Part II

 
CONTENT

Federal Register: January 29, 2009 (Volume 74, Number 18)

Rules and Regulations

Page 5244-5498

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr29ja09-7

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FEDERAL RESERVE SYSTEM 12 CFR Part 226

Regulation Z; Docket No. R-1286

Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board is amending Regulation Z, which implements the Truth in Lending Act (TILA), and the staff commentary to the regulation, following a comprehensive review of TILA's rules for open-end

(revolving) credit that is not home-secured. Consumer testing was conducted as a part of the review.

Except as otherwise noted, the changes apply solely to open-end credit. Disclosures accompanying credit card applications and solicitations must highlight fees and reasons penalty rates might be applied, such as for paying late. Creditors are required to summarize key terms at account opening and when terms are changed. Specific fees are identified that must be disclosed to consumers in writing before an account is opened, and creditors are given flexibility regarding how and when to disclose other fees imposed as part of the open-end plan.

Costs for interest and fees are separately identified for the cycle and year to date. Creditors are required to give 45 days' advance notice prior to certain changes in terms and before the rate applicable to a consumer's account is increased as a penalty. Rules of general applicability such as the definition of open-end credit, dispute resolution procedures, and payment processing limitations apply to all open-end plans, including home-equity lines of credit. Rules regarding the disclosure of debt cancellation and debt suspension agreements are revised for both closed-end and open-end credit transactions. Loans taken against employer-sponsored retirement plans are exempt from TILA coverage.

DATES: The rule is effective July 1, 2010.

FOR FURTHER INFORMATION CONTACT: Benjamin K. Olson, Attorney, Amy Burke or Vivian Wong, Senior Attorneys, or Krista Ayoub, Ky Tran-Trong, or

John Wood, Counsels, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, at (202) 452-3667 or 452- 2412; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background on TILA and Regulation Z

Congress enacted the Truth in Lending Act (TILA) based on findings that economic stability would be enhanced and competition among consumer credit providers would be strengthened by the informed use of credit resulting from consumers' awareness of the cost of credit. The purposes of TILA are (1) to provide a meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit; and

(2) to protect consumers against inaccurate and unfair credit billing and credit card practices.

TILA's disclosures differ depending on whether consumer credit is an open-end (revolving) plan or a closed-end (installment) loan. TILA also contains procedural and substantive protections for consumers.

TILA is implemented by the Board's Regulation Z. An Official Staff

Commentary interprets the requirements of Regulation Z. By statute, creditors that follow in good faith Board or official staff interpretations are insulated from civil liability, criminal penalties, or administrative sanction.

II. Summary of Major Changes

The goal of the amendments to Regulation Z is to improve the effectiveness of the disclosures that creditors provide to consumers at application and throughout the life of an open-end (not home-secured) account. The changes are the result of the Board's review of the provisions that apply to open-end (not home-secured) credit. The Board is adopting changes to format, timing, and content requirements for the five main types of open-end credit disclosures governed by Regulation

Z: (1) Credit and charge card application and solicitation disclosures;

(2) account-opening disclosures; (3) periodic statement disclosures;

(4) change-in-terms notices; and (5) advertising provisions. The Board is also adopting additional protections that complement rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register regarding certain credit card practices.

Applications and solicitations. Format and content changes are adopted to make the credit and charge card application and solicitation disclosures more meaningful and easier for consumers to use. The changes include:

Adopting new format requirements for the summary table, including rules regarding: type size and use of boldface type for certain key terms, and placement of information.

Revising content, including: a requirement that creditors disclose the duration that penalty rates may be in effect, a shorter disclosure about variable rates, new descriptions when a grace period is offered on purchases or when no grace period is offered, and a reference to consumer education materials on the

Board's Web site.

Account-opening disclosures. Requirements for cost disclosures provided at account opening are adopted to make the information more conspicuous and easier to read. The changes include:

Disclosing certain key terms in a summary table at account opening, in order to summarize for consumers key information that is most important to informed decision-making. The table is substantially similar to the table required for credit and charge card applications and solicitations.

Adopting a different approach to disclosing fees, to provide greater clarity for identifying fees that must be disclosed.

In addition, creditors would have flexibility to disclose charges

(other than those in the summary table) in writing or orally.

Periodic statement disclosures. Revisions are adopted to make disclosures on periodic statements more understandable, primarily by making changes to the format requirements, such as by grouping fees and interest charges together. The changes include:

Itemizing interest charges for different types of transactions, such as purchases and cash advances, grouping interest charges and fees separately, and providing separate totals of fees and interest for the month and year-to-date.

Eliminating the requirement to disclose an ``effective

APR.''

Requiring disclosure of the effect of making only the minimum required payment on the time to repay balances, as required by the Bankruptcy Act.

Changes in consumer's interest rate and other account terms. The final rule expands the circumstances under which consumers receive written notice of changes in the terms (e.g., an increase in the interest rate) applicable to their accounts, and increase the amount of time these notices must be sent before the change becomes effective.

The changes include:

Increasing advance notice before a changed term can be imposed from 15 to 45 days, to better allow consumers to obtain alternative financing or change their account usage.

Requiring creditors to provide 45 days' prior notice before the creditor increases a rate either due to a change in the terms applicable to the consumer's account or due to the consumer's delinquency or default or as a penalty.

When a change-in-terms notice accompanies a periodic statement, requiring

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a tabular disclosure on the front side of the periodic statement of the key terms being changed.

Advertising provisions. Rules governing advertising of open-end credit are revised to help ensure consumers better understand the credit terms offered. These revisions include:

Requiring advertisements that state a periodic payment amount on a plan offered to finance the purchase of goods or services to state, in equal prominence to the periodic payment amount, the time period required to pay the balance and the total of payments if only periodic payments are made.

Permitting advertisements to refer to a rate as

``fixed'' only if the advertisement specifies a time period for which the rate is fixed and the rate will not increase for any reason during that time, or if a time period is not specified, if the rate will not increase for any reason while the plan is open.

Additional protections. Rules are adopted that provide additional protections to consumers. These include:

In setting reasonable cut-off hours for mailed payments to be received on the due date and be considered timely, deeming 5 p.m. to be a reasonable time.

Requiring creditors that do not accept mailed payments on the due date, such as on weekends or holidays, to treat a mailed payment received on the next business day as timely.

Clarifying that advances that are separately underwritten are generally not open-end credit, but closed-end credit for which closed-end disclosures must be given.

III. The Board's Review of Open-end Credit Rules

A. Advance Notices of Proposed Rulemaking

December 2004 ANPR. The Board began a review of Regulation Z in

December 2004.\1\ The Board initiated its review of Regulation Z by issuing an advance notice of proposed rulemaking (December 2004 ANPR). 69 FR 70925, December 8, 2004. At that time, the Board announced its intent to conduct its review of Regulation Z in stages, focusing first on the rules for open-end (revolving) credit accounts that are not home-secured, chiefly general-purpose credit cards and retailer credit card plans. The December 2004 ANPR sought public comment on a variety of specific issues relating to three broad categories: the format of open-end credit disclosures, the content of those disclosures, and the substantive protections provided for open-end credit under the regulation. The December 2004 ANPR solicited comment on the scope of the Board's review, and also requested commenters to identify other issues that the Board should address in the review. A summary of the comments received in response to the December 2004 ANPR is contained in the supplementary information to proposed revisions to Regulation Z published by the Board in June 2007 (June 2007 Proposal). 72 FR 32948, 32949, June 14, 2007.

\1\ The review was initiated pursuant to requirements of section 303 of the Riegle Community Development and Regulatory Improvement

Act of 1994, section 610(c) of the Regulatory Flexibility Act of 1980, and section 2222 of the Economic Growth and Regulatory

Paperwork Reduction Act of 1996.

October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 (the Bankruptcy Act) primarily amended the federal bankruptcy code, but also contained several provisions amending

TILA. Public Law 109-8, 119 Stat. 23. The Bankruptcy Act's TILA amendments principally deal with open-end credit accounts and require new disclosures on periodic statements, on credit card applications and solicitations, and in advertisements.

In October 2005, the Board published a second ANPR to solicit comment on implementing the Bankruptcy Act amendments (October 2005

ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the

Board stated its intent to implement the Bankruptcy Act amendments as part of the Board's ongoing review of Regulation Z's open-end credit rules. A summary of the comments received in response to the October 2005 ANPR also is contained in the supplementary information to the

June 2007 Proposal. 72 FR 32948, 32950, June 14, 2007.

B. Notices of Proposed Rulemakings

June 2007 Proposal. The Board published proposed amendments to

Regulation Z's rules for open-end plans that are not home-secured in

June 2007. 72 FR 32948, June 14, 2007. The goal of the proposed amendments to Regulation Z was to improve the effectiveness of the disclosures that creditors provide to consumers at application and throughout the life of an open-end (not home-secured) account. In developing the proposal, the Board conducted consumer research, in addition to considering comments received on the two ANPRs.

Specifically, the Board retained a research and consulting firm (Macro

International) to assist the Board in using consumer testing to develop proposed model forms, as discussed in C. Consumer Testing of this section, below. The proposal would have made changes to format, timing, and content requirements for the five main types of open-end credit disclosures governed by Regulation Z: (1) Credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic statement disclosures; (4) change-in-terms notices; and (5) advertising provisions.

For credit and charge card application and solicitation disclosures, the June 2007 Proposal included new format requirements for the summary table, such as rules regarding type size and use of boldface type for certain key terms, placement of information, and the use of cross-references. Content revisions included requiring creditors to disclose the duration that penalty rates may be in effect and a shorter disclosure about variable rates.

For disclosures provided at account opening, the June 2007 Proposal called for creditors to disclose certain key terms in a summary table that is substantially similar to the table required for credit and charge card applications and solicitations. A different approach to disclosing fees was proposed, to provide greater clarity for identifying fees that must be disclosed, and to provide creditors with flexibility to disclose charges (other than those in the summary table) in writing or orally.

The June 2007 Proposal also included changes to the format requirements for periodic statements, such as by grouping fees, interest charges, and transactions together and providing separate totals of fees and interest for the month and year-to-date. The proposal also modified the provisions for disclosing the ``effective

APR,'' including format and terminology requirements to make it more understandable. Because of concerns about the disclosure's effectiveness, however, the Board also solicited comment on whether this rate should be required to be disclosed. The proposal required card issuers to disclose the effect of making only the minimum required payment on repayment of balances, as required by the Bankruptcy Act.

For changes in consumer's interest rate and other account terms, the June 2007 Proposal expanded the circumstances under which consumers receive written notice of changes in the terms (e.g., an increase in the interest rate) applicable to their accounts to include increases of a rate due to the consumer's delinquency or default, and increased the amount of time (from 15 to 45 days) these notices must be sent before the change becomes effective.

For advertisements that state a minimum monthly payment on a plan offered to finance the purchase of goods or services, the June 2007

Proposal required additional information about

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the time period required to pay the balance and the total of payments if only minimum payments are made. The proposal also limited the circumstances under which an advertisement may refer to a rate as

``fixed.''

The Board received over 2,500 comments on the June 2007 Proposal.

About 85% of these were from consumers and consumer groups, and of those, nearly all (99%) were from individuals. Of the approximately 15% of comment letters received from industry representatives, about 10% were from financial institutions or their trade associations. The vast majority (90%) of the industry letters were from credit unions and their trade associations. Those latter comments mainly concerned a proposed revision to the definition of open-end credit that could affect how many credit unions currently structure their consumer loan products.

In general, commenters generally supported the June 2007 Proposal and the Board's use of consumer testing to develop revisions to disclosure requirements. There was opposition to some aspects of the proposal. For example, industry representatives opposed many of the format requirements for periodic statements as being overly prescriptive. They also opposed the Board's proposal to require creditors to provide at least 45 days' advance notice before certain key terms change or interest rates are increased due to default or delinquency or as a penalty. Consumer groups opposed the Board's proposed alternative that would eliminate the effective annual percentage rate (effective APR) as a periodic statement disclosure.

Consumers and consumer groups also believed the Board's proposal was too limited in scope and urged the Board to provide more substantive protections and prohibit certain card issuer practices. Comments on specific proposed revisions are discussed in VI. Section-by-Section

Analysis, below.

May 2008 Proposal. In May 2008, the Board published revisions to several disclosures in the June 2007 Proposal (May 2008 Proposal). 73

FR 28866, May 19, 2008. In developing these revisions, the Board considered comments received on the June 2007 Proposal and worked with its testing consultant, Macro International, to conduct additional consumer research, as discussed in C. Consumer Testing of this section, below. In addition, the May 2008 Proposal contained proposed amendments to Regulation Z that complemented a proposal published by the Board, along with the Office of Thrift Supervision and the National Credit

Union Administration, to adopt rules prohibiting specific unfair acts or practices with respect to consumer credit card accounts under their authority under the Federal Trade Commission Act (FTC Act). See 15

U.S.C. 57a(f)(1). 73 FR 28904, May 19, 2008.

The May 2008 Proposal would have, among other things, required changes for the summary table provided on or with application and solicitations for credit and charge cards. Specifically, it would have required different terminology than the term ``grace period'' as a heading that describes whether the card issuer offers a grace period on purchases, and added a de minimis dollar amount trigger of more than

$1.00 for disclosing minimum interest or finance charges.

Under the May 2008 Proposal, creditors assessing fees at account opening that are 25% or more of the minimum credit limit would have been required to provide in the account-opening summary table a notice of the consumer's right to reject the plan after receiving disclosures if the consumer has not used the account or paid a fee (other than certain application fees).

Currently, creditors may require consumers to comply with reasonable payment instructions. The May 2008 Proposal would have deemed a cut-off hour for receiving mailed payments before 5 p.m. on the due date to be an unreasonable instruction. The proposal also would have prohibited creditors that set due dates on a weekend or holiday but do not accept mailed payments on those days from considering a payment received on the next business day as late for any reason.

For deferred interest plans that advertise ``no interest'' or similar terms, the May 2008 Proposal would have added notice and proximity requirements to require advertisements to state the circumstances under which interest is charged from the date of purchase and, if applicable, that the minimum payments required will not pay off the balance in full by the end of the deferral period.

The Board received over 450 comments on the May 2008 Proposal.

About 88% of these were from consumers and consumer groups, and of those, nearly all (98%) were from individuals. Six comments (1%) were from government officials or organizations, and the remaining 11% represented industry, such as financial institutions or their trade associations and payment system networks.

Commenters generally supported the May 2008 Proposal, although like the June 2007 Proposal, some commenters opposed aspects of the proposal. For example, operational concerns and costs for system changes were cited by industry representatives that opposed limitations on when creditors may consider mailed payments to be untimely.

Regarding revised disclosure requirements, some industry and consumer group commenters opposed proposed heading descriptions for accounts offering a grace period, although these commenters were split between those that favor retaining the current term (``grace period'') and those that suggested other heading descriptions. Consumer groups opposed the May 2008 proposal to permit card issuers and creditors to omit charges in lieu of interest that are $1.00 or less from the table provided with credit or charge card applications and solicitations and the table provided at account opening. Some retailers opposed the proposed advertising rules for deferred interest offers. Comments on specific proposed revisions are discussed in VI. Section-by-Section

Analysis, below.

C. Consumer Testing

Developing the June 2007 Proposal. A principal goal for the

Regulation Z review was to produce revised and improved credit card disclosures that consumers will be more likely to pay attention to, understand, and use in their decisions, while at the same time not creating undue burdens for creditors. In April 2006, the Board retained a research and consulting firm (Macro International) that specializes in designing and testing documents to conduct consumer testing to help the Board review Regulation Z's credit card rules. Specifically, the

Board used consumer testing to develop model forms that were proposed in June 2007 for the following credit card disclosures required by

Regulation Z:

Summary table disclosures provided in direct-mail solicitations and applications;

Disclosures provided at account opening;

Periodic statement disclosures; and

Subsequent disclosures, such as notices provided when key account terms are changed, and notices on checks provided to access credit card accounts.

Working closely with the Board, Macro International conducted several tests. Each round of testing was conducted in a different city throughout the United States. In addition, the consumer testing groups contained participants with a range of ethnicities, ages, educational levels, and credit card behavior. The consumer testing groups also contained participants likely to have subprime credit cards as well as those likely to have prime credit cards.

