20804 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

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–2009–0006] 

RIN 1550–AC17 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 706 

RIN 3133–AD62 

Unfair or Deceptive Acts or Practices; 

Clarifications 

AGENCIES: Board of Governors of the 

Federal Reserve System (Board); Office 

of Thrift Supervision, Treasury (OTS); 

and National Credit Union 

Administration (NCUA). 

ACTION: Proposed rule; request for 

public comment. 

SUMMARY: In December 2008, the Board, 

OTS, and NCUA (collectively, the 

Agencies) exercised their authority 

under the Federal Trade Commission 

Act to issue a final rule prohibiting 

institutions from engaging in specific 

acts or practices in connection with 

consumer credit card accounts. The 

Agencies understand that clarification is 

needed regarding certain aspects of the 

final rule. Accordingly, in order to 

facilitate compliance, the Agencies 

propose to amend specific portions of 

the regulations and official staff 

commentary. 

DATES: Comments must be received on 

or before June 4, 2009. 

ADDRESSES: Because paper mail in the 

Washington DC area and at the Agencies 

is subject to delay, we encourage 

commenters to submit comments by 

e-mail, if possible. We also encourage 

commenters to use the title ‘‘Unfair or 

Deceptive Acts or Practices’’ to facilitate 

our organization and distribution of the 

comments. Comments submitted to one 

or more of the Agencies will be made 

available to all of the Agencies. 

Interested parties are invited to submit 

comments as follows: 

Board: You may submit comments, 

identified by Docket No. R–1314, by any 

of the following methods: 

• Agency Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Facsimile: (202) 452–3819 or (202) 

452–3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper form in Room MP–500 of the 

Board’s Martin Building (20th and C 

Streets, NW.), between 9 a.m. and 5 p.m. 

on weekdays. 

OTS: You may submit comments, 

identified by OTS–2009–0006, by any of 

the following methods: 

• Federal eRulemaking Portal- 

‘‘Regulations.gov’’: Go to http:// 

www.regulations.gov, under the ‘‘more 

Search Options’’ tab click next to the 

‘‘Advanced Docket Search’’ option 

where indicated, select ‘‘Office of Thrift 

Supervision’’ from the agency dropdown menu, then click ‘‘Submit.’’ In the 

‘‘Docket ID’’ column, select ‘‘OTS– 

2009–0006’’ to submit or view public 

comments and to view supporting and 

related materials for this proposed 

rulemaking. The ‘‘How to Use This Site’’ 

link on the Regulations.gov home page 

provides information on using 

Regulations.gov, including instructions 

for submitting or viewing public 

comments, viewing other supporting 

and related materials, and viewing the 

docket after the close of the comment 

period. 

• Mail: Regulation Comments, Chief 

Counsel’s Office, Office of Thrift 

Supervision, 1700 G Street, NW., 

Washington, DC 20552, Attention: OTS– 

2009–0006. 

• Facsimile: (202) 906–6518. 

• Hand Delivery/Courier: Guard’s 

Desk, East Lobby Entrance, 1700 G 

Street, NW., from 9 a.m. to 4 p.m. on 

business days, Attention: Regulation 

Comments, Chief Counsel’s Office, 

Attention: OTS–2009–0006. 

• Instructions: All submissions 

received must include the agency name 

and docket number for this rulemaking. 

All comments received will be entered 

into the docket and posted on 

Regulations.gov without change, 

including any personal information 

provided. Comments, including 

attachments and other supporting 

materials received are part of the public 

record and subject to public disclosure. 

Do not enclose any information in your 

comment or supporting materials that 

you consider confidential or 

inappropriate for public disclosure. 

• Viewing Comments Electronically: 

Go to http://www.regulations.gov, select 

‘‘Office of Thrift Supervision’’ from the 

agency drop-down menu, then click 

‘‘Submit.’’ Select Docket ID ‘‘OTS– 

2009–0006’’ to view public comments 

for this notice of proposed rulemaking. 

• Viewing Comments On-Site: You 

may inspect comments at the Public 

Reading Room, 1700 G Street, NW., by 

appointment. To make an appointment 

for access, call (202) 906–5922, send an 

e-mail to public.info@ots.treas.gov, or 

send a facsimile transmission to (202) 

906–6518. (Prior notice identifying the 

materials you will be requesting will 

assist us in serving you.) We schedule 

appointments on business days between 

10 a.m. and 4 p.m. In most cases, 

appointments will be available the next 

business day following the date we 

receive a request. 

NCUA: You may submit comments, 

identified by number RIN 3133–AD62, 

by any of the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• NCUA Web site: http:// 

www.ncua.gov/news/proposed_regs/ 

proposed_regs.html. Follow the 

instructions for submitting comments. 

• E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on Proposed Rule Part 

706’’ in the e-mail subject line. 

• Facsimile: (703) 518–6319. Use the 

subject line described above for e-mail. 

• Mail: Address to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, VA 22314–3428. 

• Hand Delivery/Courier: Same as 

mail address. 

• Public Inspection: All public 

comments are available on the agency’s 

Web site at http://www.ncua.gov/ 

RegulationsOpinionsLaws/comments as 

submitted, except as may not be 

possible for technical reasons. Public 

comments will not be edited to remove 

any identifying or contact information. 

Paper copies of comments may be 

inspected in NCUA’s law library at 1775 

Duke Street, Alexandria, Virginia 22314, 

by appointment, weekdays between 9 

a.m. and 3 p.m. To make an 

appointment, call (703) 518–6540 or 

send an e-mail to OGCMail@ncua.gov. 

FOR FURTHER INFORMATION CONTACT: 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20805 

1 Generally, NCUA gives the public 60 days to 

comment on proposed rules; however, a shorter 

comment period is appropriate in this instance to 

ensure compliance with the January 2009 Rule. See 

IRPS 87–2, 52 FR 35231 (Sept. 18, 1987). 

Board: 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: 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: Matthew J. Biliouris, Program 

Officer, Office of Examination and 

Insurance, (703) 518–6360; or Moisette 

I. Green, Staff Attorney, Office of 

General Counsel, (703) 518–6540, 

National Credit Union Administration, 

1775 Duke Street, Alexandria, VA 

22314–3428. 

SUPPLEMENTARY INFORMATION: 

I. Background 

In December 2008, the Federal 

Reserve Board (Board), the Office of 

Thrift Supervision (OTS), and the 

National Credit Union Administration 

(NCUA) (collectively, the Agencies) 

adopted a final rule under the Federal 

Trade Commission Act (FTC Act) to 

protect consumers from unfair acts or 

practices with respect to consumer 

credit card accounts. This rule was 

published in the Federal Register on 

January 29, 2009. See 74 FR 5498 

(January 2009 Rule). On that same date, 

the Board published a final rule 

amending the provisions regarding 

open-end credit (not home secured) in 

Regulation Z, which implements the 

Truth in Lending Act (TILA). See 74 FR 

5244 (January 2009 Regulation Z Rule). 

The effective date for both rules is July 

1, 2010. See 74 FR 5548; 74 FR 5388– 

5390. 

Since publication of the two rules, the 

Agencies have become aware that 

clarification is needed to resolve 

confusion regarding how institutions 

will comply with particular aspects of 

those rules. Accordingly, in order to 

provide guidance and facilitate 

compliance with the January 2009 Rule 

by the effective date, the Agencies 

propose to amend portions of the rule 

and the accompanying staff 

commentary. These proposed 

amendments are discussed in detail in 

section III of this SUPPLEMENTARY

INFORMATION. Similarly, elsewhere in 

today’s Federal Register, the Board has 

proposed to amend certain aspects of 

the January 2009 Regulation Z Rule. 

Although comment is requested on 

the proposed amendments, the Agencies 

emphasize that the purpose of these 

rulemakings is to clarify and facilitate 

compliance with the final rule, not to 

reconsider the need for—or the extent 

of—the protections that the rule affords 

consumers. Thus, commenters are 

encouraged to limit their submissions 

accordingly. 

In addition, because the Agencies do 

not intend to extend the effective date 

for the January 2009 Rule, any 

amendments must be adopted in final 

form with sufficient time for institutions 

to implement the amended rule on or 

prior to July 1, 2010. The Agencies 

emphasize that, because this rulemaking 

focuses on clarifications to discrete 

aspects of the January 2009 Rule, 

institutions should continue their efforts 

to come into compliance with that rule 

as soon as practicable and, in any event, 

prior to July 1, 2010. In order to ensure 

that final clarifications can be provided 

as soon as possible, the Agencies are 

requiring that comments on this 

proposal be submitted within 30 days 

from publication in the Federal 

Register.1

II. Statutory Authority 

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). In the 

SUPPLEMENTARY INFORMATION for the 

January 2009 Rule, the Agencies set 

forth the standards codified by Congress 

or adopted by the Federal Trade 

Commission for determining whether an 

act or practice is unfair or deceptive and 

applied those standards to the practices 

prohibited by the final rule. See 74 FR 

5501 et seq. In addition, the OTS relied 

on its authority under the Home 

Owners’ Loan Act (HOLA) as a 

secondary basis for its final rule. See, 

e.g., 74 FR 5505–5506. For purposes of 

this rulemaking, the Agencies continue 

to rely on this legal authority and 

analysis. 

III. Section-by-Section Analysis 

The final rules adopted by the Board, 

OTS, and NCUA under the FTC Act are 

located in, respectively, parts 227, 535, 

and 706 of title 12 of the Code of 

Federal Regulations. For purposes of the 

discussion in this SUPPLEMENTARY

INFORMATION, the Agencies use the 

shared numerical suffix for each 

provision. For example, §l.21 refers to 

the Board’s 12 CFR 227.21, the OTS’s 12 

CFR 535.21, and the NCUA’s 12 CFR 

706.21. 

Section l.21—Definitions 

Subpart C to the Agencies’ rules 

contains the provisions addressing 

consumer credit card accounts. Section 

l.21 defines certain terms used in 

Subpart C. 

Section l.21(a) Annual Percentage 

Rate 

Section l.21(a) defines ‘‘annual 

percentage rate’’ as the product of 

multiplying each periodic rate for a 

balance or transaction on a consumer 

credit card account by the number of 

periods in a year. In the text of the 

regulations and in the commentary, the 

Agencies sometimes use the term ‘‘rate’’ 

in place of ‘‘annual percentage rate’’ to 

conserve space and avoid repetition. To 

avoid possible confusion, the Agencies 

propose to add a new comment 21(a)– 

1, clarifying that, for purposes of 

Subpart C, ‘‘rate’’ has the same meaning 

as ‘‘annual percentage rate’’ unless 

otherwise specified. Furthermore, for 

clarity and consistency, the Agencies 

propose to substitute ‘‘rate’’ for ‘‘annual 

percentage rate’’ in the titles to certain 

comments. See comments 23–3, 23–6, 

24(b)(2)–5, 24(b)(5)–2, 24(c)(1)(i)–2. 

Section l.21(c) Consumer Credit Card 

Account 

The provisions of Subpart C apply to 

‘‘consumer credit card accounts,’’ which 

are defined in §l.21(c) as accounts 

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. 

Based on questions received following 

issuance of the January 2009 Rule, the 

Agencies understand that clarification is 

needed regarding whether an 

outstanding balance on a consumer 

credit card account remains subject to 

Subpart C when the account is closed, 

when the account is acquired by another 

institution, and when the balance is 

transferred to another credit account. In 

particular, concerns have been raised 

that permitting institutions to apply an 

increased rate to an outstanding balance 

in these circumstances could lead to 

20806 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

2Thus, the acquiring institution would not be 

permitted to substitute a new index for the index 

applicable to an acquired variable rate balance if the 

change could result in an increase in the applicable 

annual percentage rate. See comment 24(b)(2)–1. An 

institution that does not utilize the index used to 

determine the variable rate for an acquired balance 

may, however, convert that rate to an equal or lower 

non-variable rate, subject to the notice requirements 

of 12 CFR 226.9(c). See comment 24(b)(2)–5. 3Proposed comment 21(c)–3 clarifies that Subpart 

C would not apply to balances transferred from a 

consumer credit card account issued by an 

institution to an open-end credit plan secured by 

the consumer’s dwelling issued by the same 

institution (or its affiliate or subsidiary) because 

these plans provide protections that are similar to— 

and, in some cases, more stringent than—the 

protections in Subpart C. For example, a creditor 

may not change the annual percentage rate on a 

home-equity plan unless the change is based on an 

index that is not under the creditor’s control and 

is available to the general public. See 12 CFR 

226.5a(f)(1). 

circumvention of the general 

prohibition in §l.24 on such increases. 

To address these concerns, the 

Agencies propose to add comments 

21(c)–1 through 3, which would clarify 

that, as a general matter, the protections 

in Subpart C continue to apply to an 

outstanding balance following the 

closure or acquisition of the account or 

the transfer of the balance to another 

credit account issued by the same 

institution (or its affiliate or subsidiary). 

Accordingly, in these circumstances, an 

institution must, for example, continue 

to provide consumers a reasonable 

amount of time to make payment on 

such balances pursuant to §l.22; 

allocate payments in excess of the 

required minimum periodic payment 

among such balances consistent with 

§l.23; and increase the annual 

percentage rates that apply to such 

balances only to the extent permitted by 

§l.24. 

Because the protections in Subpart C 

cannot be waived or forfeited, the 

proposed comments do not distinguish 

between closures or transfers initiated 

by the institution and closures or 

transfers initiated by the consumer. In 

the January 2009 Rule, the Agencies 

determined that, because many of the 

prohibited practices cannot be 

effectively disclosed, consumers are 

unable to reasonably avoid the harm 

caused by those practices. Thus, as 

discussed below, allowing institutions 

to engage in the prohibited practices by 

obtaining the consumer’s agreement 

could undercut the purpose of the rule. 

Although there may be circumstances 

in which individual consumers could 

make informed choices about the 

benefits and costs of waiving the 

protections in Subpart C, an exception 

for those circumstances would create a 

significant loophole that could be used 

to deny the protections to other 

consumers. For example, if an 

institution offered to transfer its 

cardholder’s outstanding balance to a 

credit product that would reduce the 

rate on the balance for a period of time 

in exchange for the cardholder 

accepting a higher rate after that period, 

the cardholder would have to determine 

whether the savings created by the 

temporary reduction would offset the 

cost of the subsequent increase, which 

would depend on the amount of the 

balance, the amount and length of the 

reduction, the amount of the increase, 

and the length of time it would take the 

consumer to pay off the balance at the 

increased rate. Based on extensive 

consumer testing conducted during the 

preparation of the January 2009 Rule 

(and the Board’s January 2009 

Regulation Z Rule), the Agencies believe 

that it would be very difficult to ensure 

that institutions disclose this 

information in a manner that will enable 

most consumers to make informed 

decisions about whether to accept the 

increase in rate. Although some 

approaches to disclosure may be 

effective, others may not and it would 

be impossible to distinguish among 

such approaches in a way that would 

provide clear guidance for institutions. 

Furthermore, consumers might be 

presented with choices that are not 

meaningful (such as a choice between 

accepting a higher rate on an 

outstanding balance or losing credit 

privileges on the account). Thus, the 

proposed commentary to §l.21(c) 

would clarify that, as a general matter, 

the protections in Subpart C do not 

depend on whether the consumer agrees 

to the closure of an account or the 

transfer of a balance. 

Accordingly, proposed comment 

21(c)–1 states that, if a consumer credit 

card account with an outstanding 

balance is closed by the consumer or the 

institution, the account continues to be 

the same consumer credit card account 

for purposes of Subpart C with respect 

to that balance. Thus, in these 

circumstances, the institution could not 

increase the rate that applies to the 

outstanding balance (except to the 

extent permitted by §l.24). 

Proposed comment 21(c)–2 addresses 

circumstances in which an institution 

acquires a consumer credit card account 

with an outstanding balance by, for 

example, merging with or acquiring 

another institution or by purchasing 

another institution’s credit card 

portfolio. In some cases, the acquiring 

institution may elect to close the 

acquired account and replace it with its 

own credit card account. See 12 CFR 

226.12 comment 12(a)(2)–3. The 

acquisition of an account does not 

involve any choice on the part of 

consumers, and the Agencies believe 

that consumers whose accounts are 

acquired should receive the same level 

of protection after acquisition as they 

did beforehand. Accordingly, the 

proposed comment states that an 

institution that acquires a consumer 

credit card account remains subject to 

the provisions of Subpart C with respect 

to any outstanding balances on the 

account. For example, the institution 

would generally be prohibited from 

increasing the annual percentage rate on 

an outstanding purchase balance to the 

rate that the institution applies to 

purchases on its accounts.2

Finally, proposed comment 21(c)–3 

addresses balance transfers between 

accounts issued by the same institution 

(or its affiliate or subsidiary) and 

balance transfers between accounts 

issued by different institutions. 

Balances may be transferred from one 

consumer credit card account issued by 

an institution to another consumer 

credit card account issued by the same 

institution when, for example, the 

consumer’s account is converted from a 

retail credit card that may only be used 

at a single retailer or affiliated group of 

retailers to a co-branded general 

purpose credit card which may be used 

at a wider number of merchants. 

Because of the concerns discussed 

above regarding circumvention and 

informed consumer choice and for 

consistency with the issuance rules 

regarding card renewals or substitutions 

for accepted credit cards under 

Regulation Z, 12 CFR 226.12(a)(2), the 

Agencies believe—and proposed 

comment 21(c)–3 states—that these 

transfers should be treated as a 

continuation of the existing account 

relationship rather than the creation of 

a new account relationship. See 12 CFR 

226.12 comment 12(a)(2)–2. Similarly, 

proposed comment 21(c)–3 would apply 

to circumstances where a balance is 

transferred to a line of credit accessed 

solely by an account number or another 

type of credit account issued by the 

same institution or its affiliate or 

subsidiary (except for an open-end 

credit plan secured by the consumer’s 

dwelling).3 Accordingly, under these 

circumstances, an institution could not, 

for example, apply an increased rate to 

an existing balance in a manner 

prohibited by §l.24. 

In contrast, proposed comment 21(c)– 

3 also states that, when a consumer 

chooses to transfer a balance to a 

consumer credit card account issued by 

a different institution, Subpart C does 

not prohibit the institution to which the 

balance is transferred from applying its 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20807 

4Many creditors offer deferred interest programs 

under which consumers are not obligated to pay 

interest on purchases if those purchases are paid in 

full by the end of a specified period. If the 

purchases are not paid in full when the period 

ends, these programs generally require the 

consumer to pay interest that has accrued on the 

purchases during the period. 

5For purposes of this SUPPLEMENTARY

INFORMATION, a waived interest program includes a 

promotional program where interest is refunded if 

a balance is paid in full within a specified period 

of time. 

account terms to that balance, provided 

those terms comply with Subpart C. For 

example, if a consumer credit card 

account issued by institution A has a 

$1,000 purchase balance at an annual 

percentage rate of 15% and the 

consumer transfers that balance to a 

consumer credit card account with a 

purchase rate of 17% issued by 

institution B, institution B may apply 

the 17% rate to the $1,000 balance. 

However, institution B may not 

subsequently increase the rate that 

applies to that balance unless permitted 

by one of the exceptions in §l.24(b). 

Although balance transfers from one 

institution to another raise some of the 

same concerns as balance transfers 

involving the same institution, the 

Agencies believe that transfers between 

institutions are not contrary to Subpart 

C because the institution to which the 

balance is transferred is not increasing 

the cost of credit it previously extended 

to the consumer. For example, assume 

that institution A has extended a 

consumer $1,000 of credit at a rate of 

15%. Because §l.24 generally 

prohibits institution A from increasing 

the rate that applies to that balance, it 

would be inconsistent with §l.24 to 

allow institution A to reprice that 

balance simply by transferring it to 

another account. In contrast, in order for 

the $1,000 balance to be transferred to 

institution B, institution B must provide 

the consumer with a new $1,000 

extension of credit in an arms-length 

transaction and should be permitted to 

price that new extension consistent with 

its evaluation of prevailing market rates, 

the risk presented by the consumer, and 

other factors. Thus, the transfer from 

institution A to institution B does not 

appear to raise concerns about 

circumvention of §l.24 because 

institution B is not increasing the cost 

of credit it previously extended. 

The Agencies understand that 

drawing this distinction between 

balance transfers involving the same 

institution and balance transfers 

involving different institutions may 

limit an institution’s ability to offer its 

existing cardholders the same terms that 

it would offer another institution’s 

cardholders. Currently, however, the 

Agencies understand that institutions 

generally do not make promotional 

balance transfer offers available to their 

existing cardholders for balances held 

by the institution because it is not costeffective to do so. Furthermore, 

although many institutions do offer 

existing cardholders the opportunity to 

upgrade to accounts offering different 

terms or features (such as upgrading to 

an account that offers a particular type 

of rewards), the Agencies understand 

that these offers generally are not 

conditioned on a balance transfer, 

which indicates that it may be costeffective for institutions to make these 

offers without repricing an outstanding 

balance. Nevertheless, the Agencies 

solicit comment on the extent to which 

proposed comment 21(c)–3 would affect 

institutions’ ability to make offers to 

existing cardholders. 

Section l.22—Unfair Acts or Practices 

Regarding Time To Make Payment 

Section l.22(a) provides that an 

institution 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. Section 

l.22(b)(1) states that an institution 

must be able to demonstrate that it has 

complied with this requirement, and 

§l.22(b)(2) provides a safe harbor for 

institutions that have adopted 

reasonable procedures designed to 

ensure that periodic statements 

specifying the payment due date are 

mailed or delivered to consumers at 

least 21 days before the payment due 

date. 

Comment 22(b)–3 offers an example 

of an alternative method of complying 

with §l.22(a). In this example, an 

institution that only provides periodic 

statements electronically and only 

accepts payments electronically for a 

particular type of consumer credit card 

account could comply with §l.22(a) 

even if it does not provide periodic 

statements 21 days before the payment 

due date. The Agencies understand that, 

although the example states that this 

type of account must also comply with 

‘‘applicable law and regulatory 

guidance,’’ an explicit reference to the 

consumer notice and consent 

procedures of the Electronic Signatures 

in Global and National Commerce Act 

(E-Sign Act), 15 U.S.C. 7001 et seq., may 

be helpful to avoid confusion. 

Accordingly, the Agencies propose to 

add an explicit reference to the E-Sign 

Act in comment 22(b)–3. 

Section l.23—Unfair Acts or Practices 

Regarding Allocation of Payments 

When different annual percentage 

rates apply to different balances on a 

consumer credit card account, §l.23 

requires institutions to allocate any 

amount paid by the consumer in excess 

of the required minimum periodic 

payment (the excess payment) among 

the balances using one of two methods. 

