernankecredit20080502.htm).

[^188]: [See]{.underline} 73 FR 28904 (May 19, 2008) (May 2008
    Proposal).

[^189]: [See]{.underline} 73 FR at 28905-07.

[^190]: [See]{.underline} 73 FR 28866 (May 19, 2008) (May 2008
    Regulation Z Proposal); 73 FR 28739 (May 19, 2008) (May 2008
    Regulation DD Proposal).

[^191]: 15 U.S.C. 57a(f)(1).

[^192]: [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 OTS, the Board, or the NCUA.
    [See]{.underline} 15 U.S.C. 57a(b)--(e), (g)--(j); 15 U.S.C. 57a--3.

[^193]: 72 FR at 43572-73.

[^194]: [See]{.underline} 73 FR at 28910 and 28948.

[^195]: [See]{.underline} 12 U.S.C. 4803.

[^196]: 12 U.S.C. 4803(a)(3).

[^197]: [See]{.underline} November 25, 2008 announcements by the
    Department of Treasury and Board of the TALF under the authority in
    the Emergency Economic Stabilization Act of 2088, Pub. L. 110-343
    and section 13(3) of the Federal Reserve Act (12 U.S.C. 343)
    (available at http://www.treas.gov/press/releases/hp1292.htm and
    http://www.federalreserve.gov/newsevents/press/monetary/monetary20081125a1.pdf).

[^198]: [See]{.underline} "Design and Testing of Effective Truth in
    Lending Disclosures" (available at:

    http://www.federalreserve.gov/dcca/regulationz/20070523/Execsummary.pdf).

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

[^200]: Federal Reserve Board, Statistical Supplement to the November
    Federal Reserve Bulletin, Nov. 7. 2008, G.19, Consumer Credit
    (available at: http://www.federalreserve.gov/releases/g19/Current/).

[^201]:
    #  IndyMac Bank was closed on July 11, 2008. The Federal Deposit Insurance Corporation is running the successor institution that holds IndyMac's assets. [See]{.underline} OTS Release OTS 08-029 (available at: http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=37f10b00-1e0b-8562-ebdd-d5d38f67934c&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=7&YearDisplay=2008). 

    # After Washington Mutual Bank was closed on Sept. 25, 2008, JPMorganChase, a national bank regulated by the Office of the Comptroller of the Currency, acquired its assets. OTS Release 08-046 (available at: http://www.ots.treas.gov/index.cfm?p=PressReleases&ContentRecord_id=9c306c81-1e0b-8562-eb0c-fed5429a3a56&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3&MonthDisplay=9&YearDisplay=2008).

[^202]: One commenter noted that some institutions could incur up to
    \$30,000 in operational costs if procedural changes are needed to
    comply with the final rules. It is unclear whether this is an
    accurate estimate of the cost of those changes and whether the size
    of the bank would affect the actual cost. Furthermore, as a
    mitigating economic factor, consumers should incur fewer fees and
    interest charges as a result of receiving a reasonable amount of
    time to pay.

[^203]: "In our review of 28 popular cards from the six largest issuers,
    we found that two of the six issuers used the double-cycle billing
    method on one or more popular cards between 2003 and 2005. The other
    four issuers indicated they would only go back one cycle to impose
    finance charges." "Credit Cards, Increased Complexity in Rates and
    Fees Heightens Need for More Effective Disclosures to Consumers,"
    Government Accountability Office, Sept. 2006 at 28. Neither of the
    two issuers referred to is supervised by OTS.

[^204]: Based on OTS supervisory observations and experience, only one
    large savings association engaged in this practice at the time that
    this provision was proposed. That institution was closed in
    September 2008 and is no longer subject to rules issued by the OTS,
    as noted above.

[^205]: [See]{.underline} 12 C.F.R. §§ 226.34(a)(3) and 226.35(b)(4).