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Initial research and design of disclosures for testing. In advance of testing a series of revised disclosures, the Board conducted research to learn what information consumers currently use in making decisions about their credit card accounts, and how they currently use disclosures that are provided to them. In May and June 2006, the Board worked with Macro International to conduct two sets of focus groups with credit card consumers. Through these focus groups, the Board gathered information on what credit terms consumers usually consider when shopping for a credit card, what information they find useful when they receive a new credit card in the mail, and what information they find useful on periodic statements. In August 2006, the Board worked with Macro International to conduct one-on-one discussions with credit card account holders. Consumers were asked to view existing sample credit card disclosures. The goals of these interviews were: (1) To learn more about what information consumers read when they receive current credit card disclosures; (2) to research how easily consumers can find various pieces of information in these disclosures; and (3) to test consumers' understanding of certain credit card-related words and phrases. In the fall of 2006, the Board worked with Macro International to develop sample credit card disclosures to be used in the later rounds of testing, taking into account information learned through the focus groups and the one-on-one interviews.

Additional testing and revisions to disclosures. In late 2006 and early 2007, the Board worked with Macro International to conduct four rounds of one-on-one interviews (seven to nine participants per round), where consumers were asked to view new sample credit card disclosures developed by the Board and Macro International. The rounds of interviews were conducted sequentially to allow for revisions to the testing materials based on what was learned from the testing during each previous round.

Several of the model forms contained in the June 2007 Proposal were developed through the testing. A report summarizing the results of the testing is available on the Board's public Web site: http:// www.federalreserve.gov (May 2007 Macro Report).\2\ See also VI.

Section-by-Section Analysis, below. To illustrate by example:

\2\ Design and Testing of Effective Truth in Lending

Disclosures, Macro International, May 16, 2007.

Testing participants generally read the summary table provided in direct-mail credit card solicitations and applications and ignored information presented outside of the table. The June 2007 Proposal would have required that information about events that trigger penalty rates and about important fees (late-payment fees, over-the-credit-limit fees, balance transfer fees, and cash advance fees) be placed in the table. Currently, this information may be placed outside the table.

With respect to the account-opening disclosures, consumer testing indicates that consumers commonly do not review their account agreements, which currently are often in small print and dense prose. The June 2007 Proposal would have required creditors to include a table summarizing the key terms applicable to the account, similar to the table required for credit card applications and solicitations. The goal of setting apart the most important terms in this way is to better ensure that consumers are apprised of those terms.

With respect to periodic statement disclosures, many consumers more easily noticed the number and amount of fees when the fees were itemized and grouped together with interest charges.

Consumers also noticed fees and interest charges more readily when they were located near the disclosure of the transactions on the account. The June 2007 Proposal would have required creditors to group all fees together and describe them in a manner consistent with consumers' general understanding of costs (``interest charge'' or ``fee''), without regard to whether the fees would be considered

``finance charges,'' ``other charges'' or neither under the regulation.

With respect to change-in-terms notices, creditors commonly provide notices about changes to terms or rates in the same envelope with periodic statements. Consumer testing indicates that consumers may not typically look at the notices if they are provided as separate inserts given with periodic statements. In such cases under the June 2007 Proposal, a table summarizing the change would have been required on the periodic statement directly above the transaction list, where consumers are more likely to notice the changes.

Developing the May 2008 Proposal. In early 2008, the Board worked with a testing consultant, Macro International, to revise model disclosures published in the June 2007 Proposal in response to comments received. In March 2008, the Board conducted an additional round of one-on-one interviews on revised disclosures provided with applications and solicitations, on periodic statements, and with checks that access a credit card account. A report summarizing the results of the testing is available on the Board's public Web site: http:// www.federalreserve.gov (December 2008 Macro Report on Qualitative

Testing).\3\

\3\ Design and Testing of Effective Truth in Lending

Disclosures: Findings from Qualitative Consumer Research, Macro

International, December 15, 2008.

With respect to the summary table provided in direct-mail credit card solicitations and applications, participants who read the heading

``How to Avoid Paying Interest on Purchases'' on the row describing a grace period generally understood what the phrase meant. The May 2008

Proposal would have required issuers to use that phrase, or a substantially similar phrase, as the row heading to describe an account with a grace period for purchases, and the phrase ``Paying Interest,'' or a substantially similar phrase, if no grace period is offered. (The same row headings were also proposed for tables provided at account- opening and with checks that access credit card accounts.)

Prior to the May 2008 Proposal, the Board also tested a disclosure of a use-by date applicable to checks that access a credit card account. The responses given by testing participants indicated that they generally did not understand prior to the testing that there may be a use-by date applicable to an offer of a promotional rate for a check that accesses a credit card account. However, the participants that saw and read the tested language understood that a standard cash advance rate, not the promotional rate, would apply if the check was used after the date disclosed. Thus, in May 2008 the Board proposed to require that creditors disclose any use-by date applicable to an offer of a promotional rate for access checks.

Testing conducted after May 2008. In July and August 2008, the

Board worked with Macro International to conduct two additional rounds of one-on-one interviews. See the December 2008 Macro Report on

Qualitative Testing, which summarizes the results of these interviews.

The results of this consumer testing were used to develop the final rule, and are discussed in more detail in VI. Section-by-Section

Analysis.

For example, these rounds of interviews examined, among other things, whether consumers understand the meaning of a minimum interest charge disclosed in the summary table provided in direct-mail credit card solicitations and applications. Most participants could correctly explain the meaning of a minimum interest charge, and most participants indicated that a minimum interest charge would not be important to them because it is a relatively small sum of money ($1.50 on the forms tested). The final rule accordingly establishes a threshold of $1.00; if the minimum interest charge is $1.00 or less it is not required to be disclosed in the table.

Consumers also were asked to review periodic statements that disclosed an impending rate increase, with a tabular summary of the change appearing on statement, as proposed by the Board in

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June 2007. This testing was used in the development of final Samples G- 20 and G-21, which give creditors guidance on how advance notice of impending rate increases or changes in terms should be presented.

Quantitative testing. In September 2008, the Board worked with

Macro International to develop a survey to conduct quantitative testing. The goal of quantitative testing was to measure consumers' comprehension and the usability of the newly-developed disclosures relative to existing disclosures and formats. A report summarizing the results of the testing is available on the Board's public Web site: http://www.federalreserve.gov (December 2008 Macro Report on

Quantitative Testing).\4\

\4\ Design and Testing of Effective Truth in Lending

Disclosures: Findings from Experimental Study, Macro International,

December 15, 2008.

The quantitative consumer testing conducted for the Board consisted of mall-intercept interviews of a total of 1,022 participants in seven cities: Dallas, TX; Detroit, MI; Los Angeles, CA; Seattle, WA;

Springfield, IL; St. Louis, MO; and Tallahassee, FL. Each interview lasted approximately fifteen minutes and consisted of showing the participant models of the summary table provided in direct-mail credit card solicitations and applications and the periodic statement and asking a series of questions designed to assess the effectiveness of certain formatting and content requirements proposed by the Board or suggested by commenters.

With regard to the summary table provided in direct-mail credit card solicitations and applications, consumers were asked questions intended to gauge the impact of (i) combining rows for APRs applicable to different transaction types, (ii) the inclusion of cross-references in the table, and (iii) the impact of splitting the table onto two pages instead of presenting the table entirely on a single page. More details about the specific forms used in the testing as well as the questions asked are available in the December 2008 Macro Report on

Quantitative Testing.

The results of the testing demonstrated that combining the rows for

APRs applicable to different transaction types that have the same applicable rate did not have a statistically significant impact on consumers' ability to identify those rates. Thus, the final rule permits creditors to combine rows disclosing the rates for different transaction types to which the same rate applies.

Similarly, the testing indicated that the inclusion of cross- references in the table did not have a statistically significant impact on consumers' ability to identify fees and rates applicable to their accounts. As a result, the Board has not adopted the proposed requirement that certain cross-references between certain rates and fees be included in the table.

Finally, the testing demonstrated that consumers have more difficulty locating fees applicable to their accounts when the table is split on two pages and the fee appears on the second page of the table.

As discussed further in VI. Section-by-Section Analysis, the Board is not requiring that creditors use a certain paper size or present the entire table on a single page, but is requiring creditors that split the table onto two or more pages to include a reference indicating that additional important information regarding the account is presented on a separate page.

The Board also tested whether consumers' understanding of payment allocation practices could be improved through disclosure. The testing showed that a disclosure, even of the relatively simple payment allocation practice of applying payments to lower-interest balances before higher-interest balances,\5\ improved understanding for very few consumers. The disclosure also confused some consumers who had understood payment allocation based on prior knowledge before reviewing the disclosure. Based on this result, and because of substantive protections adopted by the Board and other federal banking agencies published elsewhere in this Federal Register, the Board is not requiring a payment allocation disclosure in the summary table provided in direct-mail solicitations and applications or at account-opening.

\5\ Under final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register, issuers are prohibited from allocating payments to low-interest balances before higher-interest balances. However, the Board chose to test a disclosure of this practice in quantitative consumer testing because (i) it is currently the practice of many issuers and

(ii) to test one of the simpler payment allocation methods on the assumption that consumers might be more likely to understand disclosure of a simpler payment allocation method than a more complex one.

With regard to periodic statements, the Board's testing consultant examined (i) the effectiveness of grouping transactions and fees on the periodic statement, (ii) consumers' understanding of the effective APR disclosure, (iii) the formatting and location of change-in-terms notices included with periodic statements, and (iv) the formatting and grouping of various payment information, including warnings about the effect of late payments and making only the minimum payment.

The testing demonstrated that grouping of fees and transactions, by type, separately on the periodic statement improved consumers' ability to find fees that were charged to the account and also moderately improved consumers' ability to locate transactions. Grouping fees separately from transactions made it more difficult for some consumers to match a transaction fee to the relevant transaction, although most consumers could successfully match the transaction and fee regardless of how the transaction list was presented. As discussed in more detail in VI. Section-by-Section Analysis, the final rule requires grouping of fees and interest separate from transactions on the periodic statement, but the Board has provided flexibility for issuers to disclose transactions on the periodic statement.

With regard to the effective APR, testing overwhelmingly showed that few consumers understood the disclosure and that some consumers were less able to locate the interest rate applicable to cash advances when the effective APR also was disclosed on the periodic statement.

Accordingly, and for the additional reasons discussed in more detail in

VI. Section-by-Section Analysis, the final rule eliminates the requirement to disclose an effective APR for open-end (not home- secured) credit.

When a change-in-terms notice for the APR for purchases was included with the periodic statement, disclosure of a tabular summary of the change on the front of the statement moderately improved consumers' ability to identify the rate that would apply when the changes take effect. However, whether the tabular summary was presented on page one or page two of the statement did not have an effect on the ability of participants to notice or comprehend the disclosure. Thus, the final rule requires a tabular summary of key changes on the periodic statement, when a change-in-terms notice is included with the periodic statement, but permits creditors to disclose that summary on the front of any page of the statement.

The formatting of certain grouped information regarding payments, including the amount of the minimum payment, due date, and warnings regarding the effect of making late or minimum payments did not have an effect on consumers' ability to notice or comprehend these disclosures.

Thus, while the final rule requires that this

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information be grouped, creditors are not required to format this information in any particular manner.

D. Other Outreach and Research

Throughout the Board's review of Regulation Z's rules affecting open-end (not home-secured) plans, the Board solicited input from members of the Board's Consumer Advisory Council on various issues.

During 2005 and 2006, for example, the Council discussed the feasibility and advisability of reviewing Regulation Z in stages, ways to improve the summary table provided on or with credit card applications and solicitations, issues related to TILA's substantive protections (including dispute resolution procedures), and issues related to the Bankruptcy Act amendments. In 2007 and 2008, the Council discussed the June 2007 and May 2008 Proposals, respectively, and comments received by the Board in response to the proposals. In addition, Board met or conducted conference calls with various industry and consumer group representatives throughout the review process leading to the June 2007 and May 2008 Proposals. Consistent with the

Bankruptcy Act, the Board also met with the other federal banking agencies, the National Credit Union Administration (NCUA), and the

Federal Trade Commission (FTC) regarding the clear and conspicuous disclosure of certain information required by the Bankruptcy Act. The

Board also reviewed disclosures currently provided by creditors, consumer complaints received by the federal banking agencies, and surveys on credit card usage to help inform the June 2007 Proposal.\6\

\6\ Surveys reviewed include: Thomas A. Durkin, Credit Cards:

Use and Consumer Attitudes, 1970-2000, FEDERAL RESERVE BULLETIN,

(September 2000); Thomas A. Durkin, Consumers and Credit

Disclosures: Credit Cards and Credit Insurance, FEDERAL RESERVE

BULLETIN (April 2002).

E. Reviewing Regulation Z in Stages

The Board is proceeding with a review of Regulation Z in stages.

This final rule largely contains revisions to rules affecting open-end plans other than home-equity lines of credit (HELOCs) subject to Sec. 226.5b. Possible revisions to rules affecting HELOCs will be considered in the Board's review of home-secured credit, currently underway. To minimize compliance burden for creditors offering HELOCs as well as other open-end credit, many of the open-end rules have been reorganized to delineate clearly the requirements for HELOCs and other forms of open-end credit. Although this reorganization increases the size of the regulation and commentary, the Board believes a clear delineation of rules for HELOCs and other forms of open-end credit pending the review of HELOC rules provides a clear compliance benefit to creditors.

In addition, as discussed elsewhere in this section and in VI.

Section-by-Section Analysis, the Board has eliminated the requirement to disclose an effective annual percentage rate for open-end (not home- secured) credit. For a home-equity plan subject to Sec. 226.5b, under the final rule a creditor has the option to disclose an effective APR

(according to the current rules in Regulation Z for computing and disclosing the effective APR), or not to disclose an effective APR. The

Board notes that the rules for computing and disclosing the effective

APR for HELOCs could be the subject of comment during the review of rules affecting HELOCs.

IV. The Board's Rulemaking Authority

TILA mandates that the Board prescribe regulations to carry out the purposes of the act. TILA also specifically authorizes the Board, among other things, to do the following:

Issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Board's judgment are necessary or proper to effectuate the purposes of TILA, facilitate compliance with the act, or prevent circumvention or evasion. 15 U.S.C. 1604(a).

Exempt from all or part of TILA any class of transactions if the Board determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. The Board must consider factors identified in the act and publish its rationale at the time it proposes an exemption for comment. 15 U.S.C. 1604(f).

Add or modify information required to be disclosed with credit and charge card applications or solicitations if the Board determines the action is necessary to carry out the purposes of, or prevent evasions of, the application and solicitation disclosure rules. 15 U.S.C. 1637(c)(5).

Require disclosures in advertisements of open-end plans. 15 U.S.C. 1663.

In adopting this final rule, the Board has considered the information collected from comment letters submitted in response to its

ANPRs and the June 2007 and May 2008 Proposals, its experience in implementing and enforcing Regulation Z, and the results obtained from testing various disclosure options in controlled consumer tests. For the reasons discussed in this notice, the Board believes this final rule is appropriate to effectuate the purposes of TILA, to prevent the circumvention or evasion of TILA, and to facilitate compliance with the act.

Also as explained in this notice, the Board believes that the specific exemptions adopted are appropriate because the existing requirements do not provide a meaningful benefit to consumers in the form of useful information or protection. In reaching this conclusion, the Board considered (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection. The rationales for these exemptions are explained in VI. Section-by-Section Analysis, below.

V. Discussion of Major Revisions

The goal of the revisions adopted in this final rule is to improve the effectiveness of the Regulation Z disclosures that must be provided to consumers for open-end accounts. A summary of the key account terms must accompany applications and solicitations for credit card accounts.

For all open-end credit plans, creditors must disclose costs and terms at account opening, generally before the first transaction. Consumers must receive periodic statements of account activity, and creditors must provide notice before certain changes in the account terms may become effective.

To shop for and understand the cost of credit, consumers must be able to identify and understand the key terms of open-end accounts.

However, the terms and conditions that impact credit card account pricing can be complex. The revisions to Regulation Z are intended to provide the most essential information to consumers when the information would be most useful to them, with content and formats that are clear and conspicuous. The revisions are expected to improve consumers' ability to make informed credit decisions and enhance competition among credit card issuers. Many of the changes are based on the consumer testing that was conducted in

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connection with the review of Regulation Z.

In considering whether to adopt the revisions, the Board has also sought to balance the potential benefits for consumers with the compliance burdens imposed on creditors. For example, the revisions seek to provide greater certainty to creditors in identifying what costs must be disclosed for open-end plans, and when those costs must be disclosed. The Board has adopted the proposal that fees must be grouped on periodic statements, but has withdrawn from the final rule proposed requirements that would have required additional formatting changes to the periodic statement, such as the grouping of transactions, for which the burden to creditors may exceed the benefit to consumers. More effective disclosures may also reduce customer confusion and misunderstanding, which may also ease creditors' costs relating to consumer complaints and inquiries.