The institution may apply the excess 

payment 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 rate (the high-to-low 

method). Alternatively, the institution 

may allocate the excess payment among 

the balances in the same proportion as 

each balance bears to the total balance 

(the pro rata method). 

When the Agencies originally 

proposed to address payment allocation, 

the proposed rule contained provisions 

specifically addressing accounts with a 

balance subject to a deferred interest 

program.4 One of these proposed 

provisions would have permitted (but 

not required) an existing practice by 

some institutions of allocating excess 

payments first to a balance on which 

interest is deferred during the last two 

billing cycles of the deferred interest 

period so that consumers could pay off 

that balance and avoid assessment of the 

accrued interest. See proposed 

§l.23(b)(1)(ii), 73 FR 28916, 28942 

(May 19, 2008). Some industry 

commenters supported this aspect of the 

proposal, while others argued that it 

would require burdensome changes to 

their systems. Some consumer group 

commenters argued that, rather than 

allowing institutions to choose whether 

to apply excess payments to deferred 

interest balances in the last two billing 

cycles, this allocation method should be 

mandatory. Due to other concerns about 

deferred interest plans, however, the 

January 2009 Rule did not include this 

provision. See 74 FR 5519, 5527–5528. 

As discussed in greater detail below 

with respect to §l.24, the Agencies 

propose to clarify that—so long as 

consumers receive sufficient 

protections—institutions may continue 

to provide promotional programs under 

which a consumer will not be obligated 

to pay interest that accrues on a balance 

if that balance is paid in full prior to a 

specified date or expiration of a 

specified period of time (deferred or 

waived interest programs).5 One area in 

which clarification is needed with 

respect to such programs is payment 

allocation. Under the current version of 

§l.23, if the deferred or waived 

interest balance is not the only balance 

on the account, the consumer would 

generally be required to pay off the 

entire outstanding balance in order to 

avoid interest charges on the deferred or 

20808 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

6For example, assume that a consumer credit 

card account has a $2,000 purchase balance with a 

20% annual percentage rate and a $1,000 balance 

on which interest accrues at a 15% annual 

percentage rate, but the consumer will not be 

obligated to pay that interest if that balance is paid 

in full by a specified date. Regardless of whether 

the institution uses the high-to-low allocation 

method or the pro rata allocation method, the 

consumer would be required to pay $3,000 in order 

to avoid interest charges on the $1,000 balance. 

Indeed, under the current version of §l.23, the 

only circumstance in which the consumer could 

pay off the $1,000 balance without also paying off 

the $2,000 purchase balance would be if the $1,000 

balance had a higher annual percentage rate than 

the $2,000 purchase balance and the institution 

chose to use the high-to-low method. 

7As discussed above, for purposes of this 

proposal, the Agencies continue to rely on the legal 

authority and analysis contained in the January 

2009 Rule. In particular, with respect to the 

proposed amendment to §l.23, the Agencies rely 

on the legal analysis regarding unfair payment 

allocation practices at 74 FR 5514–5517. In 

addition, the Agencies note that failing to allocate 

excess payments first to deferred or waived interest 

balances during the last two billing cycles of the 

promotional period appears to cause substantial 

consumer injury insofar as a different allocation 

method would result in the assessment of accrued 

interest (unless the consumer pays off all balances 

on the account). Because one of the intended 

purposes of a credit card account is to finance 

purchases over multiple billing cycles, it would be 

unreasonable to expect consumers to avoid accrued 

interest charges on a deferred or waived interest 

balance by paying off all balances on the account. 

Finally, failing to comply with the proposed 

amendment does not appear to create any benefits 

for consumers that would outweigh the injury. 

Indeed, the Agencies understand that the payment 

allocation practices of many institutions offering 

deferred or waived interest programs already 

comply with the proposed amendment. 

8Specifically, the Board is proposing to amend 12 

CFR 226.7 comment 7(b)–1 to require creditors 

offering deferred or waived interest programs to 

disclose on the periodic statement the balance 

subject to the program and the amount of interest 

that has accrued on that balance. In addition, the 

Board is proposing to add a new 12 CFR 

226.7(b)(14) that would require creditors to state on 

the front of the periodic statement for the two 

billing cycles immediately preceding expiration of 

the promotional period the date on which the 

period expires and that the deferred or waived 

interest balance must be paid in full by a specific 

date in order to avoid accrued interest charges. 

9The Agencies note that, if the institution uses 

the pro rata allocation method, a proportionate 

amount of the excess payment will be applied to 

the deferred or waived interest balance each month 

during the promotional period. 

waived interest balance.6 If the 

consumer is unaware of the need to pay 

off the entire balance, the consumer 

would be charged interest on the 

deferred or waived interest balance and 

thus would not obtain the benefits of the 

promotional program. 

To ensure that consumers are 

adequately protected, the Agencies 

propose to amend §l.23 to require 

institutions to allocate excess payments 

first to deferred or waived interest 

balances during the last two billing 

cycles of the promotional period. As 

noted above, this is consistent with the 

current practice of many institutions 

with respect to deferred interest plans 

and is generally beneficial to consumers 

insofar as it enables them to avoid 

interest charges by paying off the 

accrued interest balance in full prior to 

expiration without paying off all other 

balances on the account.7 Accordingly, 

the Agencies propose to move the 

provisions in the current version of 

§l.23 to §l.23(a), to place the new 

provision for deferred or waived 

programs in §l.23(b), and to renumber 

the existing commentary accordingly. 

The Agencies also propose to add a new 

example in comment 23(a)–1 (proposed 

comment 23(a)(1)–1) illustrating the 

application of proposed §l.23(b). In 

addition, elsewhere in today’s Federal 

Register, the Board has proposed to 

amend the disclosure requirements for 

periodic statements in Regulation Z, 12 

CFR 226.7, to ensure that consumers are 

informed of the amount of interest 

accrued on the deferred or waived 

balance and the date by which that 

balance must be paid in full to avoid 

those accrued interest charges.8

Furthermore, the Agencies propose to 

amend comment 23–6 to clarify that, for 

purposes of §l.23, a balance on which 

interest will not be charged if the 

balance is paid in full prior to 

expiration of a specified period should 

be treated as a balance with an annual 

percentage rate of zero rather than a 

balance with the rate at which interest 

accrues during the promotional period 

(the accrual rate). As an initial matter, 

treating the rate as zero is consistent 

with the nature of the deferred or 

waived interest program insofar as the 

consumer will not be obligated to pay 

any accrued interest if the balance is 

paid in full prior to expiration. In 

addition, because §l.23 only applies 

when different annual percentage rates 

apply to different balances on the 

account, using the accrual rate for 

purposes of §l.23 could significantly 

narrow the protections of the payment 

allocation rules. Specifically, when the 

accrual rate for a deferred or waived 

interest balance is the same as the rate 

that applies to purchases (which the 

Agencies understand is often the case) 

and there are no other balances on the 

account, §l.23 would not apply if the 

accrual rate was used. For example, if 

an account has a $1,000 purchase 

balance with an annual percentage rate 

of 15% and a $2,000 balance on which 

interest accrues at 15% but will not be 

charged if that balance is paid in full 

within a specific period of time, §l.23 

would not apply if the accrual rate of 

15% was the applicable rate for the 

$2,000 balance for purposes of payment 

allocation. The Agencies believe that, in 

these circumstances, consumers should 

be afforded the protections in §l.23 

(and, in particular, the protections in 

proposed §l.23(b)). 

In addition, for purposes of the highto-low allocation method in 

§l.23(a)(1), treating the rate on this 

type of promotional balance as zero 

during the accrued interest period 

ensures that excess payments will be 

applied first to balances on which 

interest is being charged, which will 

generally result in lower interest charges 

if the consumer pays the deferred or 

waived interest balance in full prior to 

expiration of the promotional period. 

Thus, using the above example, the 

amendments to comment 23–6 would 

clarify that an institution using the highto-low method would allocate excess 

payments to the $1,000 purchase 

balance before the $2,000 balance until 

the last two billing cycles of the accrued 

interest period (when proposed 

§l.24(b) would require that excess 

payments be applied first to any 

remaining portion of the $2,000 

balance). Although treating the rate on 

the deferred or waived interest balance 

as zero could prevent consumers who 

wish to pay off that balance in 

installments over the course of the 

promotional period from doing so, the 

Agencies believe that, on balance, this 

treatment produces the best overall 

outcome for consumers when the highto-low allocation method is used.9

Finally, proposed comment 23(b)–1 

would clarify that §l.23(b) applies to 

promotional programs under which the 

consumer is not obligated to pay interest 

that accrues on a balance if that balance 

is paid in full prior to the expiration of 

a specified period of time, not to grace 

periods offered by the institution. 

Requests for Comment 

The Agencies request comment on: 

• Whether the provision in proposed 

§l.23(b) regarding balances on which 

interest will not be charged if the 

balance is paid in full by a specified 

date should apply during the last two 

billing cycles of the deferred or waived 

interest period or during a longer or 

shorter time period. 

• Whether proposed §l.23(b) should 

apply to a grace period offered by the 

institution. In particular, the Agencies 

request comment on whether 

institutions offer grace periods that only 

require consumers to pay certain 

balances in full each billing cycle 

(rather than the entire balance) and, if 

so, whether proposed §l.23(b) should 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20809 

10As noted below, the Agencies request comment 

on whether institutions establish separate categories 

of transactions based on factors other than annual 

percentage rates and, if so, for what reasons. 

11For example, assume that, on January 1 of year 

one, a consumer opens a consumer credit card 

account with a purchase rate of 15%. On July 1 of 

year one, the account is replaced with a consumer 

credit card account issued by the same institution, 

which offers different features (such as rewards on 

purchases). Under these circumstances, the 

institution could not increase the annual percentage 

rate for purchases to a rate that is higher than 15% 

pursuant to §l.24(b)(3) until January 1 of year two 

(which is one year after the first account was 

opened). 

12As discussed above, the proposed commentary 

to §l.21 would clarify that, in these 

circumstances, the institution could not increase 

the annual percentage rate that applies to the $1,000 

balance unless otherwise permitted by §l.24. 

13Proposed comment 24–4 provides 15 days and 

30 days as alternatives. 

permit institutions to apply excess 

payments to those balances first. 

Section l.24—Unfair Acts or Practices 

Regarding Increases in Annual 

Percentage Rates 

Section l.24(a) requires institutions 

to disclose, at account opening, the 

annual percentage rates that will apply 

to each category of transactions on a 

consumer credit card account. In 

addition, §l.24(a) prohibits 

institutions from increasing those rates 

unless specifically permitted by one of 

the exceptions in §l.24(b). 

As an initial matter, the Agencies 

understand that clarification is needed 

regarding the meaning of ‘‘category of 

transactions’’ for purposes of §l.24. 

Accordingly, the Agencies propose to 

add a new comment 24–3 to clarify that, 

for purposes of §l.24, a ‘‘category of 

transactions’’ is a type or group of 

transactions to which an annual 

percentage rate applies that is different 

than the annual percentage rate that 

applies to other transactions. For 

example, purchase transactions, cash 

advance transactions, and balance 

transfer transactions are separate 

categories of transactions for purposes 

of § l.24 if an institution applies 

different annual percentage rates to 

each. Furthermore, if, for example, the 

institution applies different annual 

percentage rates to different types of 

purchase transactions (such as one rate 

for purchases of gasoline and a different 

rate for all other purchases), each type 

constitutes a separate category of 

transactions for purposes of §l.24.10

In addition, the Agencies understand 

there is some confusion regarding 

whether certain changes to a consumer 

credit card account constitute an 

‘‘account opening’’ for purposes of 

§l.24 generally and, in particular, the 

general prohibition on increasing rates 

during the first year after account 

opening. Accordingly, the Agencies 

propose to add a new comment 24–4 

clarifying that, when a consumer has a 

credit card account with an institution 

and the consumer opens a new credit 

card account with the same institution 

(or its affiliate or subsidiary), the 

opening of the new account constitutes 

an ‘‘account opening’’ for purposes of 

§l.24 if the consumer retains the 

ability to obtain additional extensions of 

credit on both accounts. Thus, for 

example, if a consumer opens a credit 

card account with an institution on 

January 1 of year one and opens a 

second credit card account with that 

institution on July 1 of year one, the 

opening of the second account 

constitutes an account opening for 

purposes of §l.24 so long as the 

consumer can engage in transactions 

using either account. This is the case 

even if the consumer transfers a balance 

from the first account to the second. 

Thus, because the institution has two 

separate account relationships with the 

consumer, the general prohibition in 

§l.24 on increasing rates during the 

first year after account opening would 

apply to the opening of the second 

account. 

In contrast, the comment would 

clarify that an account has not been 

opened for purposes of §l.24 when an 

institution replaces one consumer credit 

card account with another consumer 

credit card account (such as when a 

retail credit card is replaced with a 

cobranded general purpose card that can 

be used at a wider number of 

merchants) or when an institution 

consolidates or combines a credit card 

account with one or more other credit 

card accounts into a single credit card 

account. As discussed above, the 

Agencies believe that these transfers 

should be treated as a continuation of 

the existing account relationship rather 

than the creation of a new account 

relationship. Similarly, the comment 

would also clarify that the replacement 

of an acquired credit card account does 

not constitute an ‘‘account opening’’ for 

purposes of §l.24. Thus, in these 

circumstances, the general prohibition 

in § l.24 on increasing rates during the 

first year after account opening would 

not apply. However, when a 

replacement or consolidation occurs 

during the first year after account 

opening, proposed comment 24–4 

would clarify that the institution may 

not increase an annual percentage rate 

in a manner otherwise prohibited by 

§l.24.11 Similarly, the other 

protections in §l.24 (such as the 

limitations on repayment of protected 

balances in §l.24(c)) would still apply 

following the replacement or 

consolidation. 

Finally, the Agencies understand that 

the replacement of one consumer credit 

card account with another generally is 

not instantaneous. If, for example, a 

consumer requests that a credit card 

account with a $1,000 balance be 

upgraded to a credit card account that 

offers rewards on purchases, the second 

account may be opened immediately or 

within a few days but, for operational 

reasons, there may be a delay before the 

$1,000 balance can be transferred and 

the first account can be closed.12

Accordingly, the Agencies solicit 

comment on whether the appropriate 

amount of time for the replacement of 

one consumer credit card account with 

another is 15 days, 30 days, or a 

different period.13

Section l.24(a) General Rule 

The Agencies also understand that 

there is some confusion regarding the 

relationship between comment 24(a)–1 

and Regulation Z, 12 CFR 

226.6(b)(2)(i)(D) with respect to the 

disclosure of penalty rates. Specifically, 

comment 24(a)–1 states that institutions 

cannot satisfy the disclosure 

requirements in §l.24(a) by disclosing 

a range of annual percentage rates or 

that a rate will be ‘‘up to’’ a particular 

amount. In contrast, when more than 

one penalty rate may apply, 12 CFR 

226.6(b)(2)(i)(D) permits creditors to 

disclose ‘‘the highest rate that could 

apply, instead of disclosing the specific 

rates or the range of rates that could 

apply.’’ Because the disclosure 

requirements in §l.24(a) are intended 

to ensure that consumers receive notice 

at account opening of the specific 

annual percentage rates that will apply 

to the categories of transactions on the 

account, those requirements do not 

apply to rates that may or may not apply 

depending on a particular event or 

occurrence (such as penalty rates) or 

rates that may be applied at the 

institution’s discretion. Therefore, the 

Agencies propose to amend comment 

24(a)–1 accordingly. The Agencies note, 

however, that this clarification is 

limited to the disclosure requirements 

in § l.24(a) and does not alter 

§l.24(a)’s general prohibition on 

applying penalty rates or other 

contingent rates unless specifically 

permitted by §l.24(b). 

The Agencies also propose the 

following clarifications and technical 

corrections to the commentary to 

§l.24(a): 

• Amend the example in comment 

24(a)–2.i to clarify that the institution 

20810 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

14For example, assume that, at account opening 

on January 1, an institution discloses that a 10% 

rate will apply to purchases for six months and a 

15% rate will apply thereafter. The first day of the 

billing cycle for the account is the fifteenth of the 

month. If the six-month period expires on July 1, 

the institution may delay application of the 15% 

rate until July 15 without relinquishing its ability 

to apply that rate under §l.24(b)(1). 

disclosed a penalty rate at account 

opening. 

• Amend the example in comment 

24(a)–2.iii to clarify that the 12 CFR 

226.9(g) notice states that, if the 

consumer becomes more than 30 days 

late on the account, the penalty rate will 

apply to all balances on the account. 

• Amend the example in comment 

24(a)–2.iii.C to correct a typographical 

error. 

Section l.24(b)(1) Account Opening 

Disclosure Exception 

Section l.24(b)(1) provides that 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. Under this 

exception, if, for example, an institution 

discloses at account opening that a 5% 

rate will apply to purchases for six 

months and that a 15% rate will apply 

thereafter, the institution can increase 

the rate on the existing purchase 

balance and on new purchases to 15% 

after six months. These plans are 

sometimes referred to as ‘‘stepped 

rates.’’ 

Comment 24(b)(1)–1 states that, 

because §l.24(b)(1) is limited to 

increased rates that will apply after a 

specified period of time, the exception 

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. 

For example, as illustrated in comment 

24(b)(1)–1.i, §l.24(b)(1) does not 

permit an institution to apply an 

increased penalty rate when a consumer 

makes a late payment even if the 

institution disclosed that rate at account 

opening. For clarity, the Agencies 

propose to move this language into the 

text of §l.24(b)(1). The Agencies also 

propose to amend comment 24(b)(1)–1 

to clarify that the examples illustrate the 

application of §l.24, rather than just 

§l.24(a). 

Comment 24(b)(1)–2 clarifies that 

nothing in §l.24 prohibits an 

institution from assessing interest due to 

the loss of a grace period to the extent 

consistent with the prohibition on twocycle billing in §l.25. Because the 

Agencies understand that there is some 

confusion regarding the relationship 

between §l.24 and the provision of a 

grace period, the Agencies propose to 

add language to this comment clarifying 

that an institution has not reduced an 

annual percentage rate on a consumer 

credit card account for purposes of 

§l.24 if the institution does not charge 

interest on a balance when the 

consumer pays that balance in full prior 

to the expiration of a grace period. In 

addition, for organizational purposes, 

the Agencies propose to redesignate this 

comment as 24–2 and renumber 

comment 24(b)(1)–3 accordingly. 

Finally, the Agencies understand that 

there is some confusion as to whether 

an institution waives the right to impose 

an increased rate pursuant to 

§l.24(b)(1) if it does not do so 

immediately upon expiration of the 

specified time period. As a general 

matter, because §l.24 is intended to 

increase predictability and transparency 

for consumers, the exceptions in 

§l.24(b) do not permit institutions to 

retain the right to increase a rate 

indefinitely and at their discretion. For 

example, if at account opening an 

institution discloses a stepped rate of 

15% on purchases for one year and 20% 

thereafter, the institution can apply a 

lower rate of 17% at the end of the year 

but, if it wants to retain its right under 

§l.24(b)(1) to apply the 20% rate to 

purchases made during the first year, it 

must disclose to the consumer (pursuant 

to 12 CFR 226.9(c)) how long the 17% 

rate will apply and that the 20% rate 

will apply thereafter so that the 

consumer can make informed decisions 

when using the card. See comment 

24(b)(1)–3 (proposed comment 24(b)(1)– 

2)). 

The Agencies understand, however, 

that applying an increased rate on a 

specific date can present operational 

difficulties when that date falls in the 

middle of a billing cycle. Accordingly, 

to address this concern, the Agencies 

propose to add a new comment 24(b)– 

1 clarifying that, if §l.24(b) permits an 

institution to apply an increased annual 

percentage rate on a date that is not the 

first day of a billing cycle, the 

institution may delay application of the 

increased rate until the first day of the 

following billing cycle without 

relinquishing the ability to apply that 

rate.14

Section l.24(b)(3) Advance Notice 

Exception 

Section l.24(b)(3) 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. 

The Agencies understand that there has 

been some confusion regarding the 

interaction between this seven-day 

period in §l.24(b)(3) and the 

requirement in 12 CFR 226.9(c) and (g) 

that notice of an increased rate be 

provided at least 45 days prior to 

imposition of the increased rate. As 

illustrated in the examples in comment 

24(b)(3)–3, the distinction is that the 

institution may apply the increased rate 

to any transaction that occurs after the 

seventh day following provision of the 

notice, but it must wait 45 days to begin 

accruing interest at that rate. The reason 

for this distinction is that the two time 

periods serve different purposes. The 

seven-day period is intended to ensure 

that the consumer receives the notice 

and is aware of the increased rate before 

engaging in transactions to which that 

increased rate will eventually apply 

(unless the consumer transfers or pays 

off the balance). See 74 FR 5531. In 

contrast, the 45-day period is intended 

to give the consumer sufficient time to 

evaluate whether to continue using the 

credit card account at the increased rate 

or whether better terms can be obtained 

elsewhere. See 74 FR 5344–5356. For 

additional clarity, the Agencies propose 

to amend comment 24(b)(3)–2 to state 

that, when calculating interest charges, 

§l.24(b)(3) does not permit an 

institution to reach back to days before 

the effective date of the rate increase 

under 12 CFR 226.9(c) or (g)—in other 

words, the date 45 days after provision 

of the notice. 

The Agencies also propose to amend 

comment 24(b)(3)–2 to clarify when a 

transaction is deemed to have occurred 

for purposes of §l.24(b)(3). 

Specifically, the current version of 

comment 24(b)(3)–2 states that an 

institution may apply a rate increased 

pursuant to §l.24(b)(3) to transactions 

that are authorized within seven days— 

but are settled more than seven days— 

after provision of the notice. The 

Agencies understand, however, that this 

distinction has created some confusion 

because, for example, authorization may 

not be obtained for all transactions and 

because the term ‘‘settled’’ could refer to 

different points in the payment process, 

including settlement between the 

acquirer and the merchant or settlement 

between the consumer and the card 

issuer. Accordingly, for consistency and 

clarity, the Agencies propose to amend 

comment 24(b)(3)–2 to clarify that when 

a transaction occurred for purposes of 

§l.24(b)(3) is determined by the date of 

the transaction (without regard to when 

the transaction is authorized, settled, or 

posted to the consumer’s account). In 

addition, the Agencies would clarify 

that, when a merchant places a ‘‘hold’’ 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20811 

15For example, assume that the annual 

percentage rate for purchases on an account is 15% 

and that, pursuant to 12 CFR 226.9(c), the 

institution provides notice on July 1 that a rate of 

5% will apply to purchases until December 31, after 

which a rate of 17% will apply. If the institution 

applies the 5% rate to purchases made on or before 

July 8, the institution may only increase the rate on 

those purchases to a maximum of 15% on 

December 31. 