[^206]: [See]{.underline} Federal Reserve Board, Statistical Supplement
    to the November Federal Reserve Bulletin, Nov. 7. 2008, G.19,
    Consumer Credit (available at:
    <http://www.federalreserve.gov/releases/g19/Current/>).

[^207]: Outstanding credit card balances as of February 2008 as reported
    by Fitch Ratings, Know Your Risk; Asset Backed Securities Prime
    Credit Card Index and Subprime Credit Card Index (available at:
    http://www.fitchresearch.com/creditdesk/sectors/surveilance/asset_backed/credit_card).

[^208]: The commenter estimated that this provision of the rule could
    reduce revenue to subprime issuers by as much as \$119 per account.
    OTS estimates that the institutions under its jurisdiction hold
    approximately 92,000 affected high fee accounts.

[^209]: The commenter projected a loss of interest revenue of up to
    \$930 million, based on a drop of 0.098 percent in income. Board and
    OTS staff estimate that the removal of requirements in the proposed
    rule regarding grace periods reduced the projected loss by \$100
    million, and the removal of requirements in the proposed rule
    regarding promotional rate balances further decrease the impact on
    interest revenue by at least 55 percent, to approximately \$415
    million.

[^210]: Outstanding revolving credit for September 2008 was \$970.5
    billion. Of this, savings institutions accounted for \$34.4 billion,
    a 3.5 % share. Federal Reserve Board, Statistical Supplement to
    November 2008 Federal Reserve Bulletin, G.19 (Nov. 7, 2008)
    (available at
    [http://www.federalreserve.gov/releases/g19/Current/](http://www.federalreserve.gov/releases/g19/Current/)).

[^211]: This estimate may be excessive because the OTS estimate of
    overall credit card receivables may inappropriately include charge
    cards, which do not carry balances and do not have different
    interest rates. To the extent that outstanding balances on charge
    cards are included, the economic effect of the rule is overstated.

[^212]: The issuers' analysis does not consider the effect of
    prohibiting APR changes in the first year on new balances or the
    adjustments that they will likely make to the way deferred interest
    rate balances are offered.

[^213]: Applying 3.5 percent to the \$2.05 billion loss of revenue gives
    an estimated revenue loss of \$71,750,000 for this provision.
    [See]{.underline} Federal Reserve Board, Statistical Supplement to
    November 2008 Federal Reserve Bulletin, G.19 (Nov. 7, 2008)
    (available at
    <http://www.federalreserve.gov/releases/g19/Current/>). As with the
    payment allocation estimate, this estimate may be excessive since it
    may inappropriately include charge cards, which do not carry
    balances and do not have different interest rates. To the extent
    that charge card outstanding balances are included, the effect of
    the rule has been overstated.

[^214]: Applying 3.5 percent to the \$7.4 billion estimate gives an
    estimated revenue loss for OTS-supervised institutions of \$259
    million for this provision.

[^215]: The range is based on \$10,948,000 (high fee cards) +
    \$14,525,000 (payment allocation) + \$71,750,000 (restriction on
    rate increases - with reduced impact) = \$97,223,000. The higher
    figure is based on \$10,948,000 (high fee cards) + \$14,525,000
    (payment allocation) + \$259,000,000 (restriction on rate increases
    -- higher estimated impact) = \$284,747,000.

[^216]: 72 FR 43573.

[^217]: The Agencies recognized that state-chartered credit unions and
    any entities providing consumer credit card accounts independent of
    a depository institution fall within the FTC's jurisdiction and
    therefore would not be subject to the proposed rules. However,
    FTC-regulated entities appear to represent a small percentage of the
    market for consumer credit card accounts and overdraft services.
    See, Federal Reserve Board, Statistical Supplement to November 2008
    Federal Reserve Bulletin, G.19 (Nov. 7, 2008) (available at
    <http://www.federalreserve.gov/releases/g19/Current/>).

[^218]: 72 FR 43575.

[^219]: Members of Congress have proposed several bills addressing
    consumer protection issues regarding credit cards. [See, e.g., H.R.
    5244 and S. 3255. See also]{.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).