A. Credit Card Applications and Solicitations

Under Regulation Z, credit and charge card issuers are required to provide information about key costs and terms with their applications and solicitations.\7\ This information is abbreviated, to help consumers focus on only the most important terms and decide whether to apply for the credit card account. If consumers respond to the offer and are issued a credit card, creditors must provide more detailed disclosures at account opening, generally before the first transaction occurs.

\7\ Charge cards are a type of credit card for which full payment is typically expected upon receipt of the billing statement.

To ease discussion, this notice will refer simply to ``credit cards.''

The application and solicitation disclosures are considered among the most effective TILA disclosures principally because they must be presented in a standardized table with headings, content, and format substantially similar to the model forms published by the Board. In 2001, the Board revised Regulation Z to enhance the application and solicitation disclosures by adding rules and guidance concerning the minimum type size and requiring additional fee disclosures.

Proposal. The proposal added new format requirements for the summary table,\8\ including rules regarding type size and use of boldface type for certain key terms, placement of information, and the use of cross-references. Content revisions included a requirement that creditors disclose the duration that penalty rates may be in effect, a shorter disclosure about variable rates, and a reference to consumer education materials available on the Board's Web site.

\8\ This table is commonly referred to as the ``Schumer box.''

Summary of final rule.

Penalty pricing. The final rule makes several revisions that seek to improve consumers' understanding of default or penalty pricing.

Currently, credit card issuers must disclose inside the table the APR that will apply in the event of the consumer's ``default.'' Some creditors define a ``default'' as making one late payment or exceeding the credit limit once. The actions that may trigger the penalty APR are currently required to be disclosed outside the table.

Consumer testing indicated that many consumers did not notice the information about penalty pricing when it was disclosed outside the table. Under the final rule, card issuers are required to include in the table the specific actions that trigger penalty APRs (such as a late payment), the rate that will apply and the circumstances under which the penalty rate will expire or, if true, the fact that the penalty rate could apply indefinitely. The regulation requires card issuers to use the term ``penalty APR'' because the testing demonstrated that some consumers are confused by the term ``default rate.''

Similarly, the final rule requires card issuers to disclose inside

(rather than outside) the table the fees for paying late, exceeding a credit limit, or making a payment that is returned. Cash advance fees and balance transfer fees also must be disclosed inside the table. This change is also based on consumer testing results; fees disclosed outside the table were often not noticed. Requiring card issuers to disclose returned-payment fees, required credit insurance, debt suspension, or debt cancellation coverage fees, and foreign transaction fees are new disclosures.

Variable-rate information. Currently, applications and solicitations offering variable APRs must disclose inside the table the index or formula used to make adjustments and the amount of any margin that is added. Additional details, such as how often the rate may change, must be disclosed outside the table. Under the final rule, information about variable APRs is reduced to a single phrase indicating the APR varies ``with the market,'' along with a reference to the type of index, such as ``Prime.'' Consumer testing indicated that few consumers use the variable-rate information when shopping for a card. Moreover, participants were distracted or confused by details about margin values, how often the rate may change, and where an index can be found.

Subprime accounts. The final rule addresses a concern that has been raised about subprime credit cards, which are generally offered to consumers with low credit scores or credit problems. Subprime credit cards often have substantial fees associated with opening the account.

Typically, fees for the issuance or availability of credit are billed to consumers on the first periodic statement, and can substantially reduce the amount of credit available to the consumer. For example, the initial fees on an account with a $250 credit limit may reduce the available credit to less than $100. Consumer complaints received by the federal banking agencies state that consumers were unaware when they applied for subprime cards of how little credit would be available after all the fees were assessed at account opening.

The final rule requires additional disclosures if the card issuer requires fees or a security deposit to issue the card that are 15 percent or more of the minimum credit limit offered for the account. In such cases, the card issuer is required to include an example in the table of the amount of available credit the consumer would have after paying the fees or security deposit, assuming the consumer receives the minimum credit limit.

Balance computation methods. TILA requires creditors to identify their balance computation method by name, and Regulation Z requires that the disclosure be inside the table. However, consumer testing demonstrates that these names hold little meaning for consumers, and that consumers do not consider such information when shopping for accounts. The final rule requires creditors to place the name of the balance computation method outside the table, so that the disclosure does not detract from information that is more important to consumers.

Description of grace period. The final rule requires card issuers to use the heading ``How to Avoid Paying Interest on Purchases'' on the row describing a grace period offered on all purchases, and the phrase

``Paying Interest'' if a grace period is not offered on all purchases.

Consumer testing indicates consumers do not understand the term ``grace period'' as a description of actions consumers must take to avoid paying interest.

B. Account-Opening Disclosures

Regulation Z requires creditors to disclose costs and terms before the first transaction is made on the account. The disclosures must specify the

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circumstances under which a ``finance charge'' may be imposed and how it will be determined. A ``finance charge'' is any charge that may be imposed as a condition of or an incident to the extension of credit, and includes, for example, interest, transaction charges, and minimum charges. The finance charge disclosures include a disclosure of each periodic rate of interest that may be applied to an outstanding balance

(e.g., purchases, cash advances) as well as the corresponding annual percentage rate (APR). Creditors must also explain any grace period for making a payment without incurring a finance charge. In addition, they must disclose the amount of any charge other than a finance charge that may be imposed as part of the credit plan (``other charges''), such as a late-payment charge. Consumers' rights and responsibilities in the case of unauthorized use or billing disputes must also be explained.

Currently, there are few format requirements for these account-opening disclosures, which are typically interspersed among other contractual terms in the creditor's account agreement.

Proposal. Certain key terms were proposed to be disclosed in a summary table at account opening, which would be substantially similar to the table required for applications and solicitations. A different approach to disclosing fees was proposed, including providing creditors with flexibility to disclose charges (other than those in the summary table) in writing or orally after the account is opened, but before the charge is imposed.

Summary of final rule.

Account-opening summary table. Account-opening disclosures have often been criticized because the key terms TILA requires to be disclosed are often interspersed within the credit agreements, and such agreements are long and complex. To address this concern and make the information more conspicuous, the final rule requires creditors to provide at account-opening a table summarizing key terms. Creditors may continue, however, to provide other account-opening disclosures, aside from the fees and terms specified in the table, with other terms in their account agreements.

The new table provided at account opening is substantially similar to the table provided with direct-mail credit card applications and solicitations. Consumer testing indicates that consumers generally are aware of the table on applications and solicitations. Consumer testing also indicates that consumers may not typically read their account agreements, which are often in small print and dense prose. Thus, setting apart the most important terms in a summary table will better ensure that consumers are aware of those terms.

The table required at account opening includes more information than the table required at application. For example, it includes a disclosure whether or not there is a grace period for all features of an account. For subprime credit cards, to give consumers the opportunity to avoid fees, the final rule also requires issuers to provide consumers at account opening, a notice about the right to reject a plan when fees have been charged but the consumer has not used the plan. However, to reduce compliance burden for creditors that provide account-opening disclosures at application, the final rule allows creditors to provide the more specific and inclusive account- opening table at application in lieu of the table otherwise required at application.

How charges are disclosed. Under the current rules, a creditor must disclose any ``finance charge'' or ``other charge'' in the account- opening disclosures. A subsequent notice is required if one of the fees disclosed at account opening increases or if certain fees are newly introduced during the life of the plan. The terms ``finance charge'' and ``other charge'' are given broad and flexible meanings in the regulation and commentary. This ensures that TILA adapts to changing conditions, but it also creates uncertainty. The distinctions among finance charges, other charges, and charges that do not fall into either category are not always clear. As creditors develop new kinds of services, some find it difficult to determine if associated charges for the new services meet the standard for a ``finance charge'' or ``other charge'' or are not covered by TILA at all. This uncertainty can pose legal risks for creditors that act in good faith to comply with the law. Examples of included or excluded charges are in the regulation and commentary, but these examples cannot provide definitive guidance in all cases. Creditors are subject to civil liability and administrative enforcement for under-disclosing the finance charge or otherwise making erroneous disclosures, so the consequences of an error can be significant. Furthermore, over-disclosure of rates and finance charges is not permitted by Regulation Z for open-end credit.

The fee disclosure rules also have been criticized as being outdated. These rules require creditors to provide fee disclosures at account opening, which may be months, and possibly years, before a particular disclosure is relevant to the consumer, such as when the consumer calls the creditor to request a service for which a fee is imposed. In addition, an account-related transaction may occur by telephone, when a written disclosure is not feasible.

The final rule is intended to respond to these criticisms while still giving full effect to TILA's requirement to disclose credit charges before they are imposed. Accordingly, the rules are revised to

(1) specify precisely the charges that creditors must disclose in writing at account opening (interest, minimum charges, transaction fees, annual fees, and penalty fees such as for paying late), which must be listed in the summary table, and; (2) permit creditors to disclose other less critical charges orally or in writing before the consumer agrees to or becomes obligated to pay the charge. Although the final rule permits creditors to disclose certain costs orally for purposes of TILA, the Board anticipates that creditors will continue to identify fees in the account agreement for contract or other reasons.

Under the final rule, some charges are covered by TILA that the current regulation, as interpreted by the staff commentary, excludes from TILA coverage, such as fees for expedited payment and expedited delivery. It may not have been useful to consumers to cover such charges under TILA when such coverage would have meant only that the charges were disclosed long before they became relevant to the consumer. The Board believes it will be useful to consumers to cover such charges under TILA as part of a rule that permits their disclosure at a time and in a manner that consumers would be likely to notice the disclosure of the charge. Further, as new services (and associated charges) are developed, the proposal minimizes risk of civil liability as well as inconsistency among creditors associated with the determination as to whether a fee is a finance charge or an other charge, or is not covered by TILA at all.

C. Periodic Statements

Creditors are required to provide periodic statements reflecting the account activity for the billing cycle (typically, about one month). In addition to identifying each transaction on the account, creditors must identify each ``finance charge'' using that term, and each ``other charge'' assessed against the account during the statement period. When a periodic interest rate is applied to an outstanding balance to compute the finance charge, creditors must disclose the periodic rate and its corresponding APR. Creditors must also disclose an ``effective'' or ``historical''

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APR for the billing cycle, which, unlike the corresponding APR, includes not just interest but also finance charges imposed in the form of fees (such as cash advance fees or balance transfer fees). Periodic statements must also state the time period a consumer has to pay an outstanding balance to avoid additional finance charges (the ``grace period''), if applicable.

Proposal. Interest charges for different types of transactions, such as purchases and cash advances would be itemized, and separate totals of fees and interest for the month and year-to-date would be disclosed. The proposal offered two approaches regarding the

``effective APR.'' One modified the provisions for disclosing the

``effective APR,'' including format and terminology requirements,\9\ and the other solicited comment on whether this rate should be required to be disclosed. To implement changes required by the Bankruptcy Act, the proposal required creditors to disclose of the effect of making only the minimum required payment on repayment of balances.

\9\ The ``effective'' APR reflects interest and other finance charges such as cash advance fees or balance transfer fees imposed for the billing cycle.

Summary of final rule.

Fees and interest costs. The final rule contains a number of revisions to the periodic statement to improve consumers' understanding of fees and interest costs. Currently, creditors must identify on periodic statements any ``finance charges'' added to the account during the billing cycle, and creditors typically intersperse these charges with other transactions, such as purchases, chronologically on the statement. The finance charges must be itemized by type. Thus, interest charges might be described as ``finance charges due to periodic rates.'' Charges such as late payment fees, which are not ``finance charges,'' are typically disclosed individually and are interspersed among other transactions.

Consumer testing indicated that consumers generally understand that

``interest'' is the cost that results from applying a rate to a balance over time and distinguish ``interest'' from other fees, such as a cash advance fee or a late payment fee. Consumer testing also indicated that many consumers more easily determine the number and amount of fees when the fees are itemized and grouped together.

Thus, under the final rule, creditors are required to group all fees together and to separately itemize interest charges by transaction type, and describe them in a manner consistent with consumers' general understanding of costs (``interest charge'' or ``fee''), without regard to whether the charges are considered ``finance charges,'' ``other charges,'' or neither. Interest charges must be identified by type (for example, interest on purchases or interest on balance transfers) as must fees (for example, cash advance fee or late-payment fee).

Consumer testing also indicated that many consumers more quickly and accurately determined the total dollar cost of credit for the billing cycle when a total dollar amount of fees for the cycle was disclosed. Thus, the final rule requires creditors to disclose the (1) total fees and (2) total interest imposed for the cycle. Creditors must also disclose year-to-date totals for interest charges and fees. For many consumers, costs disclosed in dollars are more readily understood than costs disclosed as percentage rates. The year-to-date figures are intended to assist consumers in better understanding the overall cost of their credit account and are an important disclosure and an effective aid in understanding annualized costs. The Board believes these figures will better ensure consumers understand the cost of credit than the effective APR currently provided on periodic statements.

The effective APR. The ``effective'' APR disclosed on periodic statements reflects the cost of interest and certain other finance charges imposed during the statement period. For example, for a cash advance, the effective APR reflects both interest and any flat or proportional fee assessed for the advance.

For the reasons discussed below, the Board is eliminating the requirement to disclose the effective APR.

Consumer testing conducted prior to the June 2007 Proposal, in

March 2008, and after the May 2008 Proposal demonstrates that consumers find the current disclosure of an APR that combines rates and fees to be confusing. The June 2007 Proposal would have required disclosure of the nominal interest rate and fees in a manner that is more readily understandable and comparable across institutions. The Board believes that this approach can better inform consumers and further the goals of consumer protection and the informed use of credit for all types of open-end credit.

The Board also considered whether there were potentially competing considerations that would suggest retention of the requirement to disclose an effective APR. First, the Board considered the extent to which ``sticker shock'' from the effective APR benefits consumers, even if the disclosure may not enable consumers to meaningfully compare costs from month to month or between different credit products. A second consideration is whether the effective APR may be a hedge against fee-intensive pricing by creditors, and if so, the extent to which it promotes transparency. On balance, however, the Board believes that the benefits of eliminating the requirement to disclose the effective APR outweigh these considerations.

The consumer testing conducted for the Board strongly supports this determination. Although in one round of testing conducted prior to the

June 2007 Proposal a majority of participants evidenced some understanding of the effective APR, the overall results of the testing show that most consumers do not correctly understand the effective APR.

Some consumers in the testing offered no explanation of the difference between the corresponding and effective APR, and others appeared to have an incorrect understanding. The results were similar in the consumer testing conducted in March 2008 and after the May 2008 proposal; in all rounds of the testing, a majority of participants did not offer a correct explanation of the effective APR. In quantitative testing conducted for the Board in the fall of 2008, only 7% of consumers answered a question correctly that was designed to test their understanding of the effective APR. In addition, including the effective APR on the statement had an adverse effect on some consumers' ability to identify the interest rate applicable to the account.

Even if some consumers have some understanding of the effective

APR, the Board believes sound reasons support eliminating the requirement for its disclosure. Disclosure of the effective APR on periodic statements does not assist consumers in credit shopping, because the effective APR disclosed on a statement on one credit card account cannot be compared to the nominal APR disclosed on a solicitation or application for another credit card account. In addition, even for the same account, the effective APR for a given cycle is unlikely to accurately indicate the cost of credit in a future cycle, because if any of several factors (such as timing of transactions and payments) is different in the future cycle, the effective APR will be different even if the amount of the transaction is the same. As to suggestions that the effective APR for a particular billing cycle provides the consumer a rough indication that it is costly to engage in transactions that trigger transaction fees, the

Board believes the requirements adopted in the final rule to disclose

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interest and fee totals for the cycle and year-to-date will better serve the same purpose. In addition, the interest and fee total disclosure requirements should address concerns that elimination of the effective APR would remove disincentives for creditors to introduce new fees.

Transactions. Currently, there are no format requirements for disclosing different types of transactions, such as purchases, cash advances, and balance transfers on periodic statements. Often, transactions are presented together in chronological order. Consumer testing indicated that participants found it helpful to have similar types of transactions grouped together on the statement. Consumers also found it helpful, within the broad grouping of fees and transactions, when transactions were segregated by type (e.g., listing all purchases together, separate from cash advances or balance transfers). Further, consumers noticed fees and interest charges more readily when they were located near the transactions. For these reasons, the final rule requires creditors to group fees and interest charges together, itemized by type, with the list of transactions. The Board has not adopted the proposed requirement that creditors group transactions by type on the periodic statement. In consumer testing, most consumers indicated that they review the transactions on their periodic statements, and grouping transactions together only moderately improved consumers' ability to locate transactions compared to when the transaction list was presented chronologically. In addition, the cost to creditors of reformatting periodic statements to group transactions by type appears to outweigh any benefit to consumers.