16For the same reasons, the Agencies propose to 

amend comment 24(b)(1)–3 (proposed comment 

24(b)(1)–2) to clarify that institutions may offer 

discounted stepped rates during the first year after 

account opening so long as the rate that applies 

after expiration of the discounted rate does not 

exceed the rate disclosed at account opening for 

that category of transactions. 

17See, e.g., 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); OTS 

Regulatory Bulletin RB 37–16 on Examination 

Handbook, Asset Quality Section 218, Credit Card 

Lending (May 8, 2006) (available at http:// 

files.ots.treas.gov/74827.pdf). 

on the available credit on an account for 

an estimated transaction amount when 

the actual transaction amount will not 

be known until a later date, the date of 

the transaction for purposes of 

§l.24(b)(3) is the date on which the 

merchant determines the actual 

transaction amount. The Agencies also 

propose to amend the examples in 

comment 24(b)(3)–3 for consistency 

with these proposed changes. 

In addition, the Agencies propose to 

amend §l.24(b)(3) and its commentary 

to reflect that notice of an increased rate 

may be provided under 12 CFR 226.9(b), 

which applies to supplemental access 

devices (such as convenience checks) 

and additional features added to the 

account after account opening. 12 CFR 

226.9(b) requires creditors to disclose 

the rates and other key terms applicable 

to the device or feature before the 

consumer uses the device or feature for 

the first time. For example, 12 CFR 

226.9(b)(3)(A) requires that creditors 

providing convenience checks to which 

a temporary promotional rate applies 

disclose key terms on the front of the 

page containing the checks, including 

the promotional rate, the period during 

which the promotional rate will be in 

effect, and the rate that will apply after 

the promotional rate expires. Thus, 

unlike rates increased pursuant to a 12 

CFR 226.9(c) and (g) notice, the sevenday period is not necessary for rate 

increases disclosed pursuant to 12 CFR 

226.9(b) because the device or feature 

will not be used before the consumer 

has received notice of the applicable 

rates and terms. Accordingly, the 

Agencies propose to amend §l.24(b)(3) 

to provide that increased rates disclosed 

pursuant to 12 CFR 226.9(b) must not be 

applied to transactions that occurred 

prior to provision of the notice. Section 

l.24(b)(3) would continue to provide 

that increased rates disclosed pursuant 

to 12 CFR 226.9(c) or (g) must not be 

applied to transactions that occurred 

within seven days after provision of the 

notice. The Agencies would also clarify 

in comment 24(b)(3)–2 that, if a rate 

increase is disclosed pursuant to both 

12 CFR 226.9(b) and 12 CFR 226.9(c), 

that rate may only be applied to 

transactions that occur more than seven 

days after provision of the 12 CFR 

226.9(c) notice. In addition, the 

Agencies would add an illustrative 

example in new comment 24(b)(3)–4.iv. 

Finally, the Agencies understand that 

clarification is needed regarding the 

application of discounted promotional 

rates to existing accounts. As discussed 

above, §l.24(b)(1) permits stepped 

rates disclosed at account opening. In 

addition, comment 24(b)(3)–3 provides 

some examples of how a stepped rate 

could be provided pursuant to a 12 CFR 

226.9(c) notice. The Agencies did not, 

however, specifically address 

circumstances in which a discounted 

promotional stepped rate is offered after 

account opening. Consistent with 

comment 24(b)(3)–3, the Agencies 

believe that, if the consumer receives 

advance notice of the term of the 

discounted rate and the rate that will 

apply after that term expires, a 

promotional stepped rate offer on an 

existing account can provide the same 

benefits to consumers as a promotional 

stepped rate offer at account opening so 

long as the offer cannot be used to 

increase the rate that applies to preexisting balances. 

Accordingly, to clarify that such offers 

are permitted, the Agencies propose to 

add a new comment 24(b)(3)–4 stating 

that nothing in §l.24 prohibits an 

institution from lowering the annual 

percentage rate that applies to an 

existing balance or to new transactions. 

The comment would further state, 

however, that, if a lower rate is applied 

to an existing balance, the institution 

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(b) or 

(c). This notice must state the period of 

time during which the lower rate will 

apply (or the date until which that rate 

will apply) and the rate that will apply 

after expiration of that period. 

Furthermore, to ensure that the 

consumer receives notice of the offer 

before engaging in transactions that are 

subject to that offer (and will therefore 

eventually be taken to a higher rate), the 

comment would clarify that, when an 

institution applies a decreased rate to 

transactions that occurred prior to 

provision of the notice (or, in the case 

of a 12 CFR 226.9(c) or (g) notice, 

transactions that occurred within seven 

days after provision of the notice), the 

institution may not subsequently 

increase the rate that applies to those 

transactions to a rate that is higher than 

the rate that applied prior to the 

decrease.15 Finally, the comment would 

provide illustrative examples of stepped 

rate offers that would comply with these 

requirements.16

Section l.24(b)(5) Workout 

Arrangement Exception 

Section l.24(b)(5) provides that an 

annual percentage rate may be increased 

due to the consumer’s failure to comply 

with the terms of a workout 

arrangement between the institution 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. This exception is intended 

to encourage institutions to continue 

offering workout arrangements that 

reduce rates for consumers in serious 

default, while also ensuring that a 

consumer who enters into such an 

arrangement but is unable to comply 

with its terms is not charged a rate that 

exceeds the rate that applied prior to the 

arrangement. See 74 FR 5532. 

Because the term ‘‘workout’’ has been 

used by the Agencies in other 

contexts,17 the Agencies understand 

that there is some confusion as to 

whether this exception also applies to 

temporary hardship arrangements that 

assist consumers in overcoming 

financial difficulties by lowering the 

annual percentage rate for a period of 

time. For example, if an account 

becomes seriously delinquent because 

of a loss of employment, the institution 

may reduce the rate that applies to the 

outstanding balance from the penalty 

rate to a rate of zero on the condition 

that the consumer make payments that 

will cure the delinquency within a 

specified period of time. If the 

arrangement is successful, the 

institution may choose to return the 

annual percentage rate to the rate that 

applied prior to commencement of the 

temporary hardship arrangement. 

Because such arrangements can provide 

important benefits to consumers, the 

Agencies propose to amend §l.24(b)(5) 

and its commentary to clarify that this 

exception also applies to temporary 

hardship arrangements and when the 

consumer completes a workout or 

temporary hardship arrangement. 

20812 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

18 50 U.S.C. app. 527(a)(1)(B) applies to 

obligations or liabilities that do not consist of a 

mortgage, trust deed, or other security in the nature 

of a mortgage. 

19 In particular, the Agencies understand that the 

references in the January 2009 Rule to ‘‘assessing’’ 

or ‘‘charging’’ interest have caused uncertainty 

about whether, during the promotional period, an 

institution must treat accrued interest for which the 

consumer may or may not ultimately be responsible 

(depending on whether the balance is paid in full 

prior to expiration) as part of the consumer’s debt. 

The Agencies did not intend to regulate the 

accounting treatment of this accrued interest. 

Instead, the Agencies intended to ensure that 

consumers understand the amount of interest for 

which they will be responsible if the balance is not 

paid in full before expiration. As discussed 

elsewhere in this SUPPLEMENTARY INFORMATION, the 

Board is proposing amendments to Regulation Z in 

today’s Federal Register to accomplish this 

purpose. 

20 If, however, the waived or deferred interest 

balance is not paid in full on or before the date the 

program expires, the institution is not required to 

wait an additional 30 days before charging accrued 

interest. See proposed comment 24(a)–2.iv. 

21As discussed above, the Board has also 

proposed to amend the periodic statement 

disclosures in Regulation Z, 12 CFR 226.7, to ensure 

that consumers who utilize these types of 

promotional programs are informed of the date on 

which the program expires and the amount of 

Proposed §l.24(b)(6) Servicemembers 

Civil Relief Act Exception 

The Agencies understand that 

clarification is required regarding the 

relationship between §l.24 and certain 

provisions of the Servicemembers Civil 

Relief Act (SCRA), 50 U.S.C. app. 501 et 

seq. Specifically, 50 U.S.C. app. 

527(a)(1) provides that ‘‘[a]n obligation 

or liability bearing interest at a rate in 

excess of 6 percent per year that is 

incurred by a servicemember, or the 

servicemember and the servicemember’s 

spouse jointly, before the 

servicemember enters military service 

shall not bear interest at a rate in excess 

of 6 percent. * * *’’ With respect to 

consumer credit card accounts, this 

restriction applies during the period of 

military service. See 50 U.S.C. app. 

527(a)(1)(B).18

Under the current version of §l.24, 

an institution that complies with the 

SCRA by lowering the rate that applies 

to an existing balance on a consumer 

credit card account when the consumer 

enters military service would not be 

permitted to increase the rate for that 

balance once the period of military 

service ends and the protections of the 

SCRA no longer apply. The Agencies 

did not intend this result, which 

appears to be inconsistent with the 

plain language of the SCRA. 

Accordingly, the Agencies propose to 

add a new exception in §l.24(b)(6) 

stating that an annual percentage rate 

that has been decreased pursuant to 50 

U.S.C. app. 527 may be increased once 

that provision no longer applies, 

provided that the increased rate does 

not exceed the rate that applied prior to 

the period of military service. 

Treatment of Deferred Interest and 

Similar Promotional Programs 

In the final rule, the Agencies 

concluded that deferred interest 

programs, as currently designed and 

marketed, are inconsistent with the 

general prohibition in §l.24 on the 

application of increased rates to existing 

balances. See 74 FR 5527–5528. The 

Agencies noted that, although such 

programs provide substantial benefits to 

consumers who pay the balance in full 

prior to expiration of the program 

(thereby avoiding the assessment of 

interest charges), consumers who do not 

do so may be unfairly surprised, 

particularly because these programs are 

typically marketed as ‘‘interest free.’’ 

Accordingly, the Agencies determined 

that the assessment of deferred interest 

is effectively a repricing of past 

transactions subject to §l.24 and that 

prohibiting this practice would improve 

transparency and enable consumers to 

make more informed decisions 

regarding the cost of using credit. See id. 

The Agencies specifically stated, 

however, that §l.24 does not prohibit 

institutions from offering promotional 

programs that provide similar benefits 

to consumers but do not raise concerns 

about unfair surprise. In particular, the 

Agencies noted that an institution could 

offer a program where interest is 

assessed on purchases at a disclosed 

rate for a period of time but the interest 

charged is waived if the principal is 

paid in full by the end of that period. 

The Agencies understand that the 

distinction in the January 2009 Rule 

between deferred interest and waived 

interest has caused confusion with 

respect to the manner in which 

institutions should structure 

promotional programs under which the 

consumer will not be obligated to pay 

interest that accrues on a balance if that 

balance is paid in full by a specified 

date or within a specified period of 

time. In light of this confusion, the 

Agencies believe that the January 2009 

Rule focused too heavily on the form or 

technical aspects of these programs.19

Deferred interest programs should not 

be categorically prohibited while 

waived interest programs are 

categorically exempt from the 

requirements of the final rule. Instead, 

the Agencies believe the better approach 

is to focus on applying consistent 

standards to ensure that consumers are 

not unfairly surprised by the cost of 

using these types of promotional 

programs. Accordingly, the Agencies 

propose the following amendments. 

As an initial matter, the Agencies 

understand that the distinction in the 

January 2009 Rule between ‘‘deferred 

interest’’ programs and ‘‘waived 

interest’’ programs could be read to 

suggest that some programs were 

covered by the final rule and others 

were not. Because the protections 

consumers receive should not depend 

on this technical distinction, the 

Agencies propose to amend the 

commentary to §l.24 to clarify that, 

although institutions may continue to 

provide promotional programs under 

which the consumer will not be 

obligated to pay interest that accrues on 

a balance if that balance is paid in full 

within a specified period of time, those 

programs are subject to all of the 

protections in §l.24, including the 

general prohibition on so-called ‘‘hair 

trigger’’ or ‘‘universal default’’ 

repricings of existing balances. See 

proposed comments 24(a)–2.iv and 

24(b)(3)–4.iii. Thus, for example, if a 

consumer relies on this type of 

promotional program when making a 

purchase, the institution cannot deny 

the consumer the opportunity to avoid 

interest charges on that purchase by 

paying the purchase in full prior to 

expiration of the promotional period 

unless the consumer is more than 30 

days’ delinquent on the account.20

Furthermore, as discussed above, the 

Agencies propose to amend the payment 

allocation rules in §l.23 to ensure that 

consumers are not required to pay off all 

balances on the account in order to 

receive the benefits of these types of 

promotional programs. In addition, 

elsewhere in today’s Federal Register, 

the Board has proposed to amend the 

advertising requirements in Regulation 

Z, 12 CFR 226.16, to address concerns 

that the use of terms such as ‘‘no 

interest’’ to describe deferred or waived 

interest programs may confuse 

consumers. Specifically, whenever ‘‘no 

interest’’ or a similar term is used in an 

advertisement for a deferred or waived 

interest program, proposed 12 CFR 

226.16(h) would require the creditor to 

disclose that any balance subject to the 

program must be paid in full by the end 

of the promotional period to avoid 

interest charges (for example, ‘‘no 

interest if paid in full within six 

months’’). In addition, the creditor 

would be required to state that, if the 

balance subject to the program is not 

paid in full within the promotional 

period, interest will be charged from the 

date the consumer became obligated for 

each transaction subject to the 

program.21 The Agencies believe that 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20813 

interest for which they will be responsible if the 

promotional balance is not paid in full by that date. 

these amendments will ensure that 

institutions can continue to offer 

programs that provide substantial 

benefits to consumers while protecting 

consumers from unexpected increases 

in the cost of completed transactions. 

Finally, the Agencies understand that 

there is some confusion regarding 

implementation of the final rule with 

respect to existing deferred interest 

programs. As noted above, the effective 

date of the January 2009 Rule is July 1, 

2010. In the SUPPLEMENTARY

INFORMATION to that rule, the Agencies 

provided guidance regarding the 

implementation of §l.24. See 74 FR 

5534. The Agencies did not, however, 

address the effect of the rule on deferred 

interest programs established prior to 

the effective date that expire after that 

date. The Agencies did not intend to 

convert these programs into interest-free 

loans by prohibiting an institution from 

charging interest if the deferred interest 

balance is not paid in full prior to 

expiration of the deferred interest 

period. However, the Agencies will not 

permit institutions to continue practices 

prohibited by the January 2009 Rule 

after the effective date. Accordingly, if 

a deferred interest program established 

prior to the effective date permits a 

consumer to avoid deferred interest 

charges by paying the deferred interest 

balance in full by a date that falls on or 

after July 1, 2010, the institution may 

charge deferred interest to the account 

consistent with the terms of the 

program, provided that: (1) Any 

periodic statement mailed or delivered 

on or after July 1, 2010 complies with 

the disclosure requirements in 12 CFR 

226.7 (as amended); and (2) as of July 1, 

2010, the institution fully complies with 

the protections in the January 2009 Rule 

(as amended), including the payment 

allocation requirements in proposed 

§l.23(b) and the prohibitions on ‘‘hair 

trigger’’ and ‘‘universal default’’ 

repricings in §l.24. 

24(c) Treatment of Protected Balances 

The Agencies propose to amend 

comment 24(c)(2)–1 to clarify that 

§l.24(c)(2) does not prohibit an 

institution from continuing to assess a 

periodic fee that was assessed before the 

account had a protected balance or from 

assessing fees such as late payment fees 

if the only balance on the account is a 

protected balance. 

Requests for Comment 

The Agencies request comment on: 

• Whether institutions establish 

separate categories of transactions based 

on factors other than annual percentage 

rates and, if so, for what reasons and 

whether proposed comment 24–3 

should be revised accordingly. 

• Whether the proposed 

implementation guidance regarding 

deferred interest plans provides 

sufficient protections for consumers and 

flexibility for institutions. 

Section l.25—Unfair Balance 

Computation Method 

Section l.25(a) prohibits institutions 

from imposing 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 

institution within which the consumer 

may repay any portion of the credit 

extended without incurring finance 

charges. The prohibited practice is 

sometimes referred to as ‘‘two-cycle’’ or 

‘‘double-cycle’’ billing. 

As discussed above, the Agencies are 

proposing amendments to §l.23, 

§l.24, and Regulation Z that would 

clarify the substantive and disclosure 

requirements for promotional programs 

under which a consumer will not be 

obligated to pay interest that accrues on 

a balance if that balance is paid in full 

prior to a specified date or the 

expiration of a specified period of time. 

Consistent with these proposed 

amendments, the Agencies also propose 

to add a new comment 25(a)–3, 

clarifying that §l.25 does not prohibit 

the institution from charging accrued 

interest under this type of program if the 

balance is not paid in full prior to the 

specified date. 

IV. Regulatory Analysis 

Section VIII of the SUPPLEMENTARY

INFORMATION to the January 2009 Rule 

sets forth the Agencies’ respective 

analyses under the Regulatory 

Flexibility Act (5 U.S.C. 601 et seq.) and 

the Paperwork Reduction Act of 1995 

(44 U.S.C. 3506; 5 CFR part 1320 

Appendix A.1). See 74 FR 5548–5551. 

This section also sets forth the OTS’s 

determinations with respect to 

Executive Orders 12866 and 13132 and 

the Unfunded Mandates Reform Act of 

1995 as well as the NCUA’s 

determinations with respect to 

Executive Order 13132 and the Treasury 

and General Government 

Appropriations Act, 1999. See 74 FR 

5551–5558. Because the proposed 

amendments are clarifications and 

would not, if adopted, alter the 

substance of the analyses and 

determinations accompanying the 

January 2009 Rule, the Agencies 

continue to rely on those analyses and 

determinations for purposes of this 

rulemaking. 

V. Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act requires the Board and OTS 

to use plain language in all proposed 

and final rules published after January 

1, 2000. Additionally, NCUA’s goal is to 

promulgate clear and understandable 

regulations that impose minimal 

regulatory burdens. Therefore, the 

Agencies specifically invite your 

comments on how to make this proposal 

easier to understand. 

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. 

Board of Governors of the Federal 

Reserve System 

12 CFR Chapter II 

Text of Proposed Revisions 

Certain conventions have been used 

to highlight the proposed revisions. 

New language is shown inside flboldtype arrowsfi while language that 

would be deleted is set off with øboldtype brackets¿. 

Authority and Issuance 

For the reasons discussed in the joint 

preamble, the Board proposes to further 

amend 12 CFR part 227, as amended at 

74 FR 5559, January 29, 2009, as set 

forth below: 

PART 227—UNFAIR OR DECEPTIVE 

ACTS OR PRACTICES (REGULATION 

AA) 

1. Section 227.23 is revised to read as 

follows: 

§ 227.23 Unfair acts or practices regarding 

allocation of payments. 

When different annual percentage 

rates apply to different balances on a 

consumer credit card accountfl: 

(a) General rule. Except as provided in 

paragraph (b) of this sectionfi, the bank 

must allocate any amount paid by the 

consumer in excess of the required 

20814 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

minimum periodic payment among the 

balances using one of the following 

methods: 

fl(1)fi ø(a)¿ High-to-low method. 

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. 

fl(2)fi ø(b)¿ Pro rata method. 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. 

fl(b) Special rule for accounts subject 

to certain promotional programs. When 

a promotional program provides that a 

consumer will not be obligated to pay 

interest that accrues on a balance if that 

balance is paid in full prior to the 

expiration of a specified period of time, 

the bank must allocate amounts paid by 

the consumer in excess of the required 

minimum periodic payment first to that 

balance during the two billing cycles 

immediately preceding expiration of the 

specified period and any remaining 

portion to the other balances consistent 

with paragraph (a) of this section.fi 

2. Section 227.24 is amended by 

revising paragraph (b) to read as follows: 

§ 227.24 Unfair acts or practices regarding 

increases in annual percentage rates. 

* * * * * 

(b) Exceptions. 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. An annual percentage rate for 

a category of transactions may be 

increased to flan annual percentage 

ratefi øa rate¿ disclosed at account 

opening upon expiration of a period of 

time disclosed at account opening. 

flThis exception does not permit 

application of an increased annual 

percentage rate disclosed at account 

opening that is contingent on a 

particular event or occurrence or that 

may be applied at the bank’s 

discretion.fi 

(2) Variable rate exception. An annual 

percentage rate for a category of 

transactions that varies according to an 

index that is not under the bank’s 

control and is available to the general 

public may be increased due to an 

increase in the index. 

(3) Advance notice exception. An 

annual percentage rate for a category of 

transactions may be increased pursuant 

to a notice under 12 CFR 226.9fl(b), (c), 

or (g)fi ø(c) or (g)¿fl, provided that: 

(i) If the bank discloses the increased 

rate pursuant to 12 CFR 226.9(b), that 

rate must not be applied to transactions 

that occurred prior to provision of the 

notice; 

(ii) If the bank discloses the increased 

rate pursuant to 12 CFR 226.9(c) or (g), 

that rate must not be applied to 

transactions that occurred within seven 

days after provision of the notice; and 

(iii) This exception does not permit an 

increase in any annual percentage rate 

during the first year after the account is 

opened.fi øfor 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. An annual 

percentage rate may be increased due to 

the bank not receiving the consumer’s 

required minimum periodic payment 

within 30 days after the due date for 

that payment. 

(5) Workout fland temporary 

hardshipfi arrangement exception. An 

annual percentage rate may be increased 

due to the consumer’s flcompletion 

offi øfailure to comply with the terms 

of¿ a workout flor temporary 

hardshipfi arrangement between the 

bank and the consumer flor the 

consumer’s failure to comply with the 

terms of such an arrangementfi, 

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 øworkout¿ 

arrangement. 

fl(6) Servicemembers Civil Relief Act 

exception. An annual percentage rate 

that has been decreased pursuant to 50 

U.S.C. app. 527 may be increased once 

that provision no longer applies, 

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 the 

decrease.fi 

* * * * * 

3. In Supplement I to Part 227: 

A. Add Section 227.21—Definitions. 

B. Under Section 227.22—Unfair Acts 

or Practices Regarding Time to Make 

Payment, under 22(b) Compliance with 

General Rule, paragraph 3. is revised. 