Late payments. Currently, creditors must disclose the date by which consumers must pay a balance to avoid finance charges. Creditors must also disclose any cut-off time for receiving payments on the payment due date; this is usually disclosed on the reverse side of periodic statements. The Bankruptcy Act amendments expressly require creditors to disclose the payment due date (or if different, the date after which a late-payment fee may be imposed) along with the amount of the late- payment fee.

Under the final rule, creditors are required to disclose the payment due date on the front side of the periodic statement. Creditors also are required to disclose, in close proximity to the due date, the amount of the late-payment fee and the penalty APR that could be triggered by a late payment, to alert consumers to the consequence of paying late.

Minimum payments. The Bankruptcy Act requires creditors offering open-end plans to provide a warning about the effects of making only minimum payments. The proposal would implement this requirement solely for credit card issuers. Under the final rule, card issuers must provide (1) a ``warning'' statement indicating that making only the minimum payment will increase the interest the consumer pays and the time it takes to repay the consumer's balance; (2) a hypothetical example of how long it would take to pay a specified balance in full if only minimum payments are made; and (3) a toll-free telephone number that consumers may call to obtain an estimate of the time it would take to repay their actual account balance using minimum payments. Most card issuers must establish and maintain their own toll-free telephone numbers to provide the repayment estimates. However, the Board is required to establish and maintain, for two years, a toll-free telephone number for creditors that are depository institutions having assets of $250 million or less. This number is for the customers of those institutions to call to get answers to questions about how long it will take to pay their account in full making only the minimum payment. The FTC must maintain a similar toll-free telephone number for use by customers of creditors that are not depository institutions. In order to standardize the information provided to consumers through the toll-free telephone numbers, the Bankruptcy Act amendments direct the

Board to prepare a ``table'' illustrating the approximate number of months it would take to repay an outstanding balance if the consumer pays only the required minimum monthly payments and if no other advances are made (``generic repayment estimate'').

Pursuant to the Bankruptcy Act amendments, the final rule also allows a card issuer to establish a toll-free telephone number to provide customers with the actual number of months that it will take consumers to repay their outstanding balance (``actual repayment disclosure'') instead of providing an estimate based on the Board- created table. A card issuer that does so need not include a hypothetical example on its periodic statements, but must disclose the warning statement and the toll-free telephone number.

The final rule also allows card issuers to provide the actual repayment disclosure on their periodic statements. Card issuers are encouraged to use this approach. Participants in consumer testing who typically carry credit card balances (revolvers) found an estimated repayment period based on terms that apply to their own account more useful than a hypothetical example. To encourage card issuers to provide the actual repayment disclosure on their periodic statements, the final rule provides that if card issuers do so, they need not disclose the warning, the hypothetical example and a toll-free telephone number on the periodic statement, nor need they maintain a toll-free telephone number to provide the actual repayment disclosure.

As described above, the Bankruptcy Act also requires the Board to develop a ``table'' that creditors, the Board and the FTC must use to create generic repayment estimates. Instead of creating a table, the final rule contains guidance for how to calculate generic repayment estimates. Consumers that call the toll-free telephone number may be prompted to input information about their outstanding balance and the

APR applicable to their account. Although issuers have the ability to program their systems to obtain consumers' account information from their account management systems, for the reasons discussed in the section-by-section analysis to Appendix M1 to part 226, the final rule does not require issuers to do so.

D. Changes in Consumer's Interest Rate and Other Account Terms

Regulation Z requires creditors to provide advance written notice of some changes to the terms of an open-end plan. The proposal included several revisions to Regulation Z's requirements for notifying consumers about such changes.

Currently, Regulation Z requires creditors to send, in most cases, notices 15 days before the effective date of certain changes in the account terms. However, creditors need not inform consumers in advance if the rate applicable to their account increases due to default or delinquency. Thus, consumers may not realize until they receive their monthly statement for a billing cycle that their late payment triggered application of the higher penalty rate, effective the first day of the month's statement.

Proposal. The proposal generally would have increased advance notice before a changed term, such as a rate increase due to a change in the contract, can be imposed from 15 to 45 days. The proposal also would have required creditors to provide 45 days' prior notice before the creditor increases a rate due to the consumer's delinquency

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or default or as a penalty. When a change-in-terms notice accompanies a periodic statement, the proposal would have required a tabular disclosure on the front of the first page of the periodic statement of the key terms being changed.

Summary of final rule.

Timing. Under the final rule, creditors generally must provide 45 days' advance notice prior to a change in any term required to be disclosed in the tabular disclosure provided at account-opening, as discussed above. This increase in the advance notice for a change in terms is intended to give consumers approximately a month to act, either to change their usage of the account or to find an alternative source of financing before the change takes effect.

Penalty rates. Currently, creditors must inform consumers about rates that are increased due to default or delinquency, but not in advance of implementation of the increase. Contractual thresholds for default are sometimes very low, and currently penalty pricing commonly applies to all existing balances, including low-rate promotional balances.

The final rule generally requires creditors to provide 45 days' advance notice before rate increases due to the consumer's delinquency or default or as a penalty, as proposed. Permitting creditors to apply the penalty rate immediately upon the consumer triggering the rate may lead to undue surprise and insufficient time for a consumer to consider alternative options regarding use of the card. Even though the final rule contain provisions intended to improve disclosure of penalty pricing at account opening, the Board believes that consumers will be more likely to notice and be motivated to act if they receive a specific notice alerting them of an imminent rate increase, rather than a general disclosure stating the circumstances when a rate might increase.

When asked which terms were the most important to them when shopping for an account, participants in consumer testing seldom mentioned the penalty rate or penalty rate triggers. Some consumers may not find this information relevant when shopping for or opening an account because they do not anticipate that they will trigger penalty pricing. As a result, they may not recall this information later, after they have begun using the account, and may be surprised when penalty pricing is subsequently imposed.

In addition, the Board believes that the notice required by Sec. 226.9(g) is the most effective time to inform consumers of the circumstances under which penalty rates can be applied to their existing balances for the reasons discussed above and in VI. Section- by-Section Analysis.

Format. Currently, there are few format requirements for change-in- terms disclosures. As with account-opening disclosures, creditors commonly intersperse change-in-terms notices with other amendments to the account agreement, and both are provided in pamphlets in small print and dense prose. Consumer testing indicates many consumers set aside and do not read densely-worded pamphlets.

Under the final rule, creditors may continue to notify consumers about changes to terms required to be disclosed by Regulation Z, together with other changes to the account agreement. However, if a changed term is one that must be provided in the account-opening summary table, creditors must provide that change in a summary table to enhance the effectiveness of the change-in-terms notice. Consumer testing conducted for the Board suggests that consumer understanding of change in terms notices is improved by presentation of that information in a tabular format.

Creditors commonly enclose notices about changes to terms or rates with periodic statements. Under the final rule, if a notice enclosed with a periodic statement discusses a change to a term that must be disclosed in the account-opening summary table, or announces that a penalty rate will be imposed on the account, a table summarizing the impending change must appear on the periodic statement. The table must appear on the front of the periodic statement, although it is not required to appear on the first page. Consumers who participated in testing often set aside change-in-terms pamphlets that accompanied periodic statements, while participants uniformly looked at the front side of periodic statements.

E. Advertisements

Currently, creditors that disclose certain terms in advertisements must disclose additional information, to help ensure consumers understand the terms of credit being offered.

Proposal. For advertisements that state a minimum monthly payment on a plan offered to finance the purchase of goods or services, additional information must also be stated about the time period required to pay the balance and the total of payments if only minimum payments are made. The proposal also limited the circumstances under which advertisements may refer to a rate as ``fixed.''

Summary of final rule.

Advertising periodic payments. Consumers commonly are offered the option to finance the purchase of goods or services (such as appliances or furniture) by establishing an open-end credit plan. The periodic payments (such as $20 a week or $45 per month) associated with the purchase are often advertised as part of the offer. Under current rules, advertisements for open-end credit plans are not required to include information about the time it will take to pay for a purchase or the total cost if only periodic payments are made; if the transaction were a closed-end installment loan, the number of payments and the total cost would be disclosed. Under the final rule, advertisements stating a periodic payment amount for an open-end credit plan that would be established to finance the purchase of goods or services must state, in equal prominence to the periodic payment amount, the time period required to pay the balance and the total of payments if only periodic payments are made.

Advertising ``fixed'' rates. Creditors sometimes advertise the APR for open-end accounts as a ``fixed'' rate even though the creditor reserves the right to change the rate at any time for any reason.

Consumer testing indicated that many consumers believe that a ``fixed rate'' will not change, and do not understand that creditors may use the term ``fixed'' as a shorthand reference for rates that do not vary based on changes in an index or formula. Under the final rule, an advertisement may refer to a rate as ``fixed'' if the advertisement specifies a time period the rate will be fixed and the rate will not increase during that period. If a time period is not specified, the advertisement may refer to a rate as ``fixed'' only if the rate will not increase while the plan is open.

F. Other Disclosures and Protections

``Open-end'' plans comprised of closed-end features. Some creditors give open-end credit disclosures on credit plans that include closed- end features, that is, separate loans with fixed repayment periods.

These creditors treat these loans as advances on a revolving credit line for purposes of Regulation Z even though the consumer's credit information is separately evaluated, the consumer may have to complete a separate application for each ``advance,'' and the consumer's payments on the ``advance'' do not replenish the line. Provisions in the commentary lend support to this approach.

Proposal. The proposal would have revised these provisions to indicate

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closed-end disclosures rather than open-end disclosures are appropriate when advances that are individually approved and underwritten are being extended, or if payments made on a particular sub-account do not replenish the credit line available for that sub-account.

Summary of final rule. The final rule generally adopts the proposal that would clarify that credit is not properly characterized as open- end credit if individual advances are separately underwritten. The proposed revision that would have required that payments on a sub- account of an open-end credit plan replenish that sub-account has been withdrawn, because of concerns that this revision would have had unintended consequences for credit cards and HELOCs that the Board believes are appropriately treated as open-end credit.

Checks that access a credit card account. Many credit card issuers provide accountholders with checks that can be used to obtain cash, pay the outstanding balance on another account, or purchase goods and services directly from merchants. The solicitation letter accompanying the checks may offer a low promotional APR for transactions that use the checks. The proposed revisions would require the checks mailed by card issuers to be accompanied by cost disclosures.

Currently, creditors need not disclose costs associated with using the checks if the finance charges that would apply (that is, the interest rate and transaction fees) have been previously disclosed, such as in the account agreement. If the check is sent 30 days or more after the account is opened, creditors must refer consumers to their account agreements for more information about how the rate and fees are determined.

Consumers may receive these checks throughout the life of the credit card account. Thus, significant time may elapse between the time account-opening disclosures are provided and the time a consumer considers using the check. In addition, consumer testing indicates that consumers may not notice references to other documents such as the account-opening disclosures or periodic statements for rate information because they tend to look for rates and dollar figures when reviewing the information accompanying access checks.

Proposal. Under the proposal, checks that can access credit card accounts would have been required to be accompanied by information about the rates and fees that will apply if the checks are used, about whether a grace period exists, and any date by which the consumer must use the checks in order to receive any discounted initial rate offered on the checks. This information would have been required to be presented in a table, on the front side of the page containing the checks.

Summary of final rule. The final rule requires the following key terms to be disclosed in a summary table on the front of the page containing checks that access credit card accounts: (1) Any discounted initial rate, and when that rate will expire, if applicable; (2) the type of rate that will apply to the checks after expiration of any discounted initial rate (such as whether the purchase or cash advance rate applies) and the applicable APR; (3) any transaction fees applicable to the checks; (4) whether a grace period applies to the checks, and if one does not apply, that interest will be charged immediately; and (5) any date by which the consumer must use the checks in order to receive any discounted initial rate offered on the checks.

The final rule requires that the tabular disclosure accompanying checks that access a credit card account include a disclosure of the actual rate or rates applicable to the checks. While the actual post- promotional rate disclosed at the time the checks are sent to a consumer may differ from the rate disclosed by the time it becomes applicable to the consumer's account (if it is a variable rate tied to an index), disclosure of the actual post-promotional rate in effect at the time that the checks are sent to the consumer is an important piece of information for the consumer to use in making an informed decision about whether to use the checks. Consumer testing suggests that a disclosure of the actual rate, rather than a toll-free number, also will help to enhance consumer understanding regarding the rate that will apply when the promotional rate expires.

Cut-off times and due dates for mailing payments. TILA generally requires that payments be credited to a consumer's account as of the date of receipt, provided the payment conforms to the creditor's instructions. Under Regulation Z, creditors are permitted to specify reasonable cut-off times for receiving payments on the due date. Some creditors use different cut-off times depending on the payment method.

Consumer groups and others have raised concerns that the use of certain cut-off times may effectively result in a due date that is one day earlier than the due date disclosed. In addition, in response to the

June 2007 Proposal, consumer commenters urged the Board to address creditors' practice of using due dates on days that the creditor does not accept payments, such as weekends or holidays.

Proposal. The May 2008 Regulation Z Proposal provided that it would be unreasonable for a creditor to require that mailed payments be received earlier than 5 p.m. on the due date in order to be considered timely. In addition, the proposal would have provided that if a creditor does not receive and accept mailed payments on the due date

(e.g., a Sunday or holiday), a payment received on the next business day is timely.

Recommendation. The draft final rule adopts the proposal regarding weekend and holiday due dates. In addition, the draft final rule adopts a modified version of the 5 p.m. cut-off time proposal to provide that a 5 p.m. cut-off time is an example of a reasonable requirement for payments.

Credit insurance, debt cancellation, and debt suspension coverage.

Under Regulation Z, premiums for credit life, accident, health, or loss-of-income insurance are considered finance charges if the insurance is written in connection with a credit transaction. However, these costs may be excluded from the finance charge and APR (for both open-end and closed-end credit transactions), if creditors disclose the cost and the fact that the coverage is not required to obtain credit, and the consumer signs or initials an affirmative written request for the insurance. Since 1996, the same rules have applied to creditors'

``debt cancellation'' agreements, in which a creditor agrees to cancel the debt, or part of it, on the occurrence of specified events.

Proposal and summary of final rule. As proposed, the existing rules for debt cancellation coverage were applied to ``debt suspension'' coverage (for both open-end credit and closed-end transactions). ``Debt suspension'' products are related to, but different from, debt cancellation products. Debt suspension products merely defer consumers' obligation to make the minimum payment for some period after the occurrence of a specified event. During the suspension period, interest may continue to accrue, or it may be suspended as well. Under the proposal, to exclude the cost of debt suspension coverage from the finance charge and APR, creditors would have been required to inform consumers that the coverage suspends, but does not cancel, the debt.

Under the current rules, charges for credit insurance and debt cancellation coverage are deemed not to be finance charges if a consumer requests coverage after an open-end credit account is opened or after a closed-end credit

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transaction is consummated because the coverage is deemed not to be

``written in connection'' with the credit transaction. Since the charges are defined as non-finance charges in such cases, Regulation Z does not require a disclosure or written evidence of consent to exclude them from the finance charge. The proposal would have implemented a broader interpretation of ``written in connection'' with a credit transaction and required creditors to provide disclosures, and obtain evidence of consent, on sales of credit insurance or debt cancellation or suspension coverage during the life of an open-end account. If a consumer requests the coverage by telephone, creditors would have been permitted to provide the disclosures orally, but in that case they would have been required to mail written disclosures within three days of the call.\10\ The final rule is unchanged from the proposal.

\10\ The revisions to Regulation Z requiring disclosures to be mailed within three days of a telephone request for these products are consistent with the rules of the federal banking agencies governing insured depository institutions' sales of insurance and with guidance published by the Office of the Comptroller of the

Currency (OCC) concerning national banks' sales of debt cancellation and debt suspension products.

VI. Section-by-Section Analysis

In reviewing the rules affecting open-end credit, the Board proposed in June 2007 to reorganize some provisions to make the regulation easier to use. Rules affecting home-equity lines of credit

(HELOCs) subject to Sec. 226.5b would have been separately delineated in Sec. 226.6 (account-opening disclosures), Sec. 226.7 (periodic statements), and Sec. 226.9 (subsequent disclosures). Rules contained in footnotes would have been moved to the text of the regulation or commentary, as appropriate, and the footnotes designated as reserved.

Commenters generally supported this approach. One commenter questioned retaining the footnotes as reserved and suggested deleting references to the footnotes entirely. The final rule is organized, and rules currently stated in footnotes have been moved, as proposed. These revisions are identified in a table below. See X. Redesignation Table.

The Board retains footnotes as ``reserved'' to preserve the current footnote numbers in provisions of Regulation Z that will be the subject of future rulemakings. When rules contained in all footnotes have been moved to the regulation or commentary, as appropriate, references to the footnotes will be removed.

Introduction

The official staff commentary to Regulation Z begins with an

Introduction. Comment I-6 discusses reference materials published at the end of each section of the commentary adopted in 1981. 46 FR 50288,

Oct. 9, 1981. The references were intended as a compliance aid during the transition to the 1981 revisions to Regulation Z. In June 2007, the

Board proposed to delete provisions addressing references and transition rules applicable to 1981 revisions to Regulation Z. No comments were received. Thus, the Board deletes the references and comments I-3, I-4(b), I-6, and I-7, as obsolete and renumbers the remaining comments accordingly.

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement, and Liability

Section 226.1(c) generally outlines the persons and transactions covered by Regulation Z. Comment 1(c)-1 provides, in part, that the regulation applies to consumer credit extended to residents (including resident aliens) of a state. In June 2007, technical revisions were proposed for clarity, and comment was requested if further guidance on the scope of coverage would be helpful. No comments were received and the comment is adopted with technical revisions for clarity.

Section 226.1(d)(2), which summarizes the organization of the regulation's open-end credit rules (Subpart B), is amended to reinsert text inadvertently deleted in a previous rulemaking, as proposed. See 54 FR 24670, June 9, 1989. Section 226.1(d)(4), which summarizes miscellaneous provisions in the regulation (Subpart D), is updated to describe amendments made in 2001 to Subpart D relating to disclosures made in languages other than English, as proposed. See 66 FR 17339,

Mar. 30, 2001. The substance of Footnote 1 is deleted as unnecessary, as proposed.

In July 2008, the Board revised Subpart E to address certain mortgage practices and disclosures. These changes are reflected in

Sec. 226.1(d)(5), as amended in the July 2008 Final HOEPA Rule. In addition, transition rules for the July 2008 rulemaking are added as comment 1(d)(5)-1. 73 FR 44522, July 30, 2008.

Section 226.2 Definitions and Rules of Construction 2(a) Definitions 2(a)(2) Advertisement

In the June 2007 Proposal, the Board proposed technical revisions to the commentary to Sec. 226.2(a)(2), with no intended change in substance or meaning. No changes were proposed for the regulatory text.

The Board received no comments on the proposed changes, and the changes are adopted as proposed. 2(a)(4) Billing Cycle or Cycle

Section 226.2(a)(4) defines ``billing cycle'' as the interval between the days or dates of regular periodic statements, and requires that billing cycles be equal (with a permitted variance of up to four days from the regular day or date) and no longer than a quarter of a year. Comment 2(a)(4)-3 states that the requirement for equal cycles does not apply to transitional billing cycles that occur when a creditor occasionally changes its billing cycles to establish a new statement day or date. The Board proposed in June 2007 to revise comment 2(a)(4)-3 to clarify that this exception also applies to the first billing cycle that occurs when a consumer opens an open-end credit account.

Few commenters addressed this provision. One creditor requested that the Board clarify that the proposed revision applies to the time period between the opening of the account and the generation of the first periodic statement (as opposed to the period between the generation of the first statement and the generation of the second statement). The comment has been revised to provide the requested clarification.

The same commenter also requested clarification that the same exception would apply when a previously closed account is reopened. The reopening of a previously closed account is no different, for purposes of comment 2(a)(4)-3, from the original opening of an account; therefore, this clarification is unnecessary. A consumer group suggested that an irregular first billing cycle should be limited to no longer than twice the length of a regular billing cycle, and that irregular billing cycles should permitted no more than once per year.

The Board believes that these limitations might unduly restrict creditors' operations. Although it would be unlikely for a creditor to utilize a billing cycle more than twice the length of the regular cycle, or an irregular billing cycle more often than once per year, such cycles might need to be used on rare occasions for operational reasons. 2(a)(6) Business Day

Section 226.2(a)(6) and comment 2(a)(6)-2, as reprinted, reflect revisions adopted in the Board's July 2008 Final HOEPA Rule to address certain

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mortgage practices and disclosures. 73 FR 44522, 44599, 44605, July 30, 2008. 2(a)(15) Credit Card

TILA defines ``credit card'' as ``any card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor, or services on credit.'' TILA Section 103(k); 15

U.S.C. 1602(k). In addition, Regulation Z currently provides that a credit card is a ``card, plate, coupon book, or other single credit device that may be used from time to time to obtain credit.'' See Sec. 226.2(a)(15).

Checks that access credit card accounts. Credit card issuers sometimes provide cardholders with checks that access a credit card account (access checks), which can be used to obtain cash, purchase goods or services or pay the outstanding balance on another account.

These checks are often mailed to cardholders on an unsolicited basis, sometimes with their monthly statements. When a consumer uses an access check, the amount of the check is billed to the consumer's credit card account.

Historically, checks that access credit card accounts have not been treated as ``credit cards'' under TILA because each check can be used only once and not ``from time to time.'' See comment 2(a)(15)-1. As a result, TILA's protections involving merchant disputes, unauthorized use of the account, and the prohibition against unsolicited issuance, which apply only to ``credit cards,'' do not apply to transactions involving these checks. See Sec. 226.12. Nevertheless, billing error rights apply with to these check transactions. See Sec. 226.13. In the

June 2007 Proposal, the Board declined to extend TILA's protections for credit cards to access checks.

While industry commenters generally supported the Board's approach, consumer groups asserted that excluding access checks from treatment as credit cards does not adequately protect consumers, particularly insofar as consumers would not be able to assert unauthorized use claims under Sec. 226.12(b). Consumer groups thus observed that the current rules lead to an anomalous result where a consumer would be protected from unauthorized use under Sec. 226.12(b) if a thief used the consumer's credit card number to initiate a credit card transaction by telephone or on-line, but would not be similarly protected if the thief used the consumer's access check to complete the same transaction. Consumer groups also observed that consumers would be unable to assert a merchant claim or defense under Sec. 226.12(c) in connection with a good or service purchased with an access check, nor would they be protected by the unsolicited issuance provisions in Sec. 226.12(a).

As stated in the proposal, the Board believes that existing provisions under state law governing checks, specifically the Uniform

Commercial Code (UCC), coupled with the billing error provisions under

Sec. 226.13, provide consumers with appropriate protections from the unauthorized use of access checks. For example, a consumer generally would not have any liability for a forged access check under the UCC, provided that the consumer complies with certain timing requirements in reporting the forgery. In addition, in the event the consumer asserts a timely notice of error for an unauthorized transaction involving an access check under Sec. 226.13, the consumer would not have any liability if the creditor's investigation determines that the transaction was in fact unauthorized. Lastly, the Board understands that, in most instances, consumers may ask their creditor to stop sending access checks altogether, and these opt-out requests will be honored by the creditor.

Coupon books. The Board stated in the supplementary information for the June 2007 Proposal that it is unaware of devices existing today that would qualify as a ``coupon book'' for purposes of the definition of ``credit card'' under Sec. 226.2(a)(15). In addition, the Board noted that elimination of this obsolete term from the definition of

``credit card'' would help to reduce potential confusion regarding whether an access check or other single credit device that is used once, if connected in some way to other checks or devices, becomes a

``coupon book,'' thus becoming a ``credit card'' for purposes of the regulation. For these reasons, the June 2007 Proposal would have deleted the reference to the term ``coupon book'' from the definition of ``credit card'' under Sec. 226.2(a)(15).

Consumer groups opposed the Board's proposal, citing the statutory reference in TILA Section 103(k) to a ``coupon book,'' and noting that even if such products were not currently being offered, the proposed deletion could provide issuers an incentive to develop such products and in that event, consumers would be unable to avail themselves of the protections against unauthorized use and unsolicited issuance.

The final rule removes the reference to ``coupon book'' in the definition of ``credit card,'' as proposed. Commenters did not cite any examples of products that could potentially qualify as a ``coupon book.'' Thus, in light of the confusion today regarding whether access checks are ``credit cards'' as a result of the existing reference to

``coupon books,'' the Board believes removal of the term is appropriate in the final rule, and that the removal will not limit the availability of Regulation Z protections overall.

Plans in which no physical device is issued. The June 2007 Proposal did not explicitly address circumstances where a consumer may conduct a transaction on an open-end plan that does not have a physical device.

In response, industry commenters agreed that it was premature and unnecessary to address such open-end plans. Consumer groups in contrast stated that it was appropriate to amend the regulation at this time to explicitly cover such plans, particularly in light of the Board's decision elsewhere to update the commentary to refer to biometric means of verifying the identity of a cardholder or authorized user. See comment 12(b)(2)(iii)-1, discussed below. While the final rule does not explicitly address open-end plans in which no physical device is issued, the Board will continue to monitor developments in the marketplace and may update the regulation if and when such products become common. Of course, to the extent a creditor has issued a device that meets the definition of a ``credit card'' for an account, the provisions that require use of a ``credit card,'' could apply even though a particular transaction itself is not conducted using the device (for example, in the case of telephone and Internet transactions; see comments 12(b)(2)(iii)-3 and 12(c)(1)-1).

Charge cards. Comment 2(a)(15)-3 discusses charge cards and identifies provisions in Regulation Z in which a charge card is distinguished from a credit card. The June 2007 Proposal would have updated comment 2(a)(15)-3 to reflect that the new late payment and minimum payment disclosure requirements set forth by the Bankruptcy Act do not apply to charge card issuers. As further discussed in more detail below under Sec. 226.7, comment 2(a)(15)-3 is adopted as proposed. 2(a)(17) Creditor

In June 2007, the Board proposed to exempt from TILA coverage credit extended under employee-sponsored retirement plans. For reasons explained in the section-by-section analysis to Sec. 226.3, this provision is adopted with modifications, as discussed below. Comment 2(a)(17)(i)-8, which provides guidance on whether such a plan is a

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creditor for purposes of TILA, is deleted as unnecessary, as proposed.

In addition, the substance of footnote 3 is moved to a new Sec. 226.2(a)(17)(v), and references revised, accordingly, as proposed. The dates used to illustrate numerical tests for determining whether a creditor ``regularly'' extends consumer credit are updated in comments 2(a)(17)(i)-3 through -6, as proposed. References in Sec. 226.2(a)(17)(iv) to provisions in Sec. 226.6 and Sec. 226.7 are renumbered consistent with this final rule. 2(a)(20) Open-End Credit

Under TILA Section 103(i), as implemented by Sec. 226.2(a)(20) of

Regulation Z, ``open-end credit'' is consumer credit extended by a creditor under a plan in which (1) the creditor reasonably contemplates repeated transactions, (2) the creditor may impose a finance charge from time to time on an outstanding unpaid balance, and (3) the amount of credit that may be extended to the consumer during the term of the plan, up to any limit set by the creditor, generally is made available to the extent that any outstanding balance is repaid.

``Open-end'' plans comprised of closed-end features. In the June 2007 Proposal, the Board proposed several revisions to the commentary regarding Sec. 226.2(a)(20) to address the concern that currently some credit products are treated as open-end plans, with open-end disclosures given to consumers, when such products would more appropriately be treated as closed-end transactions. The proposal was based on the Board's belief that closed-end disclosures are more appropriate than open-end disclosures when the credit being extended is individual loans that are individually approved and underwritten. As stated in the June 2007 Proposal, the Board was particularly concerned about certain credit plans, where each individual credit transaction is separately evaluated.

For example, under certain so-called multifeatured open-end plans, creditors may offer loans to be used for the purchase of an automobile.

These automobile loan transactions are approved and underwritten separately from other credit made available on the plan. (In addition, the consumer typically has no right to borrow additional amounts on the automobile loan ``feature'' as the loan is repaid.) If the consumer repays the entire automobile loan, he or she may have no right to take further advances on that ``feature,'' and must separately reapply if he or she wishes to obtain another automobile loan, or use that aspect of the plan for similar purchases. Typically, while the consumer may be able to obtain additional advances under the plan as a whole, the creditor separately evaluates each request.

In the June 2007 Proposal, the Board proposed, among other things, two main substantive revisions to the commentary to Sec. 226.2(a)(20).

First, the Board proposed to revise comment 2(a)(20)-2 to clarify that while a consumer's account may contain different sub-accounts, each with different minimum payment or other payment options, each sub- account must meet the self-replenishing criterion. Proposed comment 2(a)(20)-2 would have provided that repayments of an advance for any sub-account must generally replenish a single credit line for that sub- account so that the consumer may continue to borrow and take advances under the plan to the extent that he or she repays outstanding balances without having to obtain separate approval for each subsequent advance.

Second, the Board proposed in June 2007 to clarify in comment 2(a)(20)-5 that in general, a credit line is self-replenishing if a consumer can obtain further advances or funds without being required to separately apply for those additional advances, and without undergoing a separate review by the creditor of that consumer's credit information, in order to obtain approval for each such additional advance. TILA Section 103(i) provides that a plan can be an open-end credit plan even if the creditor verifies credit information from time to time. 15 U.S.C. 1602(i). As stated in the June 2007 Proposal, however, the Board believes this provision is not intended to permit a creditor to separately underwrite each advance made to a consumer under an open-end plan or account. Such a process could result in closed-end credit being deemed open-end credit.

General comments. The Board received approximately 300 comment letters, mainly from credit unions, on the proposed changes to Sec. 226.2(a)(20). (See below for a discussion of the comments specific to each portion of the proposed changes to Sec. 226.2(a)(20); more general comments pertaining to the overall impact of recharacterizing certain multifeatured plans as closed-end credit are discussed in this subsection.)

Consumer groups and one credit union supported the proposed changes. The credit union commenter noted that it currently uses a multifeatured open-end lending program, but that it believes the changes would be beneficial to consumers and financial institutions, and that the benefit to consumers would outweigh any inconvenience and cost imposed on the credit union. This commenter noted that under a multifeatured open-end lending program, a consumer signs a master loan agreement but does not receive meaningful disclosures with each additional extension of credit. This commenter believes that consumers often do not realize that subsequent extensions of credit are subject to the terms of the master loan agreement.

Consumer groups stated that there is no meaningful difference between a customer who obtains a conventional car loan from a bank versus one who receives an advance to purchase a car via a sub-account from an open-end plan. Consumer groups further noted that to the extent a sub-account has fixed payments, fixed terms, and no replenishing line, it is functionally indistinguishable from any other closed-end loan for which closed-end disclosures must be given. The consumer groups' comments stated that there is no legitimate basis on which to continue to classify these plans as open-end credit.

Most comment letters opposed the proposed changes to the definition of ``open-end credit.'' Many credit union commenters questioned the need for the proposed changes, and stated that the Board had not identified a specific harm arising out of multifeatured open-end lending. These commenters stated that there is no evidence of harm to consumers associated with these plans, such as complaints, information about credit union members paying higher rates or purchasing unnecessary products, or evidence of higher default rates. These commenters noted that such plans have been offered by credit unions for more than 25 years. These commenters also stated that open-end credit disclosures are adequate and provide members with the information they need on a timely basis, and that open-end lending members receive frequent reminders, via periodic statements, of key financial terms such as the APR. Also, commenters stated that to the extent credit unions do not charge fees for advances with fixed repayment periods, the APR disclosed for purposes of the open-end credit disclosures is the same as the APR that would be disclosed if the transaction were characterized as closed-end.

The National Credit Union Administration (NCUA) commented that there are no problems that appear to be generated by or inherent to the multifeatured aspect of credit unions' multifeatured open-end plans.

This agency urged the Board not to ignore the identity of the creditor in considering

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the appropriateness of disclosures because doing so ignores the circumstances in which the disclosures are made; the comment letter further noted that multifeatured open-end plans offered by credit unions involve circumstances where there is an ongoing relationship between the consumer-member and a regulated financial institution.

Credit union commenters and the NCUA also stated that the proposed revisions would result in a loss of convenience to consumers because credit unions generally would not be able to continue to offer multifeatured open-end lending programs, and consumers would have to sign additional paperwork in order to obtain closed-end advances.