C. Under Section 227.23—Unfair Acts 

or Practices Regarding Allocation of 

Payments: 

(i) Paragraph 2., the heading of 

paragraph 3., and paragraphs 4. and 6. 

are revised; 

(ii) Redesignate 23(a) High-to-Low 

Method as 23(a)(1) High-to-Low Method; 

(iii) Under 23(a)(1) High-to-Low 

Method, paragraph 1.v is added; 

(iv) Redesignate 23(b) Pro Rata 

Method as 23(a)(2) Pro Rata Method; 

(v) Under 23(a)(2) Pro Rata Method, 

paragraph 1. is revised; and 

(vi) Add 23(b) Special Rule for 

Accounts Subject to Certain 

Promotional Programs. 

D. Under Section 227.24—Unfair Acts 

or Practices Regarding Increases in 

Annual Percentage Rates: 

(i) Paragraph 1. is revised; 

(ii) Add paragraphs 2., 3., 4.; 

(iii) Under 24(a) General Rule, 

paragraphs 1., 2.i. introductory text, 

2.iii. introductory text, and 2.iii.C. are 

revised, and paragraph 2.iv is added; 

(iv) Under 24(b) Exceptions, add 

paragraph 1.; 

(v) Under 24(b)(1) Account Opening 

Disclosure Exception, paragraph 1. 

introductory text is revised, paragraph 

1.iii. and paragraph 2. are removed, 

paragraph 3. is redesignated as 

paragraph 2., the introductory text of 

newly designated paragraph 2. is 

revised, and paragraph 2.ii. is added; 

(vi) Under 24(b)(2) Variable Rate 

Exception, the heading of paragraph 5. 

is revised; 

(vii) Under 24(b)(3) Advance Notice 

Exception, paragraphs 2. and 3. are 

revised and paragraph 4. is added; 

(viii) Revise 24(b)(5) Workout 

Arrangement Exception; 

(ix) Under 24(c) Treatment of 

Protected Balances, under 24(c)(1) 

Repayment, under Paragraph 24(c)(1)(i), 

the heading of paragraph 2. is revised; 

and 

(x) Under 24(c) Treatment of 

Protected Balances, under 24(c)(2) Fees 

and Charges, paragraph 1. is revised. 

E. Under Section 227.25—Unfair 

Balance Computation Method, under 

25(a) General Rule, paragraph 3. is 

added. 

* * * * * 

Subpart C—Consumer Credit Card 

Account Practices Rule 

fl§ 227.21—Definitions 

21(a) Annual Percentage Rate 

1. Use of ‘‘rate.’’ For purposes of 

Subpart C, ‘‘rate’’ has the same meaning 

as ‘‘annual percentage rate’’ unless 

otherwise specified. 

21(c) Consumer Credit Card Account 

1. Closed accounts. If a consumer 

credit card account with an outstanding 

balance is closed, the account continues 

to be the same consumer credit card 

account for purposes of Subpart C with 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20815 

respect to that balance. For example, if 

a bank or a consumer closes a consumer 

credit card account with an outstanding 

balance, the bank would still be 

prohibited from increasing the annual 

percentage rate that applies to that 

balance unless permitted by one of the 

exceptions in § 227.24(b). 

2. Acquired accounts. If, through 

merger or acquisition (for example), a 

bank acquires a consumer credit card 

account with an outstanding balance, 

the account continues to be the same 

consumer credit card account for 

purposes of Subpart C with respect to 

that balance. For example, if a consumer 

credit card account has a $1,000 

purchase balance with an annual 

percentage rate of 15% and the bank 

that acquires that account applies an 

18% rate to purchases, the bank would 

be prohibited from applying the 18% 

rate to the $1,000 balance unless 

permitted by one of the exceptions in 

§ 227.24(b). 

3. Balance transfers. 

i. Between accounts issued by the 

same bank. If a balance is transferred 

from a consumer credit card account 

issued by a bank to another credit 

account issued by the same bank or its 

affiliate or subsidiary, the account 

continues to be the same consumer 

credit card account for purposes of 

Subpart C with respect to that balance 

unless the account to which the balance 

is transferred is an open-end credit plan 

secured by the consumer’s dwelling. For 

example, if a consumer credit card 

account has a $2,000 purchase balance 

with an annual percentage rate of 15% 

and that balance is transferred to 

another consumer credit card account 

issued by the same bank that applies an 

18% rate to purchases, the bank would 

be prohibited from applying the 18% 

rate to the $2,000 balance unless 

permitted by one of the exceptions in 

§ 227.24(b). Additional circumstances in 

which a balance is considered 

transferred for purposes of this 

comment include when: 

A. A retail credit card with an 

outstanding balance is replaced or 

substituted with a cobranded general 

purpose card that can be used with a 

broader merchant base; 

B. A credit card account with an 

outstanding balance is replaced or 

substituted with another credit card 

account offering different features; 

C. A credit card account with an 

outstanding balance is consolidated or 

combined with one or more other credit 

card accounts into a single credit card 

account; and 

D. A credit card account is replaced 

or substituted with a line of credit that 

can be accessed solely by an account 

number. 

ii. Between accounts issued by 

different institutions. If a balance is 

transferred to a consumer credit card 

account issued by a bank from a credit 

account issued by a different bank or an 

institution that is not an affiliate or 

subsidiary of the bank that issued the 

consumer credit card account, the 

account is not the same consumer credit 

card account for purposes of Subpart C 

with respect to that balance. Thus, the 

provisions of Subpart C do not prohibit 

the bank to which the balance is 

transferred from applying its account 

terms to that balance, provided that 

those terms comply with Subpart C. For 

example, if a consumer credit card 

account issued by bank A has a $1,000 

purchase balance at an annual 

percentage rate of 15% and the 

consumer transfers that balance to a 

consumer credit card account with a 

purchase rate of 17% issued by bank B, 

bank B may apply the 17% rate to the 

$1,000 balance. However, bank B may 

not subsequently increase the rate on 

that balance unless permitted by one of 

the exceptions in § 227.24(b).fi 

§ 227.22—Unfair Acts or Practices 

Regarding Time To Make Payment 

* * * * * 

22(b) Compliance With General Rule 

* * * * * 

3. Example of alternative method of 

compliance. Assume that, for a 

particular type of consumer credit card 

account, a bank only provides periodic 

statements electronically and only 

accepts payments electronically 

(consistent with applicable law and 

regulatory guidancefl, including the 

consumer notice and consent 

procedures of the Electronic Signatures 

in Global and National Commerce Act 

(E-Sign Act), 15 U.S.C. 7001 et seq.fi). 

Under these circumstances, the bank 

could comply with § 227.22(a) even if it 

does not provide periodic statements 21 

days before the payment due date 

consistent with § 227.22(b)(2). 

§ 227.23—Unfair Acts or Practices 

Regarding Allocation of Payments 

* * * * * 

2. Adjustments of one dollar or less 

permitted. When allocating payments, 

the bank may adjust amounts by one 

dollar or less. For example, if a bank is 

allocating $100 pursuant to 

§ 227.23fl(a)(2)fiø(b)¿ among balances 

of $1,000, $2,000, and $4,000, the bank 

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 øannual 

percentage¿ rates. * * * 

4. Use of permissible allocation 

methods. A bank 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 § 227.23. For example, a 

bank may change from allocating to the 

highest rate balance first pursuant to 

§ 227.23(a)fl(1)fi to allocating pro rata 

pursuant to § 227.23fl(a)(2)fiø(b)¿ or 

vice versa. Similarly, a bank may 

allocate to the highest rate balance first 

pursuant to § 227.23(a)fl(1)fi on some 

of its accounts and allocate pro rata 

pursuant to § 227.23fl(a)(2)fiø(b)¿ on 

other accounts. 

* * * * * 

6. Balances with the same øannual 

percentage¿ rate. 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, 

§ 227.23 flgenerallyfi does not require 

that any particular method be used 

when allocating among the balances 

with the same annual percentage rate. 

Under these circumstances, a bank may 

treat the balances with the same rate as 

a single balance or separate balances. 

See comments 23(a)fl(1)fi–1.iv and 

23fl(a)(2)fiø(b)¿–2.iv. flHowever, 

when a consumer will not be obligated 

to pay interest that accrues on a balance 

if that balance is paid in full prior to the 

expiration of a specified period of time, 

that balance must be treated as a balance 

with an annual percentage rate of zero 

for purposes of § 227.23 during that 

period of time. For example, if an 

account has a $1,000 purchase balance 

and a $2,000 balance on which the 

consumer will not be obligated to pay 

interest if that balance is paid in full 

prior to July 1 and a 15% annual 

percentage rate applies to both, the 

balances must be treated as balances 

with different rates for purposes of 

§ 227.23 until July 1. In addition, for 

purposes of allocating pursuant to 

§ 227.23(a)(1), any amount paid by the 

consumer in excess of the required 

minimum periodic payment must be 

applied first to the $1,000 purchase 

balance except during the last two 

billing cycles of the promotional period 

(when it must be applied first to any 

remaining portion of the $2,000 

balance). See comment 23(a)(1)–1.v.fi 

23(a)fl(1)fi High-to-Low Method 

1. * * * 

flv. Assume that on January 1 a 

consumer uses a credit card account to 

make a $1,200 purchase subject to a 

20816 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

promotional offer under which interest 

accrues at an annual percentage rate of 

15% but the consumer will not be 

obligated to pay that interest if the 

balance is paid in full on or before June 

30. The billing cycles for this account 

begin on the first day of the month and 

end on the last day of the month. Each 

month from January through June, the 

consumer uses the account to make 

$200 in purchases that are not subject to 

the promotional offer but are subject to 

the 15% rate. Each month from 

February through June, the consumer 

pays $400 in excess of the required 

minimum periodic payment on the 

payment due date, which is the twentyfifth of the month. Any interest that 

accrues on the non-promotional 

purchases is paid by the required 

minimum periodic payment. A bank 

using this method would allocate the 

$400 excess payments received on 

February 25, March 25, and April 25 as 

follows: $200 to pay off the nonpromotional balance (that is subject to 

the 15% rate) and the remaining $200 to 

the promotional balance (that is treated 

as a balance with a rate of zero). Section 

227.23(b), however, requires the bank to 

allocate the entire $400 excess payment 

received on May 25 to the promotional 

balance. Similarly, § 227.23(b) requires 

the bank to allocate the $400 excess 

payment received on June 25 as follows: 

$200 to the promotional balance (which 

pays that purchase in full) and the 

remaining $200 to the non-promotional 

balance.fi 

23fl(a)(2)fiø(b)¿ Pro Rata Method 

1. Total balance. A bank 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 

§ 227.23fl(a)(2)fiø(b)(3)¿. See 

comment 23fl(a)(2)fiø(b)¿–2.iii. 

* * * * * 

fl23(b) Special Rule for Accounts 

Subject to Certain Promotional 

Programs 

1. Grace periods. Section 227.23(b) 

applies to promotional programs under 

which the consumer is not obligated to 

pay interest that accrues on a balance if 

that balance is paid in full prior to the 

expiration of a specified period of time. 

A grace period during which a 

consumer may repay one or more 

balances on a consumer credit card 

account is not a ‘‘promotional program’’ 

for purposes of § 227.23(b).fi 

§ 227.24—Unfair Acts or Practices 

Regarding Increases in Annual 

Percentage Rates 

1. Relationship to Regulation Z, 12 

CFR part 226. A bank that complies 

with the applicable disclosure 

requirements in Regulation Z, 12 CFR 

part 226, has complied with the 

disclosure requirements in § 227.24. See 

12 CFR 226.5a, 226.6, 226.9. For 

example, a bank may comply with the 

requirement in § 227.24(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 

§ 227.24(b)(3), a bank must comply with 

the disclosure requirements in 12 CFR 

226.9fl(b), (c), or (g)fi ø(c) or (g)¿. 

However, nothing in § 227.24 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. 

fl2. Relationship to grace period. 

Nothing in § 227.24 prohibits a bank 

from assessing interest due to the loss of 

a grace period to the extent consistent 

with § 227.25. In addition, a bank has 

not reduced an annual percentage rate 

on a consumer credit account for 

purposes of § 227.24 if the bank does 

not charge interest on a balance when 

the consumer pays that balance in full 

prior to the expiration of a grace period. 

3. Category of transactions. For 

purposes of § 227.24, a ‘‘category of 

transactions’’ is a type or group of 

transactions to which an annual 

percentage rate applies that is different 

than the annual percentage rate that 

applies to other transactions. For 

example, purchase transactions, cash 

advance transactions, and balance 

transfer transactions are separate 

categories of transactions for purposes 

of § 227.24 if a bank applies different 

annual percentage rates to each. 

Furthermore, if, for example, the bank 

applies different annual percentage rates 

to different types of purchase 

transactions (such as one rate for 

purchases of gasoline and a different 

rate for all other purchases), each type 

constitutes a separate category of 

transactions for purposes of § 227.24. 

4. Account opening. 

i. Multiple accounts with same bank. 

When a consumer has a credit card 

account with a bank and the consumer 

opens a new credit card account with 

the same bank (or its affiliate or 

subsidiary), the opening of the new 

account constitutes an ‘‘account 

opening’’ for purposes of § 227.24 if, 

more than 15/30 days after the new 

account is opened, the consumer has the 

ability to obtain additional extensions of 

credit on each account. For example, 

assume that, on January 1 of year one, 

a consumer opens a credit card account 

with a bank. On July 1 of year one, the 

consumer opens a second credit card 

account with that bank. On July 15, a 

$1,000 balance is transferred from the 

first account to the second account. The 

opening of the second account 

constitutes the opening of an account 

for purposes of § 227.24 so long as, on 

July 17/August 1, the consumer can 

engage in transactions using either 

account. Under these circumstances, the 

bank could not increase an annual 

percentage rate on the second account 

pursuant to § 227.24(b)(3) until July 1 of 

year two (which is one year after the 

second account was opened). 

ii. Replacement or consolidation. 

A. Generally. A consumer credit card 

account has not been opened for 

purposes of § 227.24 when a consumer 

credit card account issued by a bank is 

replaced or consolidated with another 

consumer credit card account issued by 

the same bank (or its affiliate or 

subsidiary). Circumstances in which a 

consumer credit card account has not 

been opened for purposes of § 227.24 

include when: 

(1) A retail credit card is replaced 

with a cobranded general purpose card 

that can be used at a wider number of 

merchants; 

(2) A credit card account is replaced 

with another consumer credit card 

account offering different features; 

(3) A credit card account is 

consolidated or combined with one or 

more other credit card accounts into a 

single credit card account; or 

(4) A credit card account acquired 

through merger or acquisition is 

replaced with a credit card account 

issued by the acquiring bank. 

B. Limitation. A bank that replaces or 

consolidates a consumer credit card 

account with another consumer credit 

card account issued by the bank (or its 

affiliate or subsidiary) may not increase 

an annual percentage rate in a manner 

otherwise prohibited by § 227.24. For 

example, assume that, on January 1 of 

year one, a consumer opens a consumer 

credit card account with an annual 

percentage rate for purchases of 15%. 

On July 1 of year one, the account is 

replaced with a consumer credit card 

account that offers different features 

(such as rewards on purchases). Under 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20817 

these circumstances, the bank cannot 

increase the annual percentage rate for 

purchases to a rate that is higher than 

15% pursuant to § 227.24(b)(3) until 

January 1 of year two (which is one year 

after the first account was opened).fi 

24(a) General Rule 

1. Rates that will apply to each 

category of transactions. Section 

227.24(a) requires banks to disclose, at 

account opening, the annual percentage 

rates that will apply to each category of 

transactions on the account. A bank 

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. flThe 

disclosure requirements in § 227.24(a) 

do not apply to annual percentage rates 

that are contingent on a particular event 

or occurrence or may be applied at the 

bank’s discretion (such as penalty rates) 

insofar as those rates may be applied 

consistent with § 227.24.fi 

2. * * * 

i. Assume that, at account opening on 

January 1 of year one, a bank discloses 

that the annual percentage rate for 

purchases is a non-variable rate of 15% 

and will apply for six months. The bank 

also discloses that, after six months, the 

annual percentage rate for purchases 

will be a variable rate that is currently 

18% and will be adjusted quarterly by 

adding a margin of 8 percentage points 

to a publicly available index not under 

the bank’s control. flFurthermore,fi 

øFinally,¿ the bank discloses that the 

annual percentage rate for cash 

advances is the same variable rate that 

will apply to purchases after six 

months. flFinally, the bank discloses 

that, to the extent consistent with 

§ 227.24 and other applicable law, a 

non-variable penalty rate of 30% may 

apply if the consumer makes a late 

payment.fi 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. 

* * * * * 

iii. Assume that, at account opening 

on January 1 of year one, a bank 

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 bank’s control. The 

bank also discloses that, to the extent 

consistent with § 227.24 and other 

applicable law, a non-variable penalty 

rate of 28% 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 bank 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 28% will 

apply as of August 9 to all transactions 

made on or after July 3 fland that, if the 

consumer becomes more than 30 days 

late, the penalty rate will apply to all 

balances on the accountfi. On July 4, 

the consumer makes a $300 purchase. 

* * * * * 

C. Same facts as paragraph A. above 

except the payment due on June 15 of 

year two is received on July 20. Section 

227.24(b)(4) permits the bank to apply 

the 28% 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 bank provided a 12 CFR 

226.9(g) notice on June fl25fiø24¿ 

stating the 28% penalty rate, the bank 

may apply the 28% 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). 

fliv. Assume that, at account opening 

on January 1 of year one, the bank 

discloses a promotional program under 

which interest on purchases made 

during January will accrue at a nonvariable rate of 20%, but the consumer 

will not be obligated to pay that interest 

if those purchases are paid in full by 

December 31 of year one. On January 15, 

the consumer makes a purchase of 

$2,000. No other transactions are made 

on the account. The payment due on 

April 1 is not received until April 10. 

Section 227.24 does not permit the bank 

to deny the consumer the opportunity to 

avoid interest charges on the $2,000 

purchase by paying that purchase in full 

on or before December 31 of year one. 

If, however, the $2,000 purchase 

remains unpaid on January 1 of year 

two, § 227.24 does not prohibit the bank 

from charging the interest accrued on 

that purchase during year one.fi 

24(b) Exceptions 

fl1. Delayed implementation of rate 

increase. If § 227.24(b) permits a bank to 

apply an increased annual percentage 

rate on a date that is not the first day 

of a billing cycle, the bank may delay 

application of the increased rate until 

the first day of the following billing 

cycle without relinquishing the ability 

to apply that rate. For example, assume 

that, at account opening on January 1, 

a bank discloses that a non-variable 

annual percentage rate of 10% will 

apply to purchases for six months and 

a non-variable rate of 15% will apply 

thereafter. The first day of the billing 

cycle for the account is the fifteenth of 

the month. If the six-month period 

expires on July 1, the bank may delay 

application of the 15% rate until July 15 

without relinquishing its ability to 

apply that rate under § 227.24(b)(1).fi 

24(b)(1) Account Opening Disclosure 

Exception 

1. Prohibited increases in rate. 

Section § 227.24(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 227.24(b)(1) does not permit 

application of flan increased annual 

percentage ratefi øincreased rates that 

are¿ disclosed at account opening 

flthat isfi øbut are¿ contingent on a 

particular event or occurrence or 

flthatfi may be applied at the bank’s 

discretion. The following examples 

illustrate rate increases that are not 

permitted by § 227.24ø(a)¿: 

* * * * * 

øiii. Assume that a bank 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 20%. The 

bank further discloses that, if all 

purchases made during year one are not 

paid in full by the end of that year, the 

bank will begin charging interest on the 

purchase balance and new purchases at 

20% and will retroactively charge 

interest on the purchase balance at a 

rate of 20% 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 227.24 does not permit the bank 

to reach back to charge interest on the 

$1,500 purchase from January 1 through 

December 31 of year one. However, the 

bank may apply the previouslydisclosed 20% rate to the $500 purchase 

balance beginning on January 1 of year 

two (pursuant to § 227.24(b)(1)).¿ 

ø2. Loss of grace period. Nothing in 

§ 227.24 prohibits a bank from assessing 

interest due to the loss of a grace period 

to the extent consistent with § 227.25.¿ 

20818 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

fl2.fi ø3.¿ Application of rate that is 

lower than disclosed rate. Section 

§ 227.24(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 § 227.24 

prohibits a bank from applying a rate 

that is lower than flafi øthe¿ disclosed 

rate fleither during orfi upon 

expiration of the period. However, 

flonce thefi øif a¿ lower rate is applied 

to an existing balance, the bank cannot 

subsequently increase the rate on that 

balance unless it øhas¿ provided the 

consumer with advance notice of the 

increase pursuant to 12 CFR 

226.9fl(b)fi or (c). flThis notice must 

state the period of time during which 

the lower rate will apply and the rate 

that will apply after expiration of that 

period.fi Furthermore, fla bank that 

applies a lower rate to transactions that 

occurred during the first year after 

account opening may not subsequently 

increase the rate that applies to those 

transactions to a rate that is higher than 

the increased rate disclosed at account 

openingfi øthe bank cannot increase 

the rate on that existing balance to a rate 

that is higher than the increased rate 

disclosed at account opening¿. The 

following flexamples illustratefi 

øexample illustrates¿ the application of 

flthefi øthis¿ rule: 

* * * * * 

flii. Assume that a bank discloses at 

account opening on January 1 of year 

one that a non-variable annual 

percentage rate of 15% will apply to 

purchases for one year, after which that 

rate will increase to a non-variable rate 

of 18%. The bank also discloses that, to 

the extent consistent with § 227.24 and 

other applicable law, a non-variable 

penalty rate of 30% may apply if the 

consumer’s required minimum periodic 

payment is received after the payment 

due date, which is the tenth of the 

month. The required minimum periodic 

payments are applied to accrued interest 

and fees but do not reduce the purchase 

balance. 

A. On September 30 of year one, the 

account has a purchase balance of 

$1,400 at the 15% rate. On October 1, 

the bank provides a notice pursuant to 

12 CFR 226.9(c) informing the consumer 

that the rate for new purchases will 

decrease to a non-variable rate of 10% 

for six months (from October 1 through 

March 31 of year two) and that, 

beginning on April 1 of year two, the 

rate for purchases will increase to a nonvariable rate of 20%. The bank does not 

apply the 10% rate to the $1,400 

purchase balance. On October 15 of year 

one, the consumer makes a $300 

purchase at the 10% rate. On January 1 

of year two, the bank may begin 

accruing interest on the $1,400 purchase 

balance at 18% (as disclosed at account 

opening). On January 15 of year two, the 

consumer makes a $150 purchase at the 

10% rate. On April 1 of year two, the 

10% rate that applies to the $300 

purchase and the $150 purchase 

expires. The bank may begin accruing 

interest on the $150 purchase at 20% (as 

disclosed in the 12 CFR 226.9(c) notice). 