Several of these commenters specifically noted that loss of convenience would be a concern with respect to military personnel and other customers they serve in geographically remote locations. Credit union commenters stated that the proposed revisions, if adopted, would result in increased costs of borrowing for consumers. Some comment letters noted that credit unions' rates would become less competitive and that consumers would be more likely to obtain financing from more expensive sources, such as auto dealers, check cashing shops, or payday lenders.

Several credit union commenters discussed the likely cost associated with providing closed-end disclosures instead of open-end disclosures. The commenters indicated that such costs would include re- training personnel, changing lending documents and data-processing systems, purchasing new lending forms, potentially increased staffing requirements, updating systems, and additional paperwork. Several commenters offered estimates of the probable cost to credit unions of converting multifeatured open-end plans to closed-end credit. Those comments with regard to small entities are discussed in more detail below in VIII. Final Regulatory Flexibility Analysis. One major service provider to credit unions estimated that the conversion in loan products would cost a credit union approximately $100,000, with total expenses of at least $350 million for all credit unions and their members. This commenter further noted that there would be annual ongoing costs totaling millions of dollars, largely due to additional staff costs that would arise because more business would take place in person at the credit union.

One commenter indicated that the proposed changes to the commentary could give rise to litigation risk, and may create more confusion and unintended consequences than currently exist under the existing commentary to Regulation Z. This commenter stated that changing the definition of open-end credit would jeopardize many legitimate open-end credit plans.

Comments regarding hybrid disclosure. Several comment letters from credit unions, one credit union trade association, and the NCUA suggested that the Board should adopt a hybrid disclosure approach for multifeatured open-end plans. Under this approach, these commenters indicated that the Board should continue to permit multifeatured open- end plans, as they are currently structured, to provide open-end disclosures to consumers, but should also impose a new subsequent disclosure requirement. Shortly after obtaining credit, such as for an auto loan, that is individually underwritten or not self-replenishing, the creditor would be required to give disclosures that mirror the disclosures given for closed-end credit.

The Board is not adopting this hybrid disclosure approach. The

Board believes that the statutory framework clearly provides for two distinct types of credit, open-end and closed-end, for which different types of disclosures are deemed to be appropriate. Such a hybrid disclosure regime would be premised on the fact that the closed-end disclosures are beneficial to consumers in connection with certain types of advances made under these plans. If this is the case, the

Board believes that consumers should receive the closed-end disclosures prior to consummation of the transaction, when a consumer is shopping for credit.

Replenishment. As discussed above, the Board proposed in June 2007 to revise comment 2(a)(20)-2 to clarify that while a consumer's account may contain different sub-accounts, each with different minimum payment or other payment options, each sub-account must meet the self- replenishing criterion.

Several industry commenters specifically objected to the new requirement in proposed comment 2(a)(20)-2 that open-end credit replenish on a sub-account by sub-account basis. Some commenters expressed concern about the applicability of proposed comment 2(a)(20)- 2 to promotional rate offers. The commenters noted that a creditor may make a balance transfer offer or send out convenience checks at a promotional APR. As the balance subject to the promotional APR is repaid, the available credit on the account will be replenished, although the available credit for the original promotional rate offer is not replenished. These commenters stated that unless the Board can define sub-accounts in a manner that excludes balances subject to special terms, the Board should withdraw the proposed revision to comment 2(a)(20)-2. Other commenters indicated that the critical requirement should be that repayment of balances in any sub-account replenishes the overall account, not that each sub-account itself must be replenishing.

Similarly, the Board received several industry comment letters indicating that the proposed changes to comment 2(a)(20)-2 would have adverse consequences for certain HELOCs. The comments noted that many creditors use multiple features or sub-accounts in order to provide consumers with flexibility and choices regarding the terms applicable to certain portions of an open-end credit balance. They noted as an example a feature on a HELOC that permits a consumer to convert a portion of the balance into a fixed-rate, fixed-term sub-account; the sub-account is never replenished but payments on the sub-account replenish the master open-end account.

In addition, the Board received a comment from an association of state regulators of credit unions raising concerns that proposed comment 2(a)(20)-2 would present a safety and soundness concern for institutions. These comments noted that a self-replenishing sub-account for an auto loan, for example, would be a safety and soundness concern because the value of the collateral would decline and eventually be less than the credit limit.

In light of the comments received and upon further analysis, the

Board has withdrawn the proposed changes to comment 2(a)(20)-2 from the final rule. The Board believes that one unintended consequence of the proposed requirement that payments on each sub-account replenish is that some sub-accounts (like HELOCs) would be re-characterized as closed-end credit when they are properly treated as open-end credit.

Generally, the proposed changes to comment 2(a)(20)-2 were intended to ensure that repayments of advances on an open-end credit plan generally would replenish the credit available to the consumer. The Board believes that replenishment of an open-end plan on an overall basis achieves this purpose and that, as discussed below, the best way to address loans that are more properly characterized as closed-end credit being treated as features of open-end plans is through clarifications

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regarding verification of credit information and separate underwriting of individual advances.

Verification and underwriting of separate advances. As discussed above, the Board proposed in June 2007 to clarify in comment 2(a)(20)-5 that, in general, a credit line is self-replenishing if a consumer can obtain further advances or funds without being required to separately apply for those additional advances, and without undergoing a separate review by the creditor of that consumer's credit information, in order to obtain such additional advance.

Notwithstanding this proposed change, the Board noted that a creditor would be permitted to verify credit information to ensure that the consumer's creditworthiness has not deteriorated (and could revise the consumer's credit limit or account terms accordingly). This is consistent with the statutory definition of ``open end credit plan,'' which provides that a credit plan may be an open end credit plan even if credit information is verified from time to time. See 15 U.S.C. 1602(i). However, the Board noted in the June 2007 Proposal its belief that performing a distinct underwriting analysis for each specific credit request would go beyond the verification contemplated by the statute and would more closely resemble underwriting of closed-end credit. For example, assume that based on the initial underwriting of an open-end plan, a consumer were initially approved for a line of credit with a $20,000 credit limit. Under the proposal, if that consumer subsequently took a large advance of $10,000, it would be inconsistent with the definition of open-end credit for the creditor to independently evaluate the consumer's creditworthiness in connection with that advance. However, proposed comment 2(a)(20)-5 would have stated that a creditor could continue to review, and as appropriate, decrease the amount of credit available to a consumer from time to time to address safety and soundness and other concerns.

The NCUA agreed with the Board that the statutory provision regarding verification is not intended to permit separate underwriting and applications for each sub-account. The agency encouraged the Board to focus any commentary changes regarding the definition of open-end credit on the distinctions between verification versus a credit evaluation as a more appropriate and less burdensome response to its concerns than the proposed revisions regarding replenishment.

Several industry commenters indicated that proposed comment 2(a)(20)-5 could have unintended adverse consequences for legitimate open-end products. One industry trade association and several industry commenters stated creditors finance purchases that may utilize a substantial portion of available credit or even exceed the credit line under pre-established credit criteria. According to these commenters, creditors may have over-the-limit buffers or strategies in place that contemplate such purchases, and these transactions should not be considered a separate underwriting. The commenters further stated that any legitimate authorization procedures or consideration of a credit line increase should not exclude a transaction from open-end credit.

One credit card association and one large credit card issuer commented that some credit cards have no preset spending limits, and issuers may need to review a cardholder's credit history in connection with certain transactions on such accounts. These commenters stated that regardless of how an issuer handles individual transactions on such accounts, they should be characterized as open-end.

One other industry commenter stated that a creditor should be able to verify the consumer's creditworthiness in connection with a request for an advance on an open-end credit account. This creditor noted that the statute does not impose any limitation on the frequency with which verification is made, nor does it indicate that verification can be made only as part of an account review, and not also when a consumer requests an advance. The commenter stated that the most important time to conduct verification is when an advance is requested.

This commenter further suggested that the concept of

``verification'' is, by itself, distinguishable from a de novo credit decision on an application for a new loan. This commenter posited that comment 2(a)(20)-5 recognizes this insofar as it contemplates a determination of whether the consumer continues to meet the lender's credit standards and provides that the consumer should have a reasonable expectation of obtaining additional credit as long as the consumer continues to meet those credit standards. An application for a new extension of credit contemplates a de novo credit determination, while verification involves a determination of whether a borrower continues to meet the lender's credit standards.

The changes to comment 2(a)(20)-5 are adopted as proposed, with one revision discussed below in the subsection titled Credit cards. Under revised comment 2(a)(20)-5, verification of a consumer's creditworthiness consistent with the statute continues to be permitted in connection with an open-end plan; however, underwriting of specific advances is not permitted for an open-end plan. The Board believes that underwriting of individual advances exceeds the scope of the verification contemplated by the statute and is inconsistent with the definition of open-end credit. The Board believes that the rule does not undermine safe and sound lending practices, but simply clarifies that certain types of advances for which underwriting is done must be treated as closed-end credit with closed-end disclosures provided to the consumer.

The revisions to comment 2(a)(20)-5 are intended only to have prospective application to advances made after the effective date of the final rule. A creditor may continue to give open-end disclosures in connection with an advance that met the definition of ``open-end credit'' under current Sec. 226.2(a)(20) and the associated commentary, if that advance was made prior to the effective date of the final rule. However, a creditor that makes a new advance under an existing credit plan after the effective date of the final rule will need to determine whether that advance is properly characterized as open-end or closed-end credit under the revised definition, and give the appropriate disclosures.

One commenter asked the Board to clarify the ``reasonable expectation'' language in comment 2(a)(20)-5. This commenter noted that a consumer should not expect to obtain additional advances if the consumer is in default in any provision of the loan agreement (it is not enough to merely be ``current'' in their payments), and otherwise does not comply with the requirements for advances in the loan agreement (such as minimum advance requirements or the method for requesting advances). The Board believes that under the current rule a creditor may suspend a consumer's credit privileges or reduce a consumer's credit limit if the consumer is in default under his or her loan agreement. Thus, the Board does not believe that this clarification is necessary and has not adopted it in the final rule.

Verification of collateral. Several commenters stated that comment 2(a)(20)-5 should expressly permit routine collateral valuation and verification procedures at any time, including as a condition of approving an advance. One of these commenters

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stated that Regulation U (Credit by Banks and Persons Other than

Brokers or Dealers for the Purpose of Purchasing or Carrying Margin

Stock) requires a bank in connection with margin lending, to not advance funds in excess of a certain collateral value. 12 CFR part 221.

The commenter also pointed out that for some accounts, a borrower's credit limit is determined from time to time based on the market value of the collateral securing the account.

In response to commenters' concerns, new comment 2(a)(20)-(6) is added to clarify that creditors that otherwise meet the requirements of

Sec. 226.2(a)(20) extend open-end credit notwithstanding the fact that the creditor must verify collateral values to comply with federal, state, or other applicable laws or verifies the value of collateral in connection with a particular advance under the plan. Current comment 2(a)(20)-6 is renumbered as comment 2(a)(20)-7.

Credit cards. Several credit and charge card issuers commented that the proposal could have adverse effects on those products. One credit card issuer indicated that the proposed changes could have unintended adverse consequences for certain credit card securitizations. This commenter noted that securitization documentation for credit cards typically provides that an account must be a revolving credit card account for the receivables arising in that account to be eligible for inclusion in the securitization. If the proposal were to recharacterize accounts that are currently included in securitizations as closed-end credit, this commenter stated that it could require restructuring of existing and future securitization transactions.

As discussed above, several industry commenters noted other circumstances in which proposed comment 2(a)(20)-5 could have adverse consequences for credit cards. Several commenters stated that creditors may have over-the-limit buffers or strategies in place that contemplate purchases utilizing a substantial portion of, or even exceed, the credit line, and these transactions should not be considered a separate underwriting. Commenters also stated that any legitimate authorization procedures or consideration of a credit line increase should not exclude a transaction from open-end credit. Finally, one credit card association and one large credit card issuer commented that some credit cards have no preset spending limits, and issuers may need to review a cardholder's credit history in connection with certain transactions on such accounts. These commenters stated that regardless of how an issuer handles individual transactions on such accounts, they should be characterized as open-end.

The Board has addressed credit card issuers' concerns about emergency underwriting and underwriting of amounts that may exceed the consumer's credit limit by expressly providing in comment 2(a)(20)-5 that a credit card account where the plan as a whole replenishes meets the self-replenishing criterion, notwithstanding the fact that a credit card issuer may verify credit information from time to time in connection with specific transactions. The Board did not intend in the

June 2007 Proposal and does not intend in the final rule to exclude credit cards from the definition of open-end credit and believes that the revised final rule gives certainty to creditors offering credit cards. The Board believes that the strategies identified by commenters, such as over-the-limit buffers, treatment of certain advances for cards without preset spending limits, and consideration of credit line increases generally do not constitute separate underwriting of advances, and that open-end disclosures are appropriate for credit cards for which the plan as a whole replenishes. The Board also believes that this clarification will help to promote uniformity in credit card disclosures by clarifying that all credit cards are subject to the open-end disclosure rules. The Board notes that charge card accounts may not meet the definition of open-end credit but pursuant to

Sec. 226.2(a)(17)(iii) are subject to the rules that apply to open-end credit.

Examples regarding repeated transactions. Due to the concerns noted above regarding closed-end automobile loans being characterized as features of so-called open-end plans, the Board also proposed in June 2007 to delete comment 2(a)(20)-3.ii., which states that it would be more reasonable for a financial institution to make advances from a line of credit for the purchase of an automobile than it would be for an automobile dealer to sell a car under an open-end plan. As stated in the proposal, the Board was concerned that the current example placed inappropriate emphasis on the identity of the creditor rather than the type of credit being extended by that creditor. Similarly, the Board proposed to revise current comment 2(a)(20)-3.i., which referred to a thrift institution, to refer more generally to a bank or financial institution and to move the example into the body of comment 2(a)(20)- 3. The Board received no comments opposing the revisions to these examples, and the changes are adopted as proposed.

Technical amendments. The Board also proposed in the June 2007

Proposal a technical update to comment 2(a)(20)-4 to delete, without intended substantive change, a reference to ``china club plans,'' which may no longer be very common. No comments were received on this aspect of the proposal, and the update to comment 2(a)(20)-4 is adopted as proposed.

Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a credit limit or refuse to extend new credit due to changes in the economy, the creditor's financial condition, or the consumer's creditworthiness. The Board's proposal would have deleted the reference to changes in the economy to simplify this provision. No comments were received on this change, which is adopted as proposed.

Implementation date. Many credit union commenters on the June 2007

Proposal expressed concern about the effect of successive regulatory changes. These commenters stated that the June 2007 Proposal, if adopted, would require them to give closed-end disclosures in connection with certain advances, such as the purchase of an automobile, for which they currently give open-end disclosures. The commenters noted that because the Board is also considering regulatory changes to closed-end lending, it could require such creditors to make two sets of major systematic changes in close succession. These commenters stated that such successive regulatory changes could impose a significant burden that would impair the ability of credit unions to serve their members effectively. The Board expects all creditors to provide closed-end or open-end disclosures, as appropriate in light of revised Sec. 226.2(a)(20) and the associated commentary, as of the effective date of the final rule. The Board has not delayed the effectiveness of the changes to the definition of ``open-end credit.''

The Board is mindful that the changes to the definition may impose costs on certain credit unions and other creditors, and that any future changes to the provisions of Regulation Z dealing with closed-end credit may impose further costs. However, the Board believes that it is important that consumers receive the appropriate type of disclosures for a given extension of credit, and that it is not appropriate to delay effectiveness of these changes pending the Board's review of the rules pertaining to closed-end credit.

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2(a)(24) Residential Mortgage Transaction

Comment 2(a)(24)-1, which identifies key provisions affected by the term ``residential mortgage transaction,'' and comment 2(a)(24)-5.ii., which provides guidance on transactions financing the acquisition of a consumer's principal dwelling, are revised from the June 2007 Proposal to conform to changes adopted by the Board in the July 2008 Final HOEPA

Rule to address certain mortgage practices and disclosures. 73 FR 44522, 44605, July 30, 2008.

Section 226.3 Exempt Transactions

Section 226.3 implements TILA Section 104 and provides exemptions for certain classes of transactions specified in the statute. 15 U.S.C. 1603.

In June 2007, the Board proposed several substantive and technical revisions to Sec. 226.3 as described below. The Board also proposed to move the substance of footnote 4 to the commentary. See comment 3-1. No comments were received on moving footnote 4 to the commentary, and that change is adopted in the final rule. 3(a) Business, Commercial, Agricultural, or Organizational Credit

Section 226.3(a) provides, in part, that the regulation does not apply to extensions of credit primarily for business, commercial or agricultural purposes. As the Board noted in the supplementary information to the June 2007 Proposal, questions have arisen from time to time regarding whether transactions made for business purposes on a consumer-purpose credit card are exempt from TILA. The Board proposed to add a new comment 3(a)-2 to clarify transactions made for business purposes on a consumer-purpose credit card are covered by TILA (and, conversely, that purchases made for consumer purposes on a business- purpose credit card are exempt from TILA). The Board received several comments on proposed comment 3(a)-2. One consumer group and one large financial institution commented in support of the change. One industry trade association stated that the proposed clarification was anomalous given the general exclusion of business credit from TILA coverage. The

Board acknowledges that this clarification will result in certain business purpose transactions being subject to TILA, and certain consumer purpose transactions being exempt from TILA. However, the

Board believes that the determination as to whether a credit card account is primarily for consumer purposes or business purposes is best made when an account is opened (or when an account is reclassified as a business-purpose or consumer-purpose account) and that comment 3(a)-2 provides important clarification and certainty to consumers and creditors. In addition, determining whether specific transactions charged to the credit card account are for consumer or business purposes could be operationally difficult and burdensome for issuers.

Accordingly, the Board adopts new comment 3(a)-2 as proposed with several technical revisions described below. Other sections of the commentary regarding Sec. 226.3(a) are renumbered accordingly. The

Board also adopts new comment 3(a)-7, which provides guidance on credit card renewals consistent with new comment 3(a)-2, as proposed.

The examples in proposed comment 3(a)-2 contained several references to credit plans, which are deleted from the final rule as unnecessary because comment 3(a)-2 was intended to address only credit cards. Credit plans are addressed by the examples in redesignated comment 3(a)-3, which is unaffected by this rulemaking. 3(g) Employer-Sponsored Retirement Plans

The Board has received questions from time to time regarding the applicability of TILA to loans taken against employer-sponsored retirement plans. Pursuant to TILA Section 104(5), the Board has the authority to exempt transactions for which it determines that coverage is not necessary in order to carry out the purposes of TILA. 15 U.S.C. 1603(5). The Board also has the authority pursuant to TILA Section 105(a) to provide adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of TILA. 15 U.S.C. 1604(a).

The June 2007 Proposal included a new Sec. 226.3(g), which would have exempted loans taken by employees against their employer-sponsored retirement plans qualified under Section 401(a) of the Internal Revenue

Code and tax-sheltered annuities under Section 403(b) of the Internal

Revenue Code, provided that the extension of credit is comprised of fully-vested funds from such participant's account and is made in compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26

U.S.C. 401(a); 26 U.S.C. 403(b). The Board stated several reasons for this proposed exemption in the supplementary information to the June 2007 Proposal, including the fact that the consumer's interest and principal payments on such a loan are reinvested in the consumer's own account and there is no third-party creditor imposing finance charges on the consumer. In addition, the costs of a loan taken against assets invested in a 401(k) plan, for example, are not comparable to the costs of a third-party loan product, because a consumer pays the interest on a 401(k) loan to himself or herself rather than to a third party.

The Board received several comments regarding proposed Sec. 226.3(g), which generally supported the proposed exemption for loans taken by employees against their employer-sponsored retirement plans.

Two commenters asked the Board to expand the proposed exemption to include loans taken against governmental 457(b) plans, which are a type of retirement plan offered by certain state and local government employers. 26 U.S.C. 457(b). The comments noted that governmental 457(b) plans may permit participant loans, subject to the requirements of section 72(p) of the Internal Revenue Code (26 U.S.C. 1 et seq.), which are the same requirements that are applicable to qualified 401(a) plans and 403(b) plans. The comments also stated that the Board's reasons for proposing the exemption apply equally to governmental 457(b) plans. The final rule expands the scope of the exemption to include loans taken against governmental 457(b) plans. The exemption for loans taken against employer-sponsored retirement plans was intended to cover all such similar plans, and the omission of governmental 457(b) plans from the proposed exemption was unintentional. The Board believes the rationales stated above and in the June 2007 Proposal for the proposed exemption for qualified 401(a) plans and 403(b) plans apply equally to governmental 457(b) plans.

In addition to the rationales stated above, another reason given for the proposed exception in the June 2007 Proposal was a statement that plan administration fees must be disclosed under applicable

Department of Labor regulations. One commenter noted that the

Department of Labor regulations cited in the supplementary information to the June 2007 Proposal do not apply to governmental 403(b) plans, governmental 457(b) plans, and certain other 403(b) programs that are not subject to the Employee Retirement Income Security Act of 1974

(ERISA). 29 U.S.C. 1001 et seq. The commenter asked for clarification regarding whether the exemption will apply to loans taken from plans and programs which are not subject to ERISA. Section 226.3(g) itself does not contain a reference to ERISA or the Department of Labor regulations pertaining to ERISA, and, accordingly,

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the exemption applies even if the particular plan is not subject to

ERISA. For the other reasons stated above and in the June 2007

Proposal, the Board believes that the exemption for the plans specified in new Sec. 226.3(g) is appropriate even for those plans to which

ERISA disclosure requirements do not apply.

Section 226.4 Finance Charge

Various provisions of TILA and Regulation Z specify how and when the cost of consumer credit expressed as a dollar amount, the ``finance charge,'' is to be disclosed. The rules for determining which charges make up the finance charge are set forth in TILA Section 106 and

Regulation Z Sec. 226.4. 15 U.S.C. 1605. Some rules apply only to open-end credit and others apply only to closed-end credit, while some apply to both. With limited exceptions, the Board did not propose in

June 2007 to change Sec. 226.4 for either closed-end credit or open- end credit. The areas in which the Board did propose to revise Sec. 226.4 and related commentary relate to (1) transaction charges imposed by credit card issuers, such as charges for obtaining cash advances from automated teller machines (ATMs) and for making purchases in foreign currencies or foreign countries, and (2) charges for credit insurance, debt cancellation coverage, and debt suspension coverage. 4(a) Definition

Transaction charges. Under the definition of ``finance charge'' in

TILA Section 106 and Regulation Z Sec. 226.4(a), a charge specific to a credit transaction is ordinarily a finance charge. 15 U.S.C. 1605.

See also Sec. 226.4(b)(2). However, under current comment 4(a)-4, a fee charged by a card issuer for using an ATM to obtain a cash advance on a credit card account is not a finance charge to the extent that it does not exceed the charge imposed by the card issuer on its cardholders for using the ATM to withdraw cash from a consumer asset account, such as a checking or savings account. Another comment indicates that the fee is an ``other charge.'' See current comment 6(b)-1.vi. Accordingly, the fee must be disclosed at account opening and on the periodic statement, but it is not labeled as a ``finance charge'' nor is it included in the effective APR.

In the June 2007 Proposal, the Board proposed new comment 4(a)-4 to address questions that have been raised about the scope and application of the existing comment. For example, assume the issuer assesses an ATM fee for one kind of deposit account (for example, an account with a low minimum balance) but not for another. The existing comment does not indicate which account is the proper basis for comparison, nor is it clear in all cases which account should be the appropriate one to use.

Questions have also been raised about whether disclosure of an ATM cash advance fee pursuant to comments 4(a)-4 and 6(b)-1.vi. is meaningful to consumers. Under the comments, the disclosure a consumer receives after incurring a fee for taking a cash advance through an ATM depends on whether the credit card issuer provides asset accounts and offers debit cards on those accounts and whether the fee for using the

ATM for the cash advance exceeds the fee for using the ATM for a cash withdrawal from an asset account. It is not clear that these distinctions are meaningful to consumers.

In addition, questions have arisen about the proper disclosure of fees that cardholders are assessed for making purchases in a foreign currency or outside the United States--for example, when the cardholder travels abroad. The question has arisen in litigation between consumers and major card issuers.\11\ Some card issuers have reasoned by analogy to comment 4(a)-4 that a foreign transaction fee is not a finance charge if the fee does not exceed the issuer's fee for using a debit card for the same purchase. Some card issuers disclose the foreign transaction fee as a finance charge and include it in the effective

APR, but others do not.

\11\ See, e.g., Third Consolidated Amended Class Action

Complaint at 47-48, In re Currency Conversion Fee Antitrust

Litigation, MDL Docket No. 1409 (S.D.N.Y.). The court approved a settlement on a preliminary basis on November 8, 2006. See also, e.g., LiPuma v. American Express Company, 406 F. Supp. 2d 1298

(S.D.Fla. 2005).

The uncertainty about proper disclosure of charges for foreign transactions and for cash advances from ATMs reflects the inherent complexity of seeking to distinguish transactions that are ``comparable cash transactions'' to credit card transactions from transactions that are not. In June 2007, the Board proposed to replace comment 4(a)-4 with a new comment of the same number stating a simple interpretive rule that any transaction fee on a credit card plan is a finance charge, regardless of whether the issuer imposes the same or lesser charge on withdrawals of funds from an asset account, such as a checking or savings account. The proposed comment would have provided as examples of such finance charges a fee imposed by the issuer for taking a cash advance at an ATM,\12\ as well as a fee imposed by the issuer for foreign transactions. The Board stated its belief that clearer guidance might result from a new and simpler approach that treats as a finance charge any fee charged by credit card issuers for transactions on their credit card plans, and accordingly proposed new comment 4(a)-4.

\12\ The change to comment 4(a)-4 does not affect disclosure of

ATM fees assessed by institutions other than the credit card issuer.

See proposed Sec. 226.6(b)(1)(ii)(A), adopted in the final rule as

Sec. 226.6(b)(3)(iii)(A).

Few commenters addressed proposed comment 4(a)-4. Some commenters supported the proposed comment, including a financial institution

(although the commenter noted that its support of the proposal was predicated on the effective APR disclosure requirements being eliminated, as the Board proposed under one alternative). Other commenters opposed the proposed comment, some expressing concern that including all transaction fees as finance charges might cause the effective APR to exceed statutory interest rate limits contained in other laws (for example, the 18 percent statutory interest rate ceiling applicable to federal credit unions).

One commenter stated particular concerns about the proposed inclusion of foreign transaction fees as finance charges. The commenter stated that the settlements in the litigation referenced above have already resolved the issues involved and that adopting the proposal would cause disruption to disclosure practices established under the settlements. A consumer group that supported including all transaction fees in the finance charge noted its concern that the positive effect of the proposal would be nullified by specifying a limited list of fees that must be disclosed in writing at account opening (see the section- by-section analysis to Sec. 226.6(b)(2) and (b)(3), below), and by eliminating the effective APR assuming the Board adopted that alternative. The commenter urged the Board to go further and include a number of other types of fees in the finance charge.

The Board is adopting proposed comment 4(a)-4 with some changes for clarification. As adopted in final form, comment 4(a)-4 includes language clarifying that foreign transaction fees include charges imposed when transactions are made in foreign currencies and converted to U.S. dollars, as well as charges imposed when transactions are made in U.S. dollars outside the United States and charges imposed when transactions are made (whether in a foreign currency or

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in U.S. dollars) with a foreign merchant, such as via a merchant's Web site. For example, a consumer may use a credit card to make a purchase in Bermuda, in U.S. dollars, and the card issuer may impose a fee because the transaction took place outside the United States. The comment also clarifies that foreign transaction fees include charges imposed by the card issuer and charges imposed by a third party that performs the conversion, such as a credit card network or the card issuer's corporate parent. (For example, in a transaction processed through a credit card network, the network may impose a 1 percent charge and the card-issuing bank may impose an additional 2 percent charge, for a total of a 3 percentage point foreign transaction fee being imposed on the consumer.)

However, the comment also clarifies that charges imposed by a third party are included only if they are directly passed on to the consumer.

For example, if a credit card network imposes a 1 percent fee on the card issuer, but the card issuer absorbs the fee as a cost of doing business (and only passes it on to consumers in the general sense that the interest and fees are imposed on all its customers to recover its costs), then the fee is not a foreign transaction fee that must be disclosed. In another example, if the credit card network imposes a 1 percent fee for a foreign transaction on the card issuer, and the card issuer imposes this same fee on the consumer who engaged in the foreign transaction, then the fee is a foreign transaction fee and must be included in finance charges to be disclosed. The comment also makes clear that a card issuer is not required to disclose a charge imposed by a merchant. For example, if the merchant itself performs the currency conversion and adds a fee, this would be not be a foreign transaction fee that card issuers must disclose. Under Sec. 226.9(d), the card issuer is not required to disclose finance charges imposed by a party honoring a credit card, such as a merchant, although the merchant itself is required to disclose such a finance charge (assuming the merchant is covered by TILA and Regulation Z generally).

The foreign transaction fee is determined by first calculating the dollar amount of the transaction, using a currency conversion rate outside the card issuer's and third party's control. Any amount in excess of that dollar amount is a foreign transaction fee. The comment provides examples of conversion rates outside the card issuer's and third party's control. (Such a rate is deemed to be outside the card issuer's and third party's control, even if the card issuer or third party could arguably in fact have some degree of control over the rate used, by selecting the rate from among a number of rates available.)

With regard to the conversion rate, the comment also clarifies that the rate used for a particular transaction need not be the same rate that the card issuer (or third party) itself obtains in its currency conversion operations. The card issuer or third party may convert currency in bulk amounts, as opposed to performing a conversion for each individual transaction. The comment also clarifies that the rate used for a particular transaction need not be the rate in effect on the date of the transaction (purchase or cash advance), because the conversion calculation may take place on a later date.

Concerns of some commenters that inclusion of all transaction charges in the finance charge would cause the effective APR to exceed permissible ceilings are moot due to the fact that the final rule eliminates the effective APR requirements as to open-end (not home- secured) credit, as discussed in the general discussion on the effective APR in the section-by-section analysis to Sec. 226.7(b). As to the consumer group comment that eliminating the effective APR would negate the beneficial impact of the proposed comment for consumers, the

Board believes that adoption of the comment will nevertheless result in better and more meaningful disclosures to consumers. Transaction fees such as ATM cash advance fees and foreign transaction fees will be disclosed more consistently. The Board also believes that the comment will provide clearer guidance to card issuers, as discussed above.

With regard to foreign transaction fees, the Board believes that although the settlements in the litigation mentioned above may have led to some standardization of disclosure practices, the proposed comment is appropriate because it will bring a uniform disclosure approach to foreign transaction fees (as opposed to possibly differing approaches under the different settlement terms), and will be a continuing federal regulatory requirement (whereas settlements can be modified or expire).

Existing comment 4(b)(2)-1 (which is not revised in the final rule) states that if a checking or transaction account charge imposed on an account with a credit feature does not exceed the charge for an account without a credit feature, the charge is not a finance charge. Comment 4(b)(2)-1 and revised comment 4(a)-4 address different situations.

Charges in comparable cash transactions. Comment 4(a)-1 provides examples of charges in comparable cash transactions that are not finance charges. Among the examples are discounts available to a particular group of consumers because they meet certain criteria, such as being members of an organization or having accounts at a particular institution. In the June 2007 Proposal, the Board solicited comment on whether the example is still useful, or should be deleted as unnecessary or obsolete. No comments were received on this issue.

Nonetheless, because many of the examples provide guidance to creditors offering closed-end credit, comment 4(a)-1 is retained in the final rule and the examples will be reviewed in a future rulemaking addressing closed-end credit. 4(b) Examples of Finance Charges

Charges for credit insurance or debt cancellation or suspension coverage. Premiums or other charges for credit life, accident, health, or loss-of-income insurance are finance charges if the insurance or coverage is ``written in connection with'' a credit transaction. 15

U.S.C. 1605(b); Sec. 226.4(b)(7). Creditors may exclude from the finance charge premiums for credit insurance if they disclose the cost of the insurance and the fact that the insurance is not required to obtain credit. In addition, the statute requires creditors to obtain an affirmative written indication of the consumer's desire to obtain the insurance, which, as implemented in Sec. 226.4(d)(1)(iii), requires creditors to obtain the consumer's initials or signature. 15 U.S.C. 1605(b). In 1996, the Board expanded the scope of the rule to include plans involving charges or premiums for debt cancellation coverage. See

Sec. 226.4(b)(10) and (d)(3). See also 61 FR 49237, Sept. 19, 1996.