Because, however, the $300 purchase 

occurred during the first year after 

account opening, the bank cannot 

increase the rate that applies to that 

purchase to a rate that is higher than the 

18% rate disclosed at account opening. 

B. Same facts as above except that the 

required minimum periodic payment 

due on November 10 of year one is not 

received until November 15. Section 

227.24(b)(1) does not permit the bank to 

increase any annual percentage rate on 

the account at this time. The bank may, 

however, apply the 30% penalty rate to 

new transactions beginning on January 

1 of year two pursuant to § 227.24(b)(3) 

by providing a 12 CFR 226.9(g) notice 

informing the consumer of this increase 

no later than November 16 of year one. 

On January 1 of year two, § 227.24(b)(1) 

permits the bank to begin accruing 

interest on the $1,400 purchase balance 

at 18% (as disclosed at account 

opening). If the consumer makes the 

$150 purchase on January 15 of year 

two, § 227.24(b)(3) would permit the 

bank to apply the 30% rate to that 

purchase. On April 1 of year two, the 

10% rate that applies to the $300 

purchase expires. Because this purchase 

occurred during the first year after 

account opening, the bank cannot 

increase the rate that applies to that 

purchase to a rate that is higher than the 

18% rate disclosed at account 

opening.fi 

24(b)(2) Variable Rate Exception 

* * * * * 

5. Changing a variable øannual 

percentage¿ rate to a non-variable 

øannual percentage¿ rate. * * * 

* * * * * 

24(b)(3) Advance Notice Exception 

* * * * * 

2. Transactions that floccurred prior 

to provision of notice or within seven 

days after provision of noticefi øoccur 

more than seven days after notice 

provided¿. flSection 227.24(b)(3) 

generally permits a bank to apply an 

increased rate to transactions that occur 

after provision of a 12 CFR 226.9(b) 

notice or more than seven days after 

provision of a 12 CFR 226.9(c) or (g) 

notice. If a rate increase is disclosed 

pursuant to both 12 CFR 226.9(b) and 12 

CFR 226.9(c), that rate may only be 

applied to transactions that occur more 

than seven days after provision of the 12 

CFR 226.9(c) notice. Section 

227.24(b)(3) does not permit a bank to 

reach back to days before the effective 

date of the rate increase under 12 CFR 

226.9(c) or (g) when calculating interest 

charges. See comment 24(b)(3)–3.fi 

øSection 227.24(b)(3) generally 

prohibits a bank from applying an 

increased rate to transactions that occur 

within seven days after provision of the 

12 CFR 226.9 (c) or (g) notice.¿ 

flWhether a transaction occurred prior 

to provision of a notice or within seven 

days after provision of a notice is 

determined by the date of the 

transaction. In some cases, however, a 

merchant may place a ‘‘hold’’ on the 

available credit on an account for an 

estimated transaction amount when the 

actual transaction amount will not be 

known until a later date. In these 

circumstances, the date of the 

transaction for purposes of 

§ 227.24(b)(3) is the date on which the 

merchant determines the actual 

transaction amount. For example, 

assume that, when a consumer uses a 

credit card account to check into a hotel 

on July 1, the hotel obtains 

authorization for a $750 hold on the 

account to ensure there is adequate 

available credit to cover the anticipated 

cost of the stay. When the consumer 

checks out on July 4, the actual cost of 

the stay is $850 because of additional 

incidental costs, and the hotel charges 

this amount to the account. For 

purposes of § 227.24(b)(3), the 

transaction occurred on July 4.fi øThis 

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. 

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 15%. On March 15, 

the bank 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 18% 

on May 1. The notice further states that 

the 18% rate will apply for six months 

(until November 1) and states that 

thereafter the bank will apply a variable 

rate that is currently 22% and is 

determined by adding a margin of 12 

percentage points to a publicly-available 

index that is not under the bank’s 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20819 

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, 

§ 227.24(b)(3) permits the bank to begin 

accruing interest at 18% on the $1,000 

purchase made on March 24. The bank 

is not permitted to apply the 18% rate 

to the $2,200 purchase balance as of 

March 22. After six months (November 

2), the bank may begin accruing interest 

on any remaining portion of the $1,000 

purchase at the previously-disclosed 

variable rate determined using the 12- 

point margin. 

øii. Same facts as above except that 

the $200 purchase is authorized by the 

bank on March 22 but is not settled 

until March 23. On May 1, § 227.24(b)(3) 

permits the bank to start charging 

interest at 18% on both the $200 

purchase and the $1,000 purchase. The 

bank is not permitted to apply the 18% 

rate to the $2,000 purchase balance as 

of March 22.¿ 

flii.fi øiii.¿ Same facts as øin 

paragraph i.¿ above except that on 

September 17 of year two (which is 45 

days before expiration of the 18% nonvariable rate), the bank 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 flin the March 15 

noticefi øat account opening¿ (12 

percentage points). On May 1 of year 

three, § 227.24(b)(3) permits the bank 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. øSee comment 

24(b)(1)–3.¿ The bank is not permitted 

to apply this rate to any remaining 

portion of the $2,200 purchase balance 

as of March 22. 

fl4. Application of a lower rate. 

Nothing in § 227.24 prohibits a bank 

from lowering the annual percentage 

rate that applies to an existing balance 

or to new transactions. However, once 

the lower rate is applied to an existing 

balance, the bank cannot subsequently 

increase the rate on that balance unless 

it provided the consumer with advance 

notice of the increase pursuant to 12 

CFR 226.9(b) or (c). This notice must 

state the period of time during which 

the lower rate will apply and the rate 

that will apply after expiration of that 

period. Furthermore, a bank that applies 

a decreased rate to transactions that 

occurred prior to provision of the 

notice—or, in the case of a 12 CFR 

226.9(c) or (g) notice, transactions that 

occurred within seven days after 

provision of the notice—may not 

subsequently increase the rate that 

applies to those transactions to a rate 

that is higher than the rate that applied 

prior to the decrease. The following 

examples illustrate the application of 

the rule: 

i. Assume that a bank discloses at 

account opening on January 1 of year 

one that a non-variable annual 

percentage rate of 10% will apply to 

purchases for one year, after which that 

rate will increase to a non-variable rate 

of 15%. The bank also discloses that, to 

the extent consistent with § 227.24 and 

other applicable law, a non-variable 

penalty rate of 30% may apply if the 

consumer’s required minimum periodic 

payment is received after the payment 

due date, which is the tenth of the 

month. The required minimum periodic 

payments are applied to accrued interest 

and fees but do not reduce the purchase 

balance. On June 30 of year two, the 

account has a purchase balance of 

$1,000 at the 15% rate. On July 1, the 

bank provides a notice pursuant to 12 

CFR 226.9(c) informing the consumer 

that the rate for new purchases will 

decrease to a non-variable rate of 5% for 

six months (from July 1 through 

December 31 of year two) and that, 

beginning on January 1 of year three, the 

rate for purchases will increase to a nonvariable rate of 17%. On July 8 of year 

two, the consumer makes a $200 

purchase. On July 9, the consumer 

makes a $100 purchase. On January 1 of 

year three, § 227.24(b)(3) permits the 

bank to begin accruing interest on the 

$100 purchase at 17%. The bank may 

not apply the 17% rate to the $200 

purchase because that transaction 

occurred within seven days after 

provision of the 12 CFR 226.9(c) notice. 

If the bank applied the 5% rate to the 

$1,000 purchase balance and the $200 

purchase, the bank may not increase the 

rate that applies to those amounts to a 

rate that is higher than 15% on January 

1 of year three. 

ii. Same facts as above except that the 

required minimum periodic payment 

due on September 10 of year two is not 

received until September 15 of year two. 

On September 15 of year two, the bank 

provides a notice pursuant to 12 CFR 

226.9(g) informing the consumer that 

the rate for new purchases will increase 

to the 30% penalty rate on October 31. 

On October 31, § 227.23(b)(3) permits 

the bank to begin accruing interest at 

30% on any purchase made on or after 

September 23. The bank may not, 

however, apply the 30% rate to the 

$1,300 in purchases. Instead, the bank 

must continue to apply the 5% rate to 

the $100 purchase until at least January 

1 of year three when § 227.24(b)(3) 

permits the bank to begin accruing 

interest on that purchase at 17%. 

Similarly, if the bank applied the 5% 

rate to the $1,000 purchase balance and 

the $200 purchase, the bank may begin 

accruing interest on those amounts at 

15% on January 1 of year three. 

iii. Assume that a bank discloses at 

account opening on January 1 of year 

one that the rate that applies to 

purchases is a variable annual 

percentage rate that is currently 18% 

and will be adjusted quarterly by adding 

a margin of 8 percentage points to a 

publicly available index not under the 

bank’s control. The bank also discloses 

that, to the extent consistent with 

§ 227.24 and other applicable law, a 

non-variable penalty rate of 30% may 

apply if the consumer’s required 

minimum periodic payment is received 

after the payment due date, which is the 

first of the month. On July 30 of year 

two, the consumer uses the account for 

a $1,000 purchase in response to a 

promotional offer. Under the terms of 

this offer, interest on purchases made 

during the months of July through 

September will accrue at the variable 

rate for purchases but the consumer will 

not be obligated to pay that interest if 

all purchases made during that threemonth period are paid in full by 

December 31 of year two. The payment 

due on September 1 of year two is not 

received until September 6. Section 

227.24 does not permit the bank to deny 

the consumer the opportunity to avoid 

interest charges on the $1,000 purchase 

by paying that purchase in full on or 

before December 31 of year two. The 

bank may, however, provide a notice 

pursuant to 12 CFR 226.9(g) on 

September 2 of year two informing the 

consumer that the promotional offer 

does not apply to purchases made on or 

after September 10 and that the rate for 

such purchases will increase to the 30% 

penalty rate on October 18. On 

December 31 of year two, the $1,000 

purchase has been paid in full. Under 

these circumstances, the bank may not 

charge any interest accrued on the 

$1,000 purchase. 

iv. Assume that a bank discloses at 

account opening on January 1 of year 

one that the rate that applies to cash 

advances is a variable annual percentage 

rate that is currently 24% and will be 

adjusted quarterly by adding a margin of 

14 percentage points to a publicly 

available index not under the bank’s 

control. On July 1 of year two, the bank 

provides checks that access the account 

20820 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

and, pursuant to 12 CFR 226.9(b)(3)(A), 

discloses that a promotional rate of 15% 

will apply to credit extended by use of 

the checks until January 1 of year three, 

after which the cash advance rate 

determined using the 14-point margin 

will apply. On July 15 of year two, the 

consumer uses one of the checks to pay 

for a $500 transaction. On January 1 of 

year three, § 227.24(b)(3) permits the 

bank to apply the cash advance rate 

determined using the 14-point margin to 

the $500 transaction.fi 

24(b)(5) Workout fland Temporary 

Hardshipfi Arrangement Exception 

1. Scope of exception. Nothing in 

§ 227.24(b)(5) permits a bank to alter the 

requirements of § 227.24 pursuant to a 

workout flor temporary hardshipfi 

arrangement between a consumer and 

the bank. For example, a bank cannot 

increase an annual percentage rate 

pursuant to a workout flor temporary 

hardshipfi arrangement unless 

otherwise permitted by § 227.24. In 

addition, a bank cannot require the 

consumer to make payments with 

respect to a protected balance that 

exceed the payments permitted under 

§ 227.24(c). 

2. Variable øannual percentage¿ 

rates. If the annual percentage rate that 

applied to a category of transactions 

prior to commencement of the workout 

flor temporary hardshipfi arrangement 

varied with an index consistent with 

§ 227.24(b)(2), the rate applied to that 

category of transactions following an 

increase pursuant to § 227.24(b)(5) must 

be determined using the same formula 

(index and margin). 

3. Exampleflsfi. 

fli.fi Assume that, consistent with 

§ 227.24(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 

bank 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 bank 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. 

flii. Assume that a consumer fails to 

make four consecutive minimum 

payments totaling $480 on a consumer 

credit card account with a balance of 

$6,000 and that, consistent with 

§ 227.24(b)(4), the annual percentage 

rate that applies to that balance is 

increased from a non-variable rate of 

15% to a non-variable penalty rate of 

30%. Assume also that the bank and the 

consumer subsequently agree to a 

temporary hardship arrangement that 

reduces all rates on the account to 0% 

on the condition that the consumer pay 

an amount by the payment due date 

each month that is sufficient to cure the 

$480 delinquency within six months. If 

the consumer pays the agreed-upon 

amount by the payment due date during 

the six-month period and cures the 

delinquency, the bank may increase the 

rate that applies to any remaining 

portion of the $6,000 balance to 15% or 

any other rate up to the 30% penalty 

rate.fi 

24(c) Treatment of Protected Balances 

* * * * * 

24(c)(1) Repayment 

* * * * * 

Paragraph 24(c)(1)(i) 

* * * * * 

2. Amortization when applicable 

øannual percentage¿ rate is variable. 

* * * 

* * * * * 

24(c)(2) Fees and Charges 

1. Fee or charge based solely on the 

protected balance. A bank is prohibited 

from assessing a fee or charge based 

solely on balances to which § 227.24(c) 

applies. For example, a bank is 

prohibited from assessing a monthly 

maintenance fee that would not be 

charged if the account did not have a 

protected balance. A bank is not, 

however, prohibited from flcontinuing 

to assess a periodic fee that was 

assessed before the account had a 

protected balance.fi flSimilarly, a 

bank is not prohibited fromfi 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 flor if the only balance on the 

account is a protected balancefi. 

§ 227.25—Unfair Balance Computation 

Method 

25(a) General Rule 

* * * * * 

fl3. Charging accrued interest at 

expiration of certain promotional 

programs. When a bank offers a 

promotional program under which a 

consumer will not be obligated to pay 

interest that accrues on a balance if that 

balance is paid in full prior to a 

specified date or expiration of a 

specified period of time, § 227.25 does 

not prohibit the bank from charging that 

accrued interest to the account if the 

balance is not paid in full prior to the 

specified date (consistent with 

applicable law and regulatory 

guidance).fi 

* * * * * 

Department of the Treasury 

Office of Thrift Supervision 

12 CFR Chapter V 

Text of Proposed Revisions 

Certain conventions have been used 

to highlight the proposed revisions. 

New language is shown inside flboldtype arrowsfi while language that 

would be deleted is set off with øboldtype brackets¿. 

Authority and Issuance 

For the reasons discussed in the joint 

preamble, OTS proposes to further 

amend 12 CFR part 535, as amended at 

74 FR 5567, January 29, 2009, as set 

forth below: 

PART 535—UNFAIR OR DECEPTIVE 

ACTS OR PRACTICES 

1. Section 535.23 is revised to read as 

follows: 

§ 535.23 Unfair allocation of payments. 

When different annual percentage 

rates apply to different balances on a 

consumer credit card accountfl: 

(a) General rule. Except as provided in 

paragraph (b) of this sectionfi, you 

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: 

fl(1)fi ø(a)¿ High-to-low method. 

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. 

fl(2)fi ø(b)¿ Pro rata method. 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. 

fl(b) Special rule for accounts subject 

to certain promotional programs. When 

a promotional program provides that a 

consumer will not be obligated to pay 

interest that accrues on a balance if that 

balance is paid in full prior to the 

expiration of a specified period of time, 

you must allocate amounts paid by the 

consumer in excess of the required 

minimum periodic payment first to that 

balance during the two billing cycles 

immediately preceding expiration of the 

specified period and any remaining 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20821 

portion to the other balances consistent 

with paragraph (a) of this section.fi 

2. Section 535.24 is amended by 

revising paragraph (b) to read as follows: 

§ 535.24 Unfair increases in annual 

percentage rates. 

* * * * * 

(b) Exceptions. 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. An annual percentage rate for 

a category of transactions may be 

increased to flan annual percentage 

ratefi øa rate¿ disclosed at account 

opening upon expiration of a period of 

time disclosed at account opening. 

flThis exception does not permit 

application of an increased annual 

percentage rate disclosed at account 

opening that is contingent on a 

particular event or occurrence or that 

may be applied at your discretion.fi 

(2) Variable rate exception. An annual 

percentage rate for a category of 

transactions that varies according to an 

index that is not under your control and 

is available to the general public may be 

increased due to an increase in the 

index. 

(3) Advance notice exception. An 

annual percentage rate for a category of 

transactions may be increased pursuant 

to a notice under 12 CFR 226.9fl(b), (c), 

or (g)fi ø(c) or (g)¿fl, provided that: 

(i) If you disclose the increased rate 

pursuant to 12 CFR 226.9(b), that rate 

must not be applied to transactions that 

occurred prior to provision of the 

notice; 

(ii) If you disclose the increased rate 

pursuant to 12 CFR 226.9(c) or (g), that 

rate must not be applied to transactions 

that occurred within seven days after 

provision of the notice; and 

(iii) This exception does not permit an 

increase in any annual percentage rate 

during the first year after the account is 

opened.fi øfor 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. An annual 

percentage rate may be increased due to 

your not receiving the consumer’s 

required minimum periodic payment 

within 30 days after the due date for 

that payment. 

(5) Workout fland temporary 

hardshipfi arrangement exception. An 

annual percentage rate may be increased 

due to the consumer’s flcompletion 

offi øfailure to comply with the terms 

of¿ a workout flor temporary 

hardshipfi arrangement between you 

and the consumer flor the consumer’s 

failure to comply with the terms of such 

an arrangementfi, 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 øworkout¿ arrangement. 

fl(6) Servicemembers Civil Relief Act 

exception. An annual percentage rate 

that has been decreased pursuant to 50 

U.S.C. app. 527 may be increased once 

that provision no longer applies, 

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 the 

decrease.fi 

* * * * * 

3. In Appendix A to Part 535: 

A. Add Section 535.21—Definitions. 

B. Under Section 535.22—Unfair Acts 

or Practices Regarding Time to Make 

Payment, under 22(b) Compliance with 

General Rule, paragraph 3. is revised. 

C. Under Section 535.23—Unfair Acts 

or Practices Regarding Allocation of 

Payments: 

(i) Paragraph 2., the heading of 

paragraph 3., and paragraphs 4. and 6. 

are revised; 

(ii) Redesignate 23(a) High-to-Low 

Method as 23(a)(1) High-to-Low Method; 

(iii) Under 23(a)(1) High-to-Low 

Method, paragraph 1.v. is added; 

(iv) Redesignate 23(b) Pro Rata 

Method as 23(a)(2) Pro Rata Method; 

(v) Under 23(a)(2) Pro Rata Method, 

paragraph 1. is revised; and 

(vi) Add 23(b) Special Rule for 

Accounts Subject to Certain 

Promotional Programs. 

D. Under Section 535.24—Unfair Acts 

or Practices Regarding Increases in 

Annual Percentage Rates: 

(i) Paragraph 1. is revised; 

(ii) Add paragraphs 2., 3., 4.; 

(iii) Under 24(a) General Rule, 

paragraphs 1., 2.i. introductory text, 

2.iii. introductory text, and 2.iii.C. are 

revised, and paragraph 2.iv. is added; 

(iv) Under 24(b) Exceptions, add 

paragraph 1.; 

(v) Under 24(b)(1) Account Opening 

Disclosure Exception, paragraph 1. 

introductory text is revised, paragraph 

1.iii. and paragraph 2. are removed, 

paragraph 3. is redesignated as 

paragraph 2., the introductory text of 

newly designated paragraph 2. is 

revised, and paragraph 2.ii. is added; 

(vi) Under 24(b)(2) Variable Rate 

Exception, the heading of paragraph 5. 

is revised; 

(vii) Under 24(b)(3) Advance Notice 

Exception, paragraphs 2. and 3. are 

revised and paragraph 4. is added; 

(viii) Revise 24(b)(5) Workout 

Arrangement Exception; 

(ix) Under 24(c) Treatment of 

Protected Balances, under 24(c)(1) 

Repayment, under Paragraph 24(c)(1)(i), 

the heading of paragraph 2. is revised; 

and 

(x) Under 24(c) Treatment of 

Protected Balances, under 24(c)(2) Fees 

and Charges, paragraph 1. is revised. 

E. Under Section 535.25—Unfair 

Balance Computation Method, under 

25(a) General Rule, paragraph 3. is 

revised. 

Appendix A to Part 535—Official Staff 

Commentary 

* * * * * 

Subpart C—Consumer Credit Card 

Account Practices 

fl§ 535.21—Definitions 

21(a) Annual Percentage Rate 

1. Use of ‘‘rate.’’ For purposes of Subpart 

C, ‘‘rate’’ has the same meaning as ‘‘annual 

percentage rate’’ unless otherwise specified. 

21(c) Consumer Credit Card Account 

1. Closed accounts. If a consumer credit 

card account with an outstanding balance is 

closed, the account continues to be the same 

consumer credit card account for purposes of 

Subpart C with respect to that balance. For 

example, if a savings association or a 

consumer closes a consumer credit card 

account with an outstanding balance, the 

savings association would still be prohibited 

from increasing the annual percentage rate 

that applies to that balance unless permitted 

by one of the exceptions in § 535.24(b). 

2. Acquired accounts. If, through merger or 

acquisition (for example), a savings 

association acquires a consumer credit card 

account with an outstanding balance, the 

account continues to be the same consumer 

credit card account for purposes of Subpart 

C with respect to that balance. For example, 

if a consumer credit card account has a 

$1,000 purchase balance with an annual 

percentage rate of 15% and the savings 

association that acquires that account applies 

an 18% rate to purchases, the savings 

association would be prohibited from 

applying the 18% rate to the $1,000 balance 

unless permitted by one of the exceptions in 

§ 535.24(b). 

3. Balance transfers. 

i. Between accounts issued by the same 

savings association. If a balance is transferred 

from a consumer credit card account issued 

by a savings association to another credit 

account issued by the same savings 

association or its affiliate or subsidiary, the 

account continues to be the same consumer 

credit card account for purposes of Subpart 

C with respect to that balance unless the 

account to which the balance is transferred 

is an open-end credit plan secured by the 

consumer’s dwelling. For example, if a 

20822 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

consumer credit card account has a $2,000 

purchase balance with an annual percentage 

rate of 15% and that balance is transferred to 

another consumer credit card account issued 

by the same savings association that applies 

an 18% rate to purchases, the savings 

association would be prohibited from 

applying the 18% rate to the $2,000 balance 

unless permitted by one of the exceptions in 

§ 535.24(b). Additional circumstances in 

which a balance is considered transferred for 

purposes of this comment include when: 

A. A retail credit card with an outstanding 

balance is replaced or substituted with a 

cobranded general purpose card that can be 

used with a broader merchant base; 

B. A credit card account with an 

outstanding balance is replaced or 

substituted with another credit card account 

offering different features; 

C. A credit card account with an 

outstanding balance is consolidated or 

combined with one or more other credit card 

accounts into a single credit card account; 

and 

D. A credit card account is replaced or 

substituted with a line of credit that can be 

accessed solely by an account number. 

ii. Between accounts issued by different 

institutions. If a balance is transferred to a 

consumer credit card account issued by a 

savings association from a credit account 

issued by a different savings association or an 

institution that is not an affiliate or 

subsidiary of the savings association that 

issued the consumer credit card account, the 

provisions of Subpart C do not prohibit the 

savings association to which the balance is 

transferred from applying its account terms 

to that balance, provided that those terms 

comply with Subpart C. For example, if a 

consumer credit card account issued by 

savings association A has a $1,000 purchase 

balance at an annual percentage rate of 15% 

and the consumer transfers that balance to a 

consumer credit card account with a 

purchase rate of 17% issued by savings 

association B, savings association B may 

apply the 17% rate to the $1,000 balance. 

However, savings association B may not 

subsequently increase the rate on that 

balance unless permitted by one of the 

exceptions in § 535.24(b).fi 

§ 535.22—Unfair Time To Make Payment 

* * * * * 

22(b) Compliance With General Rule 

* * * * * 

3. Example of alternative method of 

compliance. Assume that, for a particular 

type of consumer credit card account, a 

savings association only provides periodic 

statements electronically and only accepts 

payments electronically (consistent with 

applicable law and regulatory guidancefl, 

including the consumer notice and consent 

procedures of the Electronic Signatures in 

Global and National Commerce Act (E-Sign 

Act), 15 U.S.C. 7001 et seq.fi). Under these 

circumstances, the savings association could 

comply with § 535.22(a) even if it does not 

provide periodic statements 21 days before 

the payment due date consistent with 

§ 535.22(b)(2). 

§ 535.23—Unfair Allocation of Payments 

* * * * * 

2. Adjustments of one dollar or less 

permitted. When allocating payments, the 

savings association may adjust amounts by 

one dollar or less. For example, if a savings 

association is allocating $100 pursuant to 

§ 535.23fl(a)(2)fiø(b)¿ among balances of 

$1,000, $2,000, and $4,000, the savings 

association 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. * * * 

4. Use of permissible allocation methods. 

A savings association 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 § 535.23. 

For example, a savings association may 

change from allocating to the highest rate 

balance first pursuant to § 535.23(a)fl(1)fi 

to allocating pro rata pursuant to 

§ 535.23fl(a)(2)fiø(b)¿ or vice versa. 

Similarly, a savings association may allocate 

to the highest rate balance first pursuant to 

§ 535.23(a)fl(1)fi on some of its accounts 

and allocate pro rata pursuant to 

§ 535.23fl(a)(2)fiø(b)¿ on other accounts. 

* * * * * 

6. Balances with the same [annual 

percentage] rate. 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, § 535.23 

flgenerallyfi does not require that any 

particular method be used when allocating 

among the balances with the same annual 

percentage rate. Under these circumstances, 

a savings association may treat the balances 

with the same rate as a single balance or 

separate balances. See comments 

23(a)fl(1)fi–1.iv and 23fl(a)(2)fiø(b)¿–2.iv. 

flHowever, when a consumer will not be 

obligated to pay interest that accrues on a 

balance if that balance is paid in full prior 

to the expiration of a specified period of 

time, that balance must be treated as a 

balance with an annual percentage rate of 

zero for purposes of § 535.23 during that 

period of time. For example, if an account 

has a $1,000 purchase balance and a $2,000 

balance on which the consumer will not be 

obligated to pay interest if that balance is 

paid in full prior to July 1 and a 15% annual 

percentage rate applies to both, the balances 

must be treated as balances with different 

rates for purposes of § 535.23 until July 1. In 

addition, for purposes of allocating pursuant 

to § 535.23(a)(1), any amount paid by the 

consumer in excess of the required minimum 

periodic payment must be applied first to the 

$1,000 purchase balance except during the 

last two billing cycles of the promotional 

period (when it must be applied first to any 

remaining portion of the $2,000 balance). See 

comment 23(a)(1)–1.v.fi 

23(a)fl(1)fi High-to-Low Method 

1. * * * 

flv. Assume that on January 1 a consumer 

uses a credit card account to make a $1,200 

purchase subject to a promotional offer under 

which interest accrues at an annual 

percentage rate of 15% but the consumer will 

not be obligated to pay that interest if the 

balance is paid in full on or before June 30. 

The billing cycles for this account begin on 

the first day of the month and end on the last 

day of the month. Each month from January 

through June, the consumer uses the account 

to make $200 in purchases that are not 

subject to the promotional offer but are 

subject to the 15% rate. Each month from 

February through June, the consumer pays 

$400 in excess of the required minimum 

periodic payment on the payment due date, 

which is the twenty-fifth of the month. Any 

interest that accrues on the non-promotional 

purchases is paid by the required minimum 

periodic payment. A savings association 

using this method would allocate the $400 

excess payments received on February 25, 

March 25, and April 25 as follows: $200 to 

pay off the non-promotional balance (that is 

subject to the 15% rate) and the remaining 

$200 to the promotional balance (that is 

treated as a balance with a rate of zero). 

Section 535.23(b), however, requires the 

savings association to allocate the entire $400 

excess payment received on May 25 to the 

promotional balance. Similarly, § 535.23(b) 

requires the savings association to allocate 

the $400 excess payment received on June 25 

as follows: $200 to the promotional balance 

(which pays that purchase in full) and the 

remaining $200 to the non-promotional 

balance.fi 

23fl(a)(2)fiø(b)¿ Pro Rata Method 

1. Total balance. A savings association 

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 

§ 535.23fl(a)(2)fiø(b)(3)¿. See comment 

23fl(a)(2)fiø(b)¿–2.iii. 

* * * * * 

fl23(b) Special Rule for Accounts Subject 

to Certain Promotional Programs 

1. Grace periods. Section 535.23(b) applies 

to promotional programs under which the 

consumer is not obligated to pay interest that 

accrues on a balance if that balance is paid 

in full prior to the expiration of a specified 

period of time. A grace period during which 

a consumer may repay one or more balances 

on a consumer credit card account is not a 

‘‘promotional program’’ for purposes of 

§ 535.23(b).fi 

§ 535.24—Unfair Increases in Annual 

Percentage Rates 

1. Relationship to Regulation Z, 12 CFR 

part 226. A savings association that complies 

with the applicable disclosure requirements 

in Regulation Z, 12 CFR part 226, has 

complied with the disclosure requirements in 

§ 535.24. See 12 CFR 226.5a, 226.6, 226.9. 

For example, a savings association may 

comply with the requirement in § 535.24(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 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20823 

order to increase an annual percentage rate 

on new transactions pursuant to 

§ 535.24(b)(3), a savings association must 

comply with the disclosure requirements in 

12 CFR 226.9fl(b), (c), or (g)fiø(c) or (g)¿. 

However, nothing in § 535.24 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 homesecured) credit plans. 

fl2. Relationship to grace period. Nothing 

in § 535.24 prohibits a savings association 

from assessing interest due to the loss of a 

grace period to the extent consistent with 

§ 535.25. In addition, a savings association 

has not reduced an annual percentage rate on 

a consumer credit account for purposes of 

§ 535.24 if the savings association does not 

charge interest on a balance when the 

consumer pays that balance in full prior to 

the expiration of a grace period. 

3. Category of transactions. For purposes of 

§ 535.24, a ‘‘category of transactions’’ is a 

type or group of transactions to which an 

annual percentage rate applies that is 

different than the annual percentage rate that 

applies to other transactions. For example, 

purchase transactions, cash advance 

transactions, and balance transfer 

transactions are separate categories of 

transactions for purposes of § 535.24 if a 

savings association applies different annual 

percentage rates to each. Furthermore, if, for 

example, the savings association applies 

different annual percentage rates to different 

types of purchase transactions (such as one 

rate for purchases of gasoline and a different 

rate for all other purchases), each type 

constitutes a separate category of transactions 

for purposes of § 535.24. 

4. Account opening. 

i. Multiple accounts with same savings 

association. When a consumer has a credit 

card account with a savings association and 

the consumer opens a new credit card 

account with the same savings association (or 

its affiliate or subsidiary), the opening of the 

new account constitutes an ‘‘account 

opening’’ for purposes of § 535.24 if, more 

than 15/30 days after the new account is 

opened, the consumer has the ability to 

obtain additional extensions of credit on each 

account. For example, assume that, on 

January 1 of year one, a consumer opens a 

credit card account with a savings 

association. On July 1 of year one, the 

consumer opens a second credit card account 

with that savings association. On July 15, a 

$1,000 balance is transferred from the first 

account to the second account. The opening 

of the second account constitutes the opening 

of an account for purposes of § 535.24 so long 

as, on July 17/August 1, the consumer can 

engage in transactions using either account. 

Under these circumstances, the savings 

association could not increase an annual 

percentage rate on the second account 

pursuant to § 535.24(b)(3) until July 1 of year 

two (which is one year after the second 

account was opened). 

ii. Replacement or consolidation. 

A. Generally. A consumer credit card 

account has not been opened for purposes of 

§ 535.24 when a consumer credit card 

account issued by a savings association is 

replaced or consolidated with another 

consumer credit card account issued by the 

same savings association (or its affiliate or 

subsidiary). Circumstances in which a 

consumer credit card account has not been 

opened for purposes of § 535.24 include 

when: 

(1) A retail credit card is replaced with a 

cobranded general purpose card that can be 

used at a wider number of merchants; 

(2) A credit card account is replaced with 

another consumer credit card account 

offering different features; 

(3) A credit card account is consolidated or 

combined with one or more other credit card 

accounts into a single credit card account; or 

(4) A credit card account acquired through 

merger or acquisition is replaced with a 

credit card account issued by the acquiring 

institution. 

B. Limitation. A savings association that 

replaces or consolidates a consumer credit 

card account with another consumer credit 

card account issued by the savings 

association (or its affiliate or subsidiary) may 

not increase an annual percentage rate in a 

manner otherwise prohibited by § 535.24. For 

example, assume that, on January 1 of year 

one, a consumer opens a consumer credit 

card account with an annual percentage rate 

for purchases of 15%. On July 1 of year one, 

the account is replaced with a consumer 

credit card account that offers different 

features (such as rewards on purchases). 

Under these circumstances, the savings 

association cannot increase the annual 

percentage rate for purchases to a rate that is 

higher than 15% pursuant to § 535.24(b)(3) 

until January 1 of year two (which is one year 

after the first account was opened).fi 

24(a) General Rule 

1. Rates that will apply to each category of 

transactions. Section 535.24(a) requires 

savings associations to disclose, at account 

opening, the annual percentage rates that will 

apply to each category of transactions on the 

account. A savings association 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. flThe 

disclosure requirements in § 535.24(a) do not 

apply to annual percentage rates that are 

contingent on a particular event or 

occurrence or may be applied at the savings 

association’s discretion (such as penalty 

rates) insofar as those rates may be applied 

consistent with § 535.24.fi 

2. * * * 

i. Assume that, at account opening on 

January 1 of year one, a savings association 

discloses that the annual percentage rate for 

purchases is a non-variable rate of 15% and 

will apply for six months. The savings 

association also discloses that, after six 

months, the annual percentage rate for 

purchases will be a variable rate that is 

currently 18% and will be adjusted quarterly 

by adding a margin of 8 percentage points to 

a publicly available index not under the 

savings association’s control. 

flFurthermore,fi øFinally,¿ the savings 

association discloses that the annual 

percentage rate for cash advances is the same 

variable rate that will apply to purchases 

after six months. flFinally, the savings 

association discloses that, to the extent 

consistent with § 535.24 and other applicable 

law, a non-variable penalty rate of 30% may 

apply if the consumer makes a late 

payment.fi 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. 

* * * * * 

iii. Assume that, at account opening on 

January 1 of year one, a savings association 

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 

savings association’s control. The savings 

association also discloses that, to the extent 

consistent with § 535.24 and other applicable 

law, a non-variable penalty rate of 28% 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 savings association 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 28% 

will apply as of August 9 to all transactions 

made on or after July 3 fland that, if the 

consumer becomes more than 30 days late, 

the penalty rate will apply to all balances on 

the accountfi. On July 4, the consumer 

makes a $300 purchase. 

* * * * * 

C. Same facts as paragraph A. above except 

the payment due on June 15 of year two is 

received on July 20. Section 535.24(b)(4) 

permits the savings association to apply the 

28% 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 savings 

association provided a 12 CFR 226.9(g) notice 

on June fl25fiø24¿ stating the 28% penalty 

rate, the savings association may apply the 

28% 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). 

fliv. Assume that, at account opening on 

January 1 of year one, the savings association 

discloses a promotional program under 

which interest on purchases made during 

January will accrue at a non-variable rate of 

20%, but the consumer will not be obligated 

to pay that interest if those purchases are 

paid in full by December 31 of year one. On 

January 15, the consumer makes a purchase 

of $2,000. No other transactions are made on 

the account. The payment due on April 1 is 

not received until April 10. Section 535.24 

does not permit the savings association to 

deny the consumer the opportunity to avoid 

interest charges on the $2,000 purchase by 

20824 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

paying that purchase in full on or before 

December 31 of year one. If, however, the 

$2,000 purchase remains unpaid on January 

1 of year two, § 535.24 does not prohibit the 

savings association from charging the interest 

accrued on that purchase during year one.fi 

24(b) Exceptions 

fl1. Delayed implementation of rate 

increase. If § 535.24(b) permits a savings 

association to apply an increased annual 

percentage rate on a date that is not the first 

day of a billing cycle, the savings association 

may delay application of the increased rate 

until the first day of the following billing 

cycle without relinquishing the ability to 

apply that rate. For example, assume that, at 

account opening on January 1, a savings 

association discloses that a non-variable 

annual percentage rate of 10% will apply to 

purchases for six months and a non-variable 

rate of 15% will apply thereafter. The first 

day of the billing cycle for the account is the 

fifteenth of the month. If the six-month 

period expires on July 1, the savings 

association may delay application of the 15% 

rate until July 15 without relinquishing its 

ability to apply that rate under 

§ 535.24(b)(1).fi 

24(b)(1) Account Opening Disclosure 

Exception 

1. Prohibited increases in rate. Section 

§ 535.24(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 535.24(b)(1) does not permit 

application of flan increased annual 

percentage ratefi øincreased rates that are¿ 

disclosed at account opening flthat isfi 

øbut are¿ contingent on a particular event or 

occurrence or flthatfi may be applied at the 

savings association’s discretion. The 

following examples illustrate rate increases 

that are not permitted by § 535.24ø(a)¿: 

* * * * * 

øiii. Assume that a savings association 

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 20%. The savings 

association further discloses that, if all 

purchases made during year one are not paid 

in full by the end of that year, the savings 

association will begin charging interest on 

the purchase balance and new purchases at 

20% and will retroactively charge interest on 

the purchase balance at a rate of 20% 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 535.24 

does not permit the savings association to 

reach back to charge interest on the $1,500 

purchase from January 1 through December 

31 of year one. However, the savings 

association may apply the previouslydisclosed 20% rate to the $500 purchase 

balance beginning on January 1 of year two 

(pursuant to § 535.24(b)(1)).¿ 

ø2. Loss of grace period. Nothing in 

§ 535.24 prohibits a savings association from 

assessing interest due to the loss of a grace 

period to the extent consistent with 

§ 535.25.¿ 

fl2.fi ø3.¿ Application of rate that is 

lower than disclosed rate. Section 

§ 535.24(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 § 535.24 prohibits a savings 

association from applying a rate that is lower 

than flafi øthe¿ disclosed rate fleither 

during orfi upon expiration of the period. 

However, flonce thefi øif a¿ lower rate is 

applied to an existing balance, the savings 

association cannot subsequently increase the 

rate on that balance unless it øhas¿ provided 

the consumer with advance notice of the 

increase pursuant to 12 CFR 226.9fl(b)fi or 

(c). flThis notice must state the period of 

time during which the lower rate will apply 

and the rate that will apply after expiration 

of that period.fi Furthermore, fla savings 

association that applies a lower rate to 

transactions that occurred during the first 

year after account opening may not 

subsequently increase the rate that applies to 

those transactions to a rate that is higher than 

the increased rate disclosed at account 

openingfi øthe savings association cannot 

increase the rate on that existing balance to 

a rate that is higher than the increased rate 

disclosed at account opening¿. The following 

flexamples illustratefi øexample 

illustrates¿ the application of flthefi øthis¿ 

rule: 

* * * * * 

flii. Assume that a savings association 

discloses at account opening on January 1 of 

year one that a non-variable annual 

percentage rate of 15% will apply to 

purchases for one year, after which that rate 

will increase to a non-variable rate of 18%. 

The savings association also discloses that, to 

the extent consistent with § 535.24 and other 

applicable law, a non-variable penalty rate of 

30% may apply if the consumer’s required 

minimum periodic payment is received after 

the payment due date, which is the tenth of 

the month. The required minimum periodic 

payments are applied to accrued interest and 

fees but do not reduce the purchase balance. 

A. On September 30 of year one, the 

account has a purchase balance of $1,400 at 

the 15% rate. On October 1, the savings 

association provides a notice pursuant to 12 

CFR 226.9(c) informing the consumer that the 

rate for new purchases will decrease to a 

non-variable rate of 10% for six months (from 

October 1 through March 31 of year two) and 

that, beginning on April 1 of year two, the 

rate for purchases will increase to a nonvariable rate of 20%. The savings association 

does not apply the 10% rate to the $1,400 

purchase balance. On October 15 of year one, 

the consumer makes a $300 purchase at the 

10% rate. On January 1 of year two, the 

savings association may begin accruing 

interest on the $1,400 purchase balance at 

18% (as disclosed at account opening). On 

January 15 of year two, the consumer makes 

a $150 purchase at the 10% rate. On April 

1 of year two, the 10% rate that applies to 

the $300 purchase and the $150 purchase 

expires. The savings association may begin 

accruing interest on the $150 purchase at 

20% (as disclosed in the 12 CFR 226.9(c) 

notice). Because, however, the $300 purchase 

occurred during the first year after account 

opening, the savings association cannot 

increase the rate that applies to that purchase 

to a rate that is higher than the 18% rate 

disclosed at account opening. 

B. Same facts as above except that the 

required minimum periodic payment due on 

November 10 of year one is not received until 

November 15. Section 535.24(b)(1) does not 

permit the savings association to increase any 

annual percentage rate on the account at this 

time. The savings association may, however, 

apply the 30% penalty rate to new 

transactions beginning on January 1 of year 

two pursuant to § 535.24(b)(3) by providing 

a 12 CFR 226.9(g) notice informing the 

consumer of this increase no later than 

November 16 of year one. On January 1 of 

year two, § 535.24(b)(1) permits the savings 

association to begin accruing interest on the 

$1,400 purchase balance at 18% (as disclosed 

at account opening). If the consumer makes 

the $150 purchase on January 15 of year two, 

§ 535.24(b)(3) would permit the savings 

association to apply the 30% rate to that 

purchase. On April 1 of year two, the 10% 

rate that applies to the $300 purchase 

expires. Because this purchase occurred 

during the first year after account opening, 

the savings association cannot increase the 

rate that applies to that purchase to a rate 

that is higher than the 18% rate disclosed at 

account opening.fi 

24(b)(2) Variable Rate Exception 

* * * * * 

5. Changing a variable øannual 

percentage¿ rate to a non-variable øannual 

percentage¿ rate. * * * 

* * * * * 

24(b)(3) Advance Notice Exception 

* * * * * 

2. Transactions that floccurred prior to 

provision of notice or within seven days after 

provision of noticefi øoccur more than seven 

days after notice provided¿. flSection 

535.24(b)(3) generally permits a savings 

association to apply an increased rate to 

transactions that occur after provision of a 12 

CFR 226.9(b) notice or more than seven days 

after provision of a 12 CFR 226.9(c) or (g) 

notice. If a rate increase is disclosed pursuant 

to both 12 CFR 226.9(b) and 12 CFR 226.9(c), 

that rate may only be applied to transactions 

that occur more than seven days after 

provision of the 12 CFR 226.9(c) notice. 

Section 535.24(b)(3) does not permit a 

savings association to reach back to days 

before the effective date of the rate increase 

under 12 CFR 226.9(c) or (g) when 

calculating interest charges. See comment 

24(b)(3)–3.fi øSection 535.24(b)(3) generally 

prohibits a savings association from applying 

an increased rate to transactions that occur 

within seven days after provision of the 12 

CFR 226.9 (c) or (g) notice.¿ flWhether a 

transaction occurred prior to provision of a 

notice or within seven days after provision of 

a notice is determined by the date of the 

transaction. In some cases, however, a 

merchant may place a ‘‘hold’’ on the 

available credit on an account for an 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20825 

estimated transaction amount when the 

actual transaction amount will not be known 

until a later date. In these circumstances, the 

date of the transaction for purposes of 

§ 535.24(b)(3) is the date on which the 

merchant determines the actual transaction 

amount. For example, assume that, when a 

consumer uses a credit card account to check 

into a hotel on July 1, the hotel obtains 

authorization for a $750 hold on the account 

to ensure there is adequate available credit to 

cover the anticipated cost of the stay. When 

the consumer checks out on July 4, the actual 

cost of the stay is $850 because of additional 

incidental costs, and the hotel charges this 

amount to the account. For purposes of 

§ 535.24(b)(3), the transaction occurred on 

July 4.fi øThis 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. 

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 15%. On March 15, 

the savings association 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 18% on 

May 1. The notice further states that the 18% 

rate will apply for six months (until 

November 1) and states that thereafter the 

savings association will apply a variable rate 

that is currently 22% and is determined by 

adding a margin of 12 percentage points to 

a publicly-available index that is not under 

the savings association’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, § 535.24(b)(3) 

permits the savings association to begin 

accruing interest at 18% on the $1,000 

purchase made on March 24. The savings 

association is not permitted to apply the 18% 

rate to the $2,200 purchase balance as of 

March 22. After six months (November 2), 

the savings association may begin accruing 

interest on any remaining portion of the 

$1,000 purchase at the previously-disclosed 

variable rate determined using the 12-point 

margin. 