Currently, however, insurance or coverage sold after consummation of a closed-end credit transaction or after the opening of an open-end plan and upon a consumer's request is considered not to be ``written in connection with the credit transaction,'' and, therefore, a charge for such insurance or coverage is not a finance charge. See comment 4(b)(7) and (8)-2.

In June 2007, the Board proposed a number of revisions to these rules:

(1) The same rules that apply to debt cancellation coverage would have been applied explicitly to debt suspension coverage. However, to exclude the cost of debt suspension coverage from the finance charge, creditors would have been required to inform consumers, as

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applicable, that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension. These proposed revisions would have applied to all open-end plans and closed-end credit transactions.

(2) Creditors could exclude from the finance charge the cost of debt cancellation and suspension coverage for events in addition to those permitted today, namely, life, accident, health, or loss-of- income. This proposed revision would also have applied to all open-end plans and closed-end credit transactions.

(3) The meaning of insurance or coverage ``written in connection with'' an open-end plan would have been expanded to cover sales made throughout the life of an open-end (not home-secured) plan. Under the proposal, for example, consumers solicited for the purchase of optional insurance or debt cancellation or suspension coverage for existing credit card accounts would have received disclosures about the cost and optional nature of the product at the time of the consumer's request to purchase the insurance or coverage. HELOCs subject to Sec. 226.5b and closed-end transactions would not have been affected by this proposed revision.

(4) For telephone sales, creditors offering open-end (not home- secured) plans would have been provided with flexibility in evidencing consumers' requests for optional insurance or debt cancellation or suspension coverage, consistent with rules published by federal banking agencies to implement Section 305 of the Gramm-Leach-Bliley Act regarding the sale of insurance products by depository institutions and guidance published by the Office of the Comptroller of the Currency

(OCC) regarding the sale of debt cancellation and suspension products.

See 12 CFR Sec. 208.81 et seq. regarding insurance sales; 12 CFR part 37 regarding debt cancellation and debt suspension products. For telephone sales, creditors could have provided disclosures orally, and consumers could have requested the insurance or coverage orally, if the creditor maintained evidence of compliance with the requirements, and mailed written information within three days after the sale. HELOCs subject to Sec. 226.5b and closed-end transactions would not have been affected by this proposed revision.

All of these products serve similar functions but some are considered insurance under state law and others are not. Taken together, the proposed revisions were intended to provide consistency in how creditors deliver, and consumers receive, information about the cost and optional nature of similar products. The revisions are discussed in detail below. 4(b)(7) and (8) Insurance Written in Connection With Credit Transaction

Premiums or other charges for insurance for credit life, accident, health, or loss-of-income, loss of or damage to property or against liability arising out of the ownership or use of property are finance charges if the insurance or coverage is written in connection with a credit transaction. 15 U.S.C. 1605(b) and (c); Sec. 226.4(b)(7) and

(b)(8). Comment 4(b)(7) and (8)-2 provides that insurance is not written in connection with a credit transaction if the insurance is sold after consummation on a closed-end transaction or after an open- end plan is opened and the consumer requests the insurance. As stated in the June 2007 Proposal, the Board believes this approach remains sound for closed-end transactions, which typically consist of a single transaction with a single advance of funds. Consumers with open-end plans, however, retain the ability to obtain advances of funds long after account opening, so long as they pay down the principal balance.

That is, a consumer can engage in credit transactions throughout the life of a plan.

Accordingly, in June 2007 the Board proposed revisions to comment 4(b)(7) and (8)-2, to state that insurance purchased after an open-end

(not home-secured) plan was opened would be considered to be written

``in connection with a credit transaction.'' Proposed new comment 4(b)(10)-2 would have given the same treatment to purchases of debt cancellation or suspension coverage. As proposed, therefore, purchases of voluntary insurance or debt cancellation or suspension coverage after account opening would trigger disclosure and consent requirements.

Few commenters addressed this issue. One financial institution trade association supported the proposed revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2, while two other commenters (a financial institution and a trade association) opposed them, arguing that the rules for open-end (not home-secured) plans should remain consistent with the rules for home-equity and closed-end credit, that there is no demonstrable harm to consumers from the existing rule, and that other state and federal law provides adequate protection.

The revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2 are adopted as proposed. In an open-end plan, where consumers can engage in credit transactions after the opening of the plan, a creditor may have a greater opportunity to influence a consumer's decision whether or not to purchase credit insurance or debt cancellation or suspension coverage than in the case of closed-end credit. Accordingly, the disclosure and consent requirements are important in open-end plans, even after the opening of the plan, to ensure that the consumer is fully informed about the offer of insurance or coverage and that the decision to purchase it is voluntary. In addition, under the final rule, creditors will be permitted to provide disclosures and obtain consent by telephone (provided they mail written disclosures to the consumer after the purchase), so long as they meet requirements intended to ensure the purchase is voluntary. See the section-by- section analysis to Sec. 226.4(d)(4) below. As to consistency between the rules for open-end (not home-secured) plans and home-equity plans, the Board intends to consider this issue when the home-equity credit plan rules are reviewed in the future. 4(b)(9) Discounts

Comment 4(b)(9)-2, which addresses cash discounts to induce consumers to use cash or other payment means instead of credit cards or other open-end plans is revised for clarity, as proposed in June 2007.

No substantive change is intended. No comments were received on this change. 4(b)(10) Debt Cancellation and Debt Suspension Fees

As discussed above, premiums or other charges for credit life, accident, health, or loss-of-income insurance are finance charges if the insurance or coverage is written in connection with a credit transaction. This same rule applies to charges for debt cancellation coverage. See Sec. 226.4(b)(10). Although debt cancellation fees meet the definition of ``finance charge,'' they may be excluded from the finance charge on the same conditions as credit insurance premiums. See

Sec. 226.4(d)(3).

The Board proposed in June 2007 to revise the regulation to provide the same treatment to debt suspension coverage as to credit insurance and debt cancellation coverage. Thus, under proposed Sec. 226.4(b)(10), charges for debt suspension coverage would be finance charges. (The conditions under which debt suspension charges may be excluded from the finance charge are discussed in the section-by- section

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analysis to Sec. 226.4(d)(3), below.) Debt suspension is the creditor's agreement to suspend, on the occurrence of a specified event, the consumer's obligation to make the minimum payment(s) that would otherwise be due. During the suspension period, interest may continue to accrue or it may be suspended as well, depending on the plan. The borrower may be prohibited from using the credit plan during the suspension period. In addition, debt suspension may cover events other than loss of life, health, or income, such as a wedding, a divorce, the birth of child, or a medical emergency.

In the June 2007 Proposal, debt suspension coverage would have been defined as coverage that suspends the consumer's obligation to make one or more payments on the date(s) otherwise required by the credit agreement, when a specified event occurs. See proposed comment 4(b)(10)-1. The comment would have clarified that the term debt suspension coverage as used in Sec. 226.4(b)(10) does not include

``skip payment'' arrangements in which the triggering event is the borrower's unilateral election to defer repayment, or the bank's unilateral decision to allow a deferral of payment.

This aspect of the proposal would have applied to closed-end as well as open-end credit transactions. As discussed in the supplementary information to the June 2007 Proposal, it appears appropriate to consider charges for debt suspension products to be finance charges, because these products operate in a similar manner to debt cancellation, and reallocate the risk of nonpayment between the borrower and the creditor.

Industry commenters supported the proposed approach of including charges for debt suspension coverage as finance charges generally, but permitting exclusion of such charges if the coverage is voluntary and meets the other conditions contained in the proposal. Consumer group commenters did not address this issue. Comment 4(b)(10)-1 is adopted as proposed with some minor changes for clarification. Exclusion of charges for debt suspension coverage from the definition of finance charge is discussed in the section-by-section analysis to Sec. 226.4(d)(3) below. 4(d) Insurance and Debt Cancellation Coverage 4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees

As explained in the section-by-section analysis to Sec. 226.4(b)(10), debt cancellation fees and, as clarified in the final rule, debt suspension fees meet the definition of ``finance charge.''

Under current Sec. 226.4(d)(3), debt cancellation fees may be excluded from the finance charge on the same conditions as credit insurance premiums. These conditions are: the coverage is not required and this fact is disclosed in writing, and the consumer affirmatively indicates in writing a desire to obtain the coverage after the consumer receives written disclosure of the cost. Debt cancellation coverage that may be excluded from the finance charge is limited to coverage that provides for cancellation of all or part of a debtor's liability (1) in case of accident or loss of life, health, or income; or (2) for amounts exceeding the value of collateral securing the debt (commonly referred to as ``gap'' coverage, frequently sold in connection with motor vehicle loans).

Debt cancellation coverage and debt suspension coverage are fundamentally similar to the extent they offer a consumer the ability to pay in advance for the right to reduce the consumer's obligations under the plan on the occurrence of specified events that could impair the consumer's ability to satisfy those obligations. The two types of coverage are, however, different in a key respect. One cancels debt, at least up to a certain agreed limit, while the other merely suspends the payment obligation while the debt remains constant or increases, depending on coverage terms.

In June 2007, the Board proposed to revise Sec. 226.4(d)(3) to expressly permit creditors to exclude charges for voluntary debt suspension coverage from the finance charge when, after receiving certain disclosures, the consumer affirmatively requests such a product. The Board also proposed to add a disclosure (Sec. 226.4(d)(3)(iii)), to be provided as applicable, that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension. These proposed revisions would have applied to closed-end as well as open-end credit transactions. Model clauses and samples were proposed at Appendix G- 16(A) and G-16(B) and Appendix H-17(A) and H-17(B) to part 226.

In addition, the Board proposed in the June 2007 Proposal to continue to limit the exclusion permitted by Sec. 226.4(d)(3) to charges for coverage for accident or loss of life, health, or income or for gap coverage. The Board also proposed, however, to add comment 4(d)(3)-3 to clarify that, if debt cancellation or debt suspension coverage for two or more events is sold at a single charge, the entire charge may be excluded from the finance charge if at least one of the events is accident or loss of life, health, or income. The proposal is adopted in the final rule, with a few modifications discussed below.

A few industry commenters suggested that the exclusion of debt cancellation or debt suspension coverage from the finance charge should not be limited to instances where one of the triggering events is accident or loss of life, health, or income. The commenters contended that such a rule would lead to an inconsistent result; for example, if debt cancellation or suspension coverage has only divorce as a triggering event, the charge could not be excluded from the finance charge, while if the coverage applied to divorce and loss of income, the charge could be excluded. The proposal is adopted without change in this regard. The identification of accident or loss of life, health, or income in current Sec. 226.4(d)(3)(ii) (renumbered Sec. 226.4(d)(3) in the final rule) with respect to debt cancellation coverage is based on TILA Section 106(b), which addresses credit insurance for accident or loss of life or health. 15 U.S.C. 1605(b). That statutory provision reflects the regulation of credit insurance by the states, which may limit the types of insurance that insurers may sell. The approach in the final rule is consistent with the purpose of Section 106(b), but also recognizes that debt cancellation and suspension coverage often are not limited by applicable law to the events allowed for insurance.

A few commenters addressed the proposed disclosure for debt suspension programs that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension. A commenter suggested that in programs combining elements of debt cancellation and debt suspension, the disclosure should not be required. The final rule retains the disclosure requirement in Sec. 226.4(d)(3)(iii). However, comment 4(d)(3)-4 has been added stating that if the debt can be cancelled under certain circumstances, the disclosure may be modified to reflect that fact. The disclosure could, for example, state (in addition to the language required by Sec. 226.4(d)(3)(iii)) that ``in some circumstances, my debt may be cancelled.'' However, the disclosure would not be permitted to list the specific events that would result in debt cancellation, to avoid ``information overload.''

Another commenter noted that the model disclosures proposed at

Appendix G-16(A), G-16(B), H-17(A),

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and H-17(B) to part 226 were phrased assuming interest continues to accrue in all cases of debt suspension programs. The commenter contended that interest does not continue to accrue during the period of suspension in all cases, and suggested revising the forms. However, the disclosures under Sec. 226.4(d)(3)(iii) are only required as applicable; thus, if the disclosure that interest will continue to accrue during the period of suspension is not applicable, it need not be provided.

A commenter noted that proposed model and sample forms G-16(A) and

G-16(B), for open-end credit, and H-17(A) and H-17(B), for closed-end credit are virtually identical, but that the model language regarding cost of coverage is more appropriate for open-end credit. Model Clause

H-17(A) and Sample H-17(B) have been revised in the final rule to include language regarding cost of coverage that is appropriate for closed-end credit.

A consumer group suggested that in debt suspension programs where interest continues to accrue during the suspension period, periodic statements should be required to include a disclosure of the amount of the accrued interest. The Board believes that the requirement under

Sec. 226.7, as adopted in the final rule, for each periodic statement to disclose total interest for the billing cycle as well as total year- to-date interest on the account adequately addresses this concern.

The Board noted in the June 2007 Proposal that the regulation provides guidance on how to disclose the cost of debt cancellation coverage (in proposed Sec. 226.4(d)(3)(ii)), and sought comment on whether additional guidance was needed for debt suspension coverage, particularly for closed-end loans. No commenters addressed this issue except for one industry commenter that responded that no additional guidance was needed.

In a technical revision, as proposed in June 2007, the substance of footnotes 5 and 6 is moved to the text of Sec. 226.4(d)(3). 4(d)(4) Telephone Purchases

Under Sec. 226.4(d)(1) and (d)(3), creditors may exclude from the finance charge premiums for credit insurance and debt cancellation or

(as provided in revisions in the final rule) debt suspension coverage if, among other conditions, the consumer signs or initials an affirmative written request for the insurance or coverage. In the June 2007 Proposal, the Board proposed an exception to the requirement to obtain a written signature or initials for telephone purchases of credit insurance or debt cancellation and debt suspension coverage on an open-end (not home-secured) plan. Under proposed new Sec. 226.4(d)(4), for telephone purchases, the creditor would have been permitted to make the disclosures orally and the consumer could affirmatively request the insurance or coverage orally, provided that the creditor (1) maintained reasonable procedures to provide the consumer with the oral disclosures and maintains evidence that demonstrates the consumer then affirmatively elected to purchase the insurance or coverage; and (2) mailed the disclosures under Sec. 226.4(d)(1) or (d)(3) within three business days after the telephone purchase. Comment 4(d)(4)-1 would have provided that a creditor does not satisfy the requirement to obtain an affirmative request if the creditor uses a script with leading questions or negative consent.

Commenters supported proposed Sec. 226.4(d)(4), with some suggested modifications, and it is adopted in final form with a few modifications discussed below. A few commenters requested that the

Board expand the proposed telephone purchase rule to home-equity plans and closed-end credit for consistency. HELOCs and closed-end credit are largely separate product lines from credit card and other open-end (not home-secured) plans, and the Board anticipates reviewing the rules applying to these types of credit separately; the issue of telephone sales of credit insurance and debt cancellation or suspension coverage can better be addressed in the course of those reviews. In addition, as discussed above, comment 4(b)(7) and (8)-2, as amended in the final rule, provides that insurance is not written in connection with a credit transaction if the insurance is sold after consummation of a closed-end transaction, or after a home-equity plan is opened, and the consumer requests the insurance. Accordingly, the requirements for disclosure and affirmative written consent to purchase the insurance or coverage do not apply in these situations, and thus the relief that would be afforded by the telephone purchase rule appears less necessary.

A commenter stated that the requirement (in Sec. 226.4(d)(4)(ii)) to mail the disclosures under Sec. 226.4(d)(1) or (d)(3) within three business days after the telephone purchase would be difficult operationally, and recommended that the rule allow five business days instead of three. The Board believes that three business days should provide adequate time to creditors to mail the written disclosures. In addition, the three-business-day period for mailing written disclosures is consistent with the rules published by the federal banking agencies to implement Section 305 of the Gramm-Leach-Bliley Act regarding the sale of insurance products by depository institutions, as well as with the OCC rules regarding the sale of debt cancellation and suspension products.

A few commenters expressed concern about proposed comment 4(d)(4)- 1, prohibiting the use of leading questions or negative consent in telephone sales. The commenters stated that the leading questions rule would be difficult to comply with, because the distinction between a leading question and routine marketing language may not be apparent in many cases. The commenters were particularly concerned about being able to ensure that the enrollment question itself not be considered leading. The final comment includes an example of an enrollment question (``Do you want to enroll in this optional debt cancellation plan?'') that would not be considered leading.

Section 226.4(d)(4)(i) in the June 2007 Proposal would have required that the creditor must, in addition to providing the required disclosures orally and