øii. Same facts as above except that the 

$200 purchase is authorized by the savings 

association on March 22 but is not settled 

until March 23. On May 1, § 535.24(b)(3) 

permits the savings association to start 

charging interest at 18% on both the $200 

purchase and the $1,000 purchase. The 

savings association is not permitted to apply 

the 18% rate to the $2,000 purchase balance 

as of March 22.¿ 

flii.fi øiii.¿ Same facts as øin paragraph 

i.¿ above except that on September 17 of year 

two (which is 45 days before expiration of 

the 18% non-variable rate), the savings 

association 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 flin the 

March 15 noticefi øat account opening¿ (12 

percentage points). On May 1 of year three, 

§ 535.24(b)(3) permits the savings association 

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. øSee 

comment 24(b)(1)–3.¿ The savings 

association is not permitted to apply this rate 

to any remaining portion of the $2,200 

purchase balance as of March 22. 

fl4. Application of a lower rate. Nothing 

in § 535.24 prohibits a savings association 

from lowering the annual percentage rate that 

applies to an existing balance or to new 

transactions. However, once the lower rate is 

applied to an existing balance, the savings 

association cannot subsequently increase the 

rate on that balance unless it provided the 

consumer with advance notice of the increase 

pursuant to 12 CFR 226.9(b) or (c). This 

notice must state the period of time during 

which the lower rate will apply and the rate 

that will apply after expiration of that period. 

Furthermore, a savings association that 

applies a decreased rate to transactions that 

occurred prior to provision of the notice—or, 

in the case of a 12 CFR 226.9(c) or (g) notice, 

transactions that occurred within seven days 

after provision of the notice—may not 

subsequently increase the rate that applies to 

those transactions to a rate that is higher than 

the rate that applied prior to the decrease. 

The following examples illustrate the 

application of the rule: 

i. Assume that a savings association 

discloses at account opening on January 1 of 

year one that a non-variable annual 

percentage rate of 10% will apply to 

purchases for one year, after which that rate 

will increase to a non-variable rate of 15%. 

The savings association also discloses that, to 

the extent consistent with § 535.24 and other 

applicable law, a non-variable penalty rate of 

30% may apply if the consumer’s required 

minimum periodic payment is received after 

the payment due date, which is the tenth of 

the month. The required minimum periodic 

payments are applied to accrued interest and 

fees but do not reduce the purchase balance. 

On June 30 of year two, the account has a 

purchase balance of $1,000 at the 15% rate. 

On July 1, the savings association provides a 

notice pursuant to 12 CFR 226.9(c) informing 

the consumer that the rate for new purchases 

will decrease to a non-variable rate of 5% for 

six months (from July 1 through December 31 

of year two) and that, beginning on January 

1 of year three, the rate for purchases will 

increase to a non-variable rate of 17%. On 

July 8 of year two, the consumer makes a 

$200 purchase. On July 9, the consumer 

makes a $100 purchase. On January 1 of year 

three, § 535.24(b)(3) permits the savings 

association to begin accruing interest on the 

$100 purchase at 17%. The savings 

association may not apply the 17% rate to the 

$200 purchase because that transaction 

occurred within seven days after provision of 

the 12 CFR 226.9(c) notice. If the savings 

association applied the 5% rate to the $1,000 

purchase balance and the $200 purchase, the 

savings association may not increase the rate 

that applies to those amounts to a rate that 

is higher than 15% on January 1 of year 

three. 

ii. Same facts as above except that the 

required minimum periodic payment due on 

September 10 of year two is not received 

until September 15 of year two. On 

September 15 of year two, the savings 

association provides a notice pursuant to 12 

CFR 226.9(g) informing the consumer that the 

rate for new purchases will increase to the 

30% penalty rate on October 31. On October 

31, § 535.23(b)(3) permits the savings 

association to begin accruing interest at 30% 

on any purchase made on or after September 

23. The savings association may not, 

however, apply the 30% rate to the $1,300 in 

purchases. Instead, the savings association 

must continue to apply the 5% rate to the 

$100 purchase until at least January 1 of year 

three when § 535.24(b)(3) permits the savings 

association to begin accruing interest on that 

purchase at 17%. Similarly, if the savings 

association applied the 5% rate to the $1,000 

purchase balance and the $200 purchase, the 

savings association may begin accruing 

interest on those amounts at 15% on January 

1 of year three. 

iii. Assume that a savings association 

discloses at account opening on January 1 of 

year one that the rate that applies to 

purchases is a variable annual percentage 

rate that is currently 18% and will be 

adjusted quarterly by adding a margin of 8 

percentage points to a publicly available 

index not under the savings association’s 

control. The savings association also 

discloses that, to the extent consistent with 

§ 535.24 and other applicable law, a nonvariable penalty rate of 30% may apply if the 

consumer’s required minimum periodic 

payment is received after the payment due 

date, which is the first of the month. On July 

30 of year two, the consumer uses the 

account for a $1,000 purchase in response to 

a promotional offer. Under the terms of this 

offer, interest on purchases made during the 

months of July through September will 

accrue at the variable rate for purchases but 

the consumer will not be obligated to pay 

that interest if all purchases made during that 

three-month period are paid in full by 

December 31 of year two. The payment due 

on September 1 of year two is not received 

until September 6. Section 535.24 does not 

permit the savings association to deny the 

consumer the opportunity to avoid interest 

charges on the $1,000 purchase by paying 

that purchase in full on or before December 

31 of year two. The savings association may, 

however, provide a notice pursuant to 12 

CFR 226.9(g) on September 2 of year two 

informing the consumer that the promotional 

offer does not apply to purchases made on or 

after September 10 and that the rate for such 

purchases will increase to the 30% penalty 

rate on October 18. On December 31 of year 

two, the $1,000 purchase has been paid in 

full. Under these circumstances, the savings 

association may not charge any interest 

accrued on the $1,000 purchase. 

iv. Assume that a savings association 

discloses at account opening on January 1 of 

year one that the rate that applies to cash 

advances is a variable annual percentage rate 

20826 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

that is currently 24% and will be adjusted 

quarterly by adding a margin of 14 

percentage points to a publicly available 

index not under the savings association’s 

control. On July 1 of year two, the savings 

association provides checks that access the 

account and, pursuant to 12 CFR 

226.9(b)(3)(A), discloses that a promotional 

rate of 15% will apply to credit extended by 

use of the checks until January 1 of year 

three, after which the cash advance rate 

determined using the 14-point margin will 

apply. On July 15 of year two, the consumer 

uses one of the checks to pay for a $500 

transaction. On January 1 of year three, 

§ 535.24(b)(3) permits the savings association 

to apply the cash advance rate determined 

using the 14-point margin to the $500 

transaction.fi 

24(b)(5) Workout fland Temporary 

Hardshipfi Arrangement Exception 

1. Scope of exception. Nothing in 

§ 535.24(b)(5) permits a savings association to 

alter the requirements of § 535.24 pursuant to 

a workout flor temporary hardshipfi 

arrangement between a consumer and the 

savings association. For example, a savings 

association cannot increase an annual 

percentage rate pursuant to a workout flor 

temporary hardshipfi arrangement unless 

otherwise permitted by § 535.24. In addition, 

a savings association cannot require the 

consumer to make payments with respect to 

a protected balance that exceed the payments 

permitted under § 535.24(c). 

2. Variable øannual percentage¿ rates. If 

the annual percentage rate that applied to a 

category of transactions prior to 

commencement of the workout flor 

temporary hardshipfi arrangement varied 

with an index consistent with § 535.24(b)(2), 

the rate applied to that category of 

transactions following an increase pursuant 

to § 535.24(b)(5) must be determined using 

the same formula (index and margin). 

3. Example flsfi. 

fli.fi Assume that, consistent with 

§ 535.24(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 savings association 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 savings 

association 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. 

flii. Assume that a consumer fails to make 

four consecutive minimum payments totaling 

$480 on a consumer credit card account with 

a balance of $6,000 and that, consistent with 

§ 535.24(b)(4), the annual percentage rate that 

applies to that balance is increased from a 

non-variable rate of 15% to a non-variable 

penalty rate of 30%. Assume also that the 

savings association and the consumer 

subsequently agree to a temporary hardship 

arrangement that reduces all rates on the 

account to 0% on the condition that the 

consumer pay an amount by the payment due 

date each month that is sufficient to cure the 

$480 delinquency within six months. If the 

consumer pays the agreed-upon amount by 

the payment due date during the six-month 

period and cures the delinquency, the 

savings association may increase the rate that 

applies to any remaining portion of the 

$6,000 balance to 15% or any other rate up 

to the 30% penalty rate.fi 

24(c) Treatment of Protected Balances 

* * * * * 

24(c)(1) Repayment 

* * * * * 

Paragraph 24(c)(1)(i) 

* * * * * 

2. Amortization when applicable øannual 

percentage¿ rate is variable. * * * 

* * * * * 

24(c)(2) Fees and Charges 

1. Fee or charge based solely on the 

protected balance. A savings association is 

prohibited from assessing a fee or charge 

based solely on balances to which § 535.24(c) 

applies. For example, a savings association is 

prohibited from assessing a monthly 

maintenance fee that would not be charged 

if the account did not have a protected 

balance. A savings association is not, 

however, prohibited from flcontinuing to 

assess a periodic fee that was assessed before 

the account had a protected balance.fi 

flSimilarly, a savings association is not 

prohibited fromfi 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 flor if the only balance 

on the account is a protected balancefi. 

§ 535.25—Unfair Balance Computation 

Method 

25(a) General Rule 

* * * * * 

fl3. Charging accrued interest at 

expiration of certain promotional programs. 

When a savings association offers a 

promotional program under which a 

consumer will not be obligated to pay 

interest that accrues on a balance if that 

balance is paid in full prior to a specified 

date or expiration of a specified period of 

time, § 535.25 does not prohibit the savings 

association from charging that accrued 

interest to the account if the balance is not 

paid in full prior to the specified date 

(consistent with applicable law and 

regulatory guidance).fi 

* * * * * 

National Credit Union Administration 

For the reasons discussed in the joint 

preamble, the NCUA Board proposes to 

further amend 12 CFR Part 706, as 

amended at 74 FR 5575, January 29, 

2009, as set forth below: 

PART 706—UNFAIR OR DECEPTIVE 

ACTS OR PRACTICES 

1. The authority citation for part 706 

continues to read as follows: 

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

2. Revise § 706.23 as follows: 

§ 706.23 Unfair allocation of payments. 

When different annual percentage 

rates apply to different balances on a 

consumer credit card account: 

(a) General rule. Except as provided in 

paragraph (b) of this section, a federal 

credit union must allocate any amount 

paid by a member in excess of the 

required minimum periodic payment 

among the balances using one of the 

following methods: 

(1) High-to-low method. The amount 

paid by a member 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. 

(2) Pro rata method. The amount paid 

by a member 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. 

(b) Special rule for accounts subject to 

certain promotional programs. When a 

promotional program provides that a 

member will not be obligated to pay 

interest that accrues on a balance if that 

balance is paid in full prior to the 

expiration of a specified period of time, 

a federal credit union must allocate 

amounts paid by a member in excess of 

the required minimum periodic 

payment first to that balance during the 

two billing cycles immediately 

preceding expiration of the specified 

period and any remaining portion to the 

other balances consistent with 

paragraph (a) of this section. 

3. Amend § 706.24 by revising 

paragraphs (b)(1) through (b)(5) and 

adding paragraph (b)(6) to read as 

follows: 

§ 706.24 Unfair increases in annual 

percentage rates. 

* * * * * 

(b) * * * 

(1) Account opening disclosure 

exception. An annual percentage rate for 

a category of transactions may be 

increased to an annual percentage rate 

disclosed at account opening upon 

expiration of a period of time disclosed 

at account opening. This exception does 

not permit application of an increased 

annual percentage rate disclosed at 

account opening that is contingent on a 

particular event or occurrence or that 

may be applied at the federal credit 

union’s discretion. 

(2) Variable rate exception. An annual 

percentage rate for a category of 

transactions that varies according to an 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20827 

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. An 

annual percentage rate for a category of 

transactions may be increased pursuant 

to a notice under 12 CFR 226.9(b), (c), 

or (g), provided that: 

(i) If the federal credit union discloses 

the increased rate pursuant to 12 CFR 

226.9(b), that rate must not be applied 

to transactions that occurred prior to 

provision of the notice; 

(ii) If the federal credit union 

discloses the increased rate pursuant to 

12 CFR 226.9(c) or (g), that rate must not 

be applied to transactions that occurred 

within seven days after provision of the 

notice; and 

(iii) This exception does not permit an 

increase in any annual percentage rate 

during the first year after an account is 

opened. 

(4) Delinquency exception. An annual 

percentage rate may be increased due to 

the federal credit union not receiving a 

member’s required minimum periodic 

payment within 30 days after the due 

date for that payment. 

(5) Workout and temporary hardship 

arrangement exception. An annual 

percentage rate may be increased due to 

a member’s completion of a workout or 

temporary hardship arrangement 

between a federal credit union and the 

member or a member’s failure to comply 

with the terms of such an arrangement, 

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 arrangement. 

(6) Servicemembers Civil Relief Act 

exception. An annual percentage rate 

that has been decreased pursuant to 50 

U.S.C. app. 527 may be increased once 

that provision no longer applies, 

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 the 

decrease. 

* * * * * 

4. In Appendix A to Part 706: 

A. Add Section 706.21—Definitions. 

B. Under Section 706.22—Unfair Acts 

or Practices Regarding Time To Make 

Payment, under 22(b) Compliance with 

General Rule, paragraph 3. is revised. 

C. Under Section 706.23—Unfair Acts 

or Practices Regarding Allocation of 

Payments: 

(i) Paragraph 2., the heading of 

paragraph 3., and paragraphs 4. and 6. 

are revised; 

(ii) Redesignate 23(a) High-to-Low 

Method as 23(a)(1) High-to-Low Method; 

(iii) Under 23(a)(1) High-to-Low 

Method, paragraph 1.v. is added; 

(iv) Redesignate 23(b) Pro Rata 

Method as 23(a)(2) Pro Rata Method; 

(v) Under 23(a)(2) Pro Rata Method, 

paragraph 1. is revised; and 

(vi) Add 23(b) Special Rule for 

Accounts Subject to Certain 

Promotional Programs. 

D. Under Section 706.24—Unfair Acts 

or Practices Regarding Increases in 

Annual Percentage Rates: 

(i) Paragraph 1. is revised; 

(ii) Add paragraphs 2., 3., 4.; 

(iii) Under 24(a) General Rule, 

paragraphs 1., 2.i. introductory text, 

2.iii. introductory text, and 2.iii.C. are 

revised, and paragraph 2.iv. is added; 

(iv) Under 24(b) Exceptions, add 

paragraph 1.; 

(v) Under 24(b)(1) Account Opening 

Disclosure Exception, paragraph 1. 

introductory text is revised, paragraph 

1.iii. and paragraph 2. are removed, 

paragraph 3. is redesignated as 

paragraph 2., the introductory text of 

newly designated paragraph 2. is 

revised, and paragraph 2.ii. is added; 

(vi) Under 24(b)(2) Variable Rate 

Exception, the heading of paragraph 5. 

is revised; 

(vii) Under 24(b)(3) Advance Notice 

Exception, paragraphs 2. and 3. are 

revised and paragraph 4. is added; 

(viii) Revise 24(b)(5) Workout 

Arrangement Exception; 

(ix) Under 24(c) Treatment of 

Protected Balances, under 24(c)(1) 

Repayment, under Paragraph 24(c)(1)(i), 

the heading of paragraph 2. is revised; 

and 

(x) Under 24(c) Treatment of 

Protected Balances, under 24(c)(2) Fees 

and Charges, paragraph 1. is revised. 

E. Under Section 706.25—Unfair 

Balance Computation Method, under 

25(a) General Rule, paragraph 3. is 

revised. 

Appendix A to Part 706—Official Staff 

Commentary 

* * * * * 

Subpart C—Consumer Credit Card 

Account Practices Rule 

§ 706.21—Definitions 

21(a) Annual Percentage Rate 

1. Use of ‘‘rate.’’ For purposes of Subpart 

C, ‘‘rate’’ has the same meaning as ‘‘annual 

percentage rate’’ unless otherwise specified. 

21(c) Consumer Credit Card Account 

1. Closed accounts. If a consumer credit 

card account with an outstanding balance is 

closed, the account continues to be the same 

consumer credit card account for purposes of 

Subpart C with respect to that balance. For 

example, if a federal credit union or a 

member closes a consumer credit card 

account with an outstanding balance, the 

federal credit union would still be prohibited 

from increasing the annual percentage rate 

that applies to that balance unless permitted 

by one of the exceptions in § 706.24(b). 

2. Acquired accounts. If, through merger or 

acquisition, for example, a federal credit 

union acquires a consumer credit card 

account with an outstanding balance, the 

account continues to be the same consumer 

credit card account for purposes of Subpart 

C with respect to that balance. For example, 

if a consumer credit card account has a 

$1,000 purchase balance with an annual 

percentage rate of 12% and the federal credit 

union that acquires that account applies a 

15% rate to purchases, the federal credit 

union would be prohibited from applying the 

15% rate to the $1,000 balance unless 

permitted by one of the exceptions in 

§ 706.24(b). 

3. Balance transfers. 

i. Between accounts issued by the same 

federal credit union. If a balance is 

transferred from a consumer credit card 

account issued by a federal credit union to 

another credit account issued by the same 

federal credit union, the account continues to 

be the same consumer credit card account for 

purposes of Subpart C with respect to that 

balance unless the account to which the 

balance is transferred is an open-end credit 

plan secured by a member’s dwelling. For 

example, if a consumer credit card account 

has a $2,000 purchase balance with an 

annual percentage rate of 12% and that 

balance is transferred to another consumer 

credit card account issued by the same 

federal credit union that applies a 15% rate 

to purchases, the federal credit union would 

be prohibited from applying the 15% rate to 

the $2,000 balance unless permitted by one 

of the exceptions in § 706.24(b). Additional 

circumstances in which a balance is 

considered transferred for purposes of this 

comment include when: 

A. A retail credit card with an outstanding 

balance is replaced or substituted with a 

cobranded general purpose card that can be 

used with a broader merchant base; 

B. A credit card account with an 

outstanding balance is replaced or 

substituted with another credit card account 

offering different features; 

C. A credit card account with an 

outstanding balance is consolidated or 

combined with one or more other credit card 

accounts into a single credit card account; 

and 

D. A credit card account is replaced or 

substituted with a line of credit that can be 

accessed solely by an account number. 

ii. Between accounts issued by different 

federal credit unions. If a balance is 

transferred to a consumer credit card account 

issued by a federal credit union from a 

consumer credit card account issued by a 

different financial institution that is not an 

affiliate or subsidiary of the federal credit 

union that issued the consumer credit card 

account, the account is not the same 

consumer credit card account for purposes of 

Subpart C with respect to that balance. Thus, 

20828 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

the provisions of Subpart C do not prohibit 

the federal credit union to which the balance 

is transferred from applying its account terms 

to that balance, provided that those terms 

comply with Subpart C. For example, if a 

consumer credit card account issued by 

federal credit union A has a $1,000 purchase 

balance at an annual percentage rate of 13% 

and a member transfers that balance to a 

consumer credit card account with a 

purchase rate of 15% issued by federal credit 

union B, federal credit union B may apply 

the 15% rate to the $1,000 balance. However, 

federal credit union B may not subsequently 

increase the rate on that balance unless 

permitted by one of the exceptions in 

§ 706.24(b). 

706.22—Unfair Time To Make Payment 

* * * * * 

22(b) Compliance With General Rule 

* * * * * 

3. Example of alternative method of 

compliance. 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, 

including the consumer notice and consent 

procedures of the Electronic Signatures in 

Global and National Commerce Act (E-Sign 

Act), 15 U.S.C. 7001 et seq.). 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). 

* * * * * 

§ 706.23—Unfair Acts or Practices Regarding 

Allocation of Payments 

* * * * * 

2. Adjustments of one dollar or less 

permitted. When allocating payments, the 

federal credit union may adjust amounts by 

one dollar or less. For example, if a federal 

credit union is allocating $100 pursuant to 

§ 706.23(a)(2) 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 rates. * * * 

4. Use of permissible allocation methods. 

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)(1) to 

allocating pro rata pursuant to § 706.23(a)(2) 

or vice versa. Similarly, a federal credit 

union may allocate to the highest rate 

balance first pursuant to § 706.23(a)(1) on 

some of its accounts and allocate pro rata 

pursuant to § 706.23(a)(2) on other accounts. 

* * * * * 

6. Balances with the same rate. 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 generally does not require that any 

particular method be used 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 comments 23(a)(1)– 

1.iv and 23(a)(2)–2.iv. However, when a 

member will not be obligated to pay interest 

that accrues on a balance if that balance is 

paid in full prior to the expiration of a 

specified period of time, that balance must be 

treated as a balance with an annual 

percentage rate of zero for purposes of 

§ 706.23 during that period of time. For 

example, if an account has a $1,000 purchase 

balance and a $2,000 balance on which the 

member will not be obligated to pay interest 

if that balance is paid in full prior to July 1 

and a 15% annual percentage rate applies to 

both, the balances must be treated as 

balances with different rates for purposes of 

§ 706.23 until July 1. In addition, for 

purposes of allocating pursuant to 

§ 706.23(a)(1), any amount paid by the 

member in excess of the required minimum 

periodic payment must be applied first to the 

$1,000 purchase balance except during the 

last two billing cycles of the promotional 

period (when it must be applied first to any 

remaining portion of the $2,000 balance). See 

comment 23(a)(1)–1.v. 

23(a)(1) High-to-Low Method 

1. * * * 

v. Assume that on January 1 a member uses 

a credit card account to make a $1,200 

purchase subject to a promotional offer under 

which interest accrues at an annual 

percentage rate of 15% but the member will 

not be obligated to pay that interest if the 

balance is paid in full on or before June 30. 

The billing cycles for this account begin on 

the first day of the month and end on the last 

day of the month. Each month from January 

through June, the member uses the account 

to make $200 in purchases that are not 

subject to the promotional offer but are 

subject to the 15% rate. Each month from 

February through June, the member pays 

$400 in excess of the required minimum 

periodic payment on the payment due date, 

which is the twenty-fifth of the month. Any 

interest that accrues on the non-promotional 

purchases is paid by the required minimum 

periodic payment. A federal credit union 

using this method would allocate the $400 

excess payments received on February 25, 

March 25, and April 25 as follows: $200 to 

pay off the non-promotional balance (that is 

subject to the 15% rate) and the remaining 

$200 to the promotional balance (that is 

treated as a balance with a rate of zero). 

Section 706.23(b), however, requires the 

federal credit union to allocate the entire 

$400 excess payment received on May 25 to 

the promotional balance. Similarly, 

§ 706.23(b) requires the federal credit union 

to allocate the $400 excess payment received 

on June 25 as follows: $200 to the 

promotional balance (which pays that 

purchase in full) and the remaining $200 to 

the non-promotional balance. 

23(a)(2) Pro Rata Method 

1. Total balance. A federal credit union 

may, but is not required to, deduct amounts 

paid by the member’s required minimum 

periodic payment when calculating the total 

balance for purposes of § 706.23(a)(2). See 

comment 23(a)(2)–2.iii. 

* * * * * 

23(b) Special Rule for Accounts Subject to 

Certain Promotional Programs 

1. Grace periods. Section 706.23(b) applies 

to promotional programs under which the 

member is not obligated to pay interest that 

accrues on a balance if that balance is paid 

in full prior to the expiration of a specified 

period of time. A grace period during which 

a member may repay one or more balances 

on a consumer credit card account is not a 

‘‘promotional program’’ for purposes of 

§ 706.23(b). 

* * * * * 

§ 706.24—Unfair Increases in Annual 

Percentage Rates 

1. Relationship to Regulation Z, 12 CFR 

part 226. 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 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(b), (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. 

2. Relationship to grace period. 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. 

Additionally, a federal credit union has not 

reduced an annual percentage rate on a 

consumer credit account for purposes of 

§ 706.24 if the federal credit union does not 

charge interest on a balance when the 

member pays that balance in full prior to the 

expiration of a grace period. 

3. Category of transactions. For purposes of 

§ 706.24, a ‘‘category of transactions’’ is a 

type or group of transactions to which an 

annual percentage rate applies that is 

different than the annual percentage rate that 

applies to other transactions. For example, 

purchase transactions, cash advance 

transactions, and balance transfer 

transactions are separate categories of 

transactions for purposes of § 706.24 if a 

federal credit union applies different annual 

percentage rates to each. Furthermore, if, for 

example, the federal credit union applies 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20829 

different annual percentage rates to different 

types of purchase transactions (such as one 

rate for purchases of gasoline and a different 

rate for all other purchases), each type 

constitutes a separate category of transactions 

for purposes of § 706.24. 

4. Account opening. 

i. Multiple accounts with same federal 

credit union. When a member has a credit 

card account with a federal credit union and 

the member opens a new credit card account 

with the same federal credit union (or its 

affiliate or subsidiary), the opening of the 

new account constitutes an ‘‘account 

opening’’ for purposes of § 706.24 if, more 

than 15/30 days after the new account is 

opened, the member has the ability to obtain 

additional extensions of credit on each 

account. For example, assume that, on 

January 1 of year one, a member opens a 

credit card account with a federal credit 

union. On July 1 of year one, the member 

opens a second credit card account with that 

federal credit union. On July 15, a $1,000 

balance is transferred from the first account 

to the second account. The opening of the 

second account constitutes the opening of an 

account for purposes of § 706.24 so long as, 

on July 17/August 1, the member can engage 

in transactions using either account. Under 

these circumstances, the bank could not 

increase an annual percentage rate on the 

second account pursuant to § 706.24(b)(3) 

until July 1 of year two (which is one year 

after the second account was opened). 

ii. Replacement or consolidation. 

A. Generally. A consumer credit card 

account has not been opened for purposes of 

§ 227.24 when a consumer credit card 

account issued by a bank is replaced or 

consolidated with another consumer credit 

card account issued by the same bank (or its 

affiliate or subsidiary). Circumstances in 

which a consumer credit card account has 

not been opened for purposes of § 227.24 

include when: 

(1) A retail credit card is replaced with a 

cobranded general purpose card that can be 

used at a wider number of merchants; 

(2) A credit card account is replaced with 

another consumer credit card account 

offering different features; 

(3) A credit card account is consolidated or 

combined with one or more other credit card 

accounts into a single credit card account; or 

(4) A credit card account acquired through 

merger or acquisition is replaced with a 

credit card account issued by the acquiring 

federal credit union. 

B. Limitation. A bank that replaces or 

consolidates a consumer credit card account 

with another consumer credit card account 

issued by the bank (or its affiliate or 

subsidiary) may not increase an annual 

percentage rate in a manner otherwise 

prohibited by § 227.24. For example, assume 

that, on January 1 of year one, a consumer 

opens a consumer credit card account with 

an annual percentage rate for purchases of 

15%. On July 1 of year one, the account is 

replaced with a consumer credit card account 

that offers different features (such as rewards 

on purchases). Under these circumstances, 

the bank cannot increase the annual 

percentage rate for purchases to a rate that is 

higher than 15% pursuant to § 227.24(b)(3) 

until January 1 of year two (which is one year 

after the first account was opened). 

24(a) General Rule 

1. Rates that will apply to each category of 

transactions. 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. The 

disclosure requirements in § 706.24(a) do not 

apply to annual percentage rates that are 

contingent on a particular event or 

occurrence or may be applied at the federal 

credit union’s discretion (such as penalty 

rates) insofar as those rates may be applied 

consistent with § 706.24. 

2. * * * 

i. 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 non-variable rate of 5% 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 3 percentage points to a publicly available 

index not under the federal credit union’s 

control. Furthermore, 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. 

Finally, the federal credit union discloses 

that, to the extent consistent with § 706.24 

and other applicable law, a non-variable 

penalty rate of 15% may apply if a member 

makes a late payment. 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. 

* * * * * 

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 2 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 a member 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 federal credit union provides a notice 

pursuant to 12 CFR 226.9(c) informing the 

member 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 member makes a $500 

purchase. On June 8, the member makes a 

$200 purchase. On June 25, the federal credit 

union has not received the payment due on 

June 15 and provides the member 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 3 and that, if the member becomes more 

than 30 days late, the penalty rate will apply 

to all balances on the account. On July 4, the 

member makes a $300 purchase. 

* * * * * 

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 25 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). 

iv. Assume that, at account opening on 

January 1 of year one, the federal credit 

union discloses a promotional program under 

which interest on purchases made during 

January will accrue at a non-variable rate of 

10%, but the member will not be obligated 

to pay that interest if those purchases are 

paid in full by December 31 of year one. On 

January 15, the member makes a purchase of 

$2,000. No other transactions are made on 

the account. The payment due on April 1 is 

not received until April 10. Section 706.24 

does not permit the federal credit union to 

deny the member the opportunity to avoid 

interest charges on the $2,000 purchase by 

paying that purchase in full on or before 

December 31 of year one. If, however, the 

$2,000 purchase remains unpaid on January 

1 of year two, § 706.24 does not prohibit the 

federal credit union from charging the 

interest accrued on that purchase during year 

one. 

24(b) Exceptions 

1. Delayed implementation of rate 

increase. If § 706.24(b) permits a federal 

credit union to apply an increased annual 

percentage rate on a date that is not the first 

day of a billing cycle, the federal credit union 

may delay application of the increased rate 

until the first day of the following billing 

cycle without relinquishing the ability to 

apply that rate. For example, assume that, at 

account opening on January 1, a federal 

credit union discloses that a non-variable 

annual percentage rate of 10% will apply to 

purchases for six months and a non-variable 

rate of 15% will apply thereafter. The first 

day of the billing cycle for the account is the 

fifteenth of the month. If the six-month 

period expires on July 1, the federal credit 

union may delay application of the 15% rate 

until July 15 without relinquishing its ability 

to apply that rate under § 706.24(b)(1). 

24(b)(1) Account Opening Disclosure 

Exception 

1. Prohibited increases in rate. 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 an increased annual 

percentage rate disclosed at account opening 

that is contingent on a particular event or 

20830 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

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: 

* * * * * 

2. Application of rate that is lower than 

disclosed rate. 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 a disclosed 

rate either during or upon expiration of the 

period. However, once the lower rate is 

applied to an existing balance, the federal 

credit union cannot subsequently increase 

the rate on that balance unless it provided 

the member with advance notice of the 

increase pursuant to 12 CFR 226.9(b) or (c). 

This notice must state the period of time 

during which the lower rate will apply and 

the rate that will apply after expiration of 

that period. Furthermore, a federal credit 

union that applies a lower rate to 

transactions that occurred during the first 

year after account opening may not 

subsequently increase the rate that applies to 

those transactions to a rate that is higher than 

the increased rate disclosed at account 

opening. The following examples illustrate 

the application of the rule: 

* * * * * 

ii. Assume that a federal credit union 

discloses at account opening on January 1 of 

year one that a non-variable annual 

percentage rate of 10% will apply to 

purchases for one year, after which that rate 

will increase to a non-variable rate of 12%. 

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 member’s 

required minimum periodic payment is 

received after the payment due date, which 

is the tenth of the month. The required 

minimum periodic payments are applied to 

accrued interest and fees but do not reduce 

the purchase balance. 

A. On September 30 of year one, the 

account has a purchase balance of $1,400 at 

the 10% rate. On October 1, the federal credit 

union provides a notice pursuant to 12 CFR 

226.9(c) informing the member that the rate 

for new purchases will decrease to a nonvariable rate of 7% for six months (from 

October 1 through March 31 of year two) and 

that, beginning on April 1 of year two, the 

rate for purchases will increase to a nonvariable rate of 13%. The federal credit union 

does not apply the 7% rate to the $1,400 

purchase balance. On October 15 of year one, 

the member makes a $300 purchase at the 7% 

rate. On January 1 of year two, the federal 

credit union may begin accruing interest on 

the $1,400 purchase balance at 12% (as 

disclosed at account opening). On January 15 

of year two, the member makes a $150 

purchase at the 7% rate. On April 1 of year 

two, the 7% rate that applies to the $300 

purchase and the $150 purchase expires. The 

federal credit union may begin accruing 

interest on the $150 purchase at 13% (as 

disclosed in the 12 CFR 226.9(c) notice). 

Because, however, the $300 purchase 

occurred during the first year after account 

opening, the federal credit union cannot 

increase the rate that applies to that purchase 

to a rate that is higher than the 12% rate 

disclosed at account opening. 

B. Same facts as above except that the 

required minimum periodic payment due on 

November 10 of year one is not received until 

November 15. Section 706.24(b)(1) does not 

permit the federal credit union to increase 

any annual percentage rate on the account at 

this time. The federal credit union may, 

however, apply the 15% penalty rate to new 

transactions beginning on January 1 of year 

two pursuant to § 706.24(b)(3) by providing 

a 12 CFR 226.9(g) notice informing the 

member of this increase no later than 

November 16 of year one. On January 1 of 

year two, § 706.24(b)(1) permits the federal 

credit union to begin accruing interest on the 

$1,400 purchase balance at 12% (as disclosed 

at account opening). If the member makes the 

$150 purchase on January 15 of year two, 

§ 706.24(b)(3) would permit the federal credit 

union to apply the 15% rate to that purchase. 

On April 1 of year two, the 7% rate that 

applies to the $300 purchase expires. 

Because this purchase occurred during the 

first year after account opening, the federal 

credit union cannot increase the rate that 

applies to that purchase to a rate that is 

higher than the 12% rate disclosed at account 

opening. 

24(b)(2) Variable Rate Exception 

* * * * * 

5. Changing a variable rate to a nonvariable rate. * * * 

* * * * * 

24(b)(3) Advance Notice Exception 

* * * * * 

2. Transactions that occurred prior to 

provision of notice or within seven days after 

provision of notice. Section 706.24(b)(3) 

generally permits a federal credit union to 

apply an increased rate to transactions that 

occur after provision of a 12 CFR 226.9(b) 

notice or more than seven days after 

provision of a 12 CFR 226.9(c) or (g) notice. 

If a rate increase is disclosed pursuant to 

both 12 CFR 226.9(b) and 12 CFR 226.9(c), 

that rate may only be applied to transactions 

that occur more than seven days after 

provision of the 12 CFR 226.9(c) notice. 

Section 706.24(b)(3) does not permit a federal 

credit union to reach back to days before the 

effective date of the rate increase under 12 

CFR 226.9(c) or (g) when calculating interest 

charges. See comment 24(b)(3)–3. Whether a 

transaction occurred prior to provision of a 

notice or within seven days after provision of 

a notice is determined by the date of the 

transaction. In some cases, however, a 

merchant may place a ‘‘hold’’ on the 

available credit on an account for an 

estimated transaction amount when the 

actual transaction amount will not be known 

until a later date. In these circumstances, the 

date of the transaction for purposes of 

§ 706.24(b)(3) is the date on which the 

merchant determines the actual transaction 

amount. For example, assume that, when a 

member uses a credit card account to check 

into a hotel on July 1, the hotel obtains 

authorization for a $750 hold on the account 

to ensure there is adequate available credit to 

cover the anticipated cost of the stay. When 

the member checks out on July 4, the actual 

cost of the stay is $850 because of additional 

incidental costs, and the hotel charges this 

amount to the account. For purposes of 

§ 706.24(b)(3), the transaction occurred on 

July 4. 

3. Examples. 

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 a 

member that the rate for new purchases will 

increase to a non-variable rate of 8% on May 

1. The notice further states that the 8% rate 

will apply for six months (until November 1) 

and states that thereafter the federal credit 

union will apply a variable rate that is 

currently 9% and is determined by adding a 

margin of 5 percentage points to a publiclyavailable 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 member makes a $200 

purchase. On March 24, the member makes 

a $1,000 purchase. On May 1, § 706.24(b)(3) 

permits the federal credit union to begin 

accruing interest at 8% on the $1,000 

purchase made on March 24. The federal 

credit union is not permitted to apply the 8% 

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 3-point 

margin. 

ii. Same facts as above except that on 

September 17 of year two (which is 45 days 

before expiration of the 8% non-variable 

rate), the federal credit union provides a 

notice pursuant to 12 CFR 226.9(c) informing 

the member 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 3 percentage points). The 

notice further states that, on May 1 of year 

three, the margin will increase to the margin 

disclosed in the March 15 notice (6 

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 5 percentage points and to 

apply that rate to any remaining portion of 

the $1,000 purchase as well as to new 

purchases. 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. 

4. Application of a lower rate. Nothing in 

§ 706.24 prohibits a federal credit union from 

lowering the annual percentage rate that 

applies to an existing balance or to new 

transactions. However, once the lower rate is 

applied to an existing balance, the federal 

credit union cannot subsequently increase 

the rate on that balance unless it provided a 

member with advance notice of the increase 

pursuant to 12 CFR 226.9(b) or (c). This 

notice must state the period of time during 

Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 20831 

which the lower rate will apply and the rate 

that will apply after expiration of that period. 

Furthermore, a federal credit union that 

applies a decreased rate to transactions that 

occurred prior to provision of the notice—or, 

in the case of a 12 CFR 226.9(c) or (g) notice, 

transactions that occurred within seven days 

after provision of the notice—may not 

subsequently increase the rate that applies to 

those transactions to a rate that is higher than 

the rate that applied prior to the decrease. 

The following examples illustrate the 

application of the rule: 

i. Assume that a federal credit union 

discloses at account opening on January 1 of 

year one that a non-variable annual 

percentage rate of 7% will apply to purchases 

for one year, after which that rate will 

increase to a non-variable rate of 9%. 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 member’s required 

minimum periodic payment is received after 

the payment due date, which is the tenth of 

the month. The required minimum periodic 

payments are applied to accrued interest and 

fees but do not reduce the purchase balance. 

On June 30 of year two, the account has a 

purchase balance of $1,000 at the 9% rate. 

On July 1, the federal credit union provides 

a notice pursuant to 12 CFR 226.9(c) 

informing the consumer that the rate for new 

purchases will decrease to a non-variable rate 

of 5% for six months (from July 1 through 

December 31 of year two) and that, beginning 

on January 1 of year three, the rate for 

purchases will increase to a non-variable rate 

of 10%. On July 8 of year two, the member 

makes a $200 purchase. On July 9, the 

member makes a $100 purchase. On January 

1 of year three, § 706.24(b)(3) permits the 

federal credit union to begin accruing interest 

on the $100 purchase at 10%. The federal 

credit union may not apply the 10% rate to 

the $200 purchase because that transaction 

occurred within seven days after provision of 

the 12 CFR 226.9(c) notice. If the federal 

credit union applied the 5% rate to the 

$1,000 purchase balance and the $200 

purchase, the federal credit union may not 

increase the rate that applies to those 

amounts to a rate that is higher than 9% on 

January 1 of year three. 

ii. Same facts as above except that the 

required minimum periodic payment due on 

September 10 of year two is not received 

until September 15 of year two. On 

September 15 of year two, the federal credit 

union provides a notice pursuant to 12 CFR 

226.9(g) informing the member that the rate 

for new purchases will increase to the 15% 

penalty rate on October 31. On October 31, 

§ 706.23(b)(3) permits the federal credit 

union to begin accruing interest at 15% on 

any purchase made on or after September 23. 

The federal credit union may not, however, 

apply the 15% rate to the $1,300 in 

purchases. Instead, the federal credit union 

must continue to apply the 5% rate to the 

$100 purchase until at least January 1 of year 

three when § 706.24(b)(3) permits the federal 

credit union to begin accruing interest on 

that purchase at 10%. Similarly, if the federal 

credit union applied the 5% rate to the 

$1,000 purchase balance and the $200 

purchase, the federal credit union may begin 

accruing interest on those amounts at 9% on 

January 1 of year three. 

iii. Assume that a federal credit union 

discloses at account opening on January 1 of 

year one that the rate that applies to 

purchases is a variable annual percentage 

rate that is currently 7% and will be adjusted 

quarterly by adding a margin of 3 percentage 

points to a publicly available index not under 

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 member’s required minimum 

periodic payment is received after the 

payment due date, which is the first of the 

month. On July 30 of year two, the member 

uses the account for a $1,000 purchase in 

response to a promotional offer. Under the 

terms of this offer, interest on purchases 

made during the months of July through 

September will accrue at the variable rate for 

purchases but the member will not be 

obligated to pay that interest if all purchases 

made during that three-month period are 

paid in full by December 31 of year two. The 

payment due on September 1 of year two is 

not received until September 6. Section 

706.24 does not permit the federal credit 

union to deny the member the opportunity to 

avoid interest charges on the $1,000 purchase 

by paying that purchase in full on or before 

December 31 of year two. The federal credit 

union may, however, provide a notice 

pursuant to 12 CFR 226.9(g) on September 2 

of year two informing the member that the 

promotional offer does not apply to 

purchases made on or after September 10 and 

that the rate for such purchases will increase 

to the 15% penalty rate on October 18. On 

December 31 of year two, the $1,000 

purchase has been paid in full. Under these 

circumstances, the federal credit union may 

not charge any interest accrued on the $1,000 

purchase. 

iv. Assume that a federal credit union 

discloses at account opening on January 1 of 

year one that the rate that applies to cash 

advances is a variable annual percentage rate 

that is currently 9% and will be adjusted 

quarterly by adding a margin of 3 percentage 

points to a publicly available index not under 

the federal credit union’s control. On July 1 

of year two, the federal credit union provides 

checks that access the account and, pursuant 

to 12 CFR 226.9(b)(3)(A), discloses that a 

promotional rate of 5% will apply to credit 

extended by use of the checks until January 

1 of year three, after which the cash advance 

rate determined using the 3-point margin will 

apply. On July 15 of year two, the member 

uses one of the checks to pay for a $500 

transaction. On January 1 of year three, 

§ 706.24(b)(3) permits the federal credit 

union to apply the cash advance rate 

determined using the 3-point margin to the 

$500 transaction. 

24(b)(5) Workout and Temporary Hardship 

Arrangement Exception 

1. Scope of exception. Nothing in 

§ 706.24(b)(5) permits a federal credit union 

to alter the requirements of § 706.24 pursuant 

to a workout or temporary hardship 

arrangement between a member and the 

federal credit union. For example, a federal 

credit union cannot increase an annual 

percentage rate pursuant to a workout or 

temporary hardship arrangement unless 

otherwise permitted by § 706.24. In addition, 

a federal credit union cannot require the 

member to make payments with respect to a 

protected balance that exceeds the payments 

permitted under § 706.24(c). 

2. Variable rates. If the annual percentage 

rate that applied to a category of transactions 

prior to commencement of the workout or 

temporary hardship 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. Examples. 

i. 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 3 

percentage points to 5 percentage points. 

Assume also that the federal credit union and 

the member subsequently agree to a workout 

arrangement that reduces the margin back to 

3 points on the condition that the member 

pay a specified amount by the payment due 

date each month. If the member 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 5 percentage 

points. 12 CFR 226.9 does not require 

advance notice of this type of increase. 

ii. Assume that a member fails to make four 

consecutive minimum payments totaling 

$480 on a consumer credit card account with 

a balance of $6,000 and that, consistent with 

§ 706.24(b)(4), the annual percentage rate that 

applies to that balance is increased from a 

non-variable rate of 5% to a non-variable 

penalty rate of 15%. Assume also that the 

federal credit union and the member 

subsequently agree to a temporary hardship 

arrangement that reduces all rates on the 

account to 0% on the condition that the 

member pay an amount by the payment due 

date each month that is sufficient to cure the 

$480 delinquency within six months. If the 

member pays the agreed-upon amount by the 

payment due date during the six-month 

period and cures the delinquency, the federal 

credit union may increase the rate that 

applies to any remaining portion of the 

$6,000 balance to 5% or any other rate up to 

the 15% penalty rate. 

24(c) Treatment of Protected Balances 

* * * * * 

24(c)(1) Repayment 

* * * * * 

Paragraph 24(c)(1)(i) 

* * * * * 

2. Amortization when applicable rate is 

variable. * * * 

* * * * * 

24(c)(2) Fees and Charges 

1. Fee or charge based solely on the 

protected balance. 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 

20832 Federal Register / Vol. 74, No. 85 / Tuesday, May 5, 2009 / Proposed Rules 

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 continuing to 

assess a periodic fee that was assessed before 

the account had a protected balance. 

Similarly, a federal credit union is not 

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 or if the only balance 

on the account is a protected balance. 

§ 706.25—Unfair Balance Computation 

Method 

25(a) General Rule 

* * * * * 

3. Charging accrued interest at expiration 

of certain promotional programs. When a 

federal credit union offers a promotional 

program under which a member will not be 

obligated to pay interest that accrues on a 

balance if that balance is paid in full prior 

to a specified date or expiration of a specified 

period of time, § 706.25 does not prohibit the 

federal credit union from charging that 

accrued interest to the account if the balance 

is not paid in full prior to the specified date 

(consistent with applicable law and 

regulatory guidance). 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, April 24, 2009. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated: April 17, 2009. 

By the Office of Thrift Supervision. 

John E. Bowman, 

Acting Director. 

By the National Credit Union 

Administration Board, on April 24, 2009. 

Mary F. Rupp, 

Secretary of the Board. 

[FR Doc. E9–9861 Filed 5–4–09; 8:45 am] 

BILLING CODE 6210–01–P, 6720–01–P, 7535–01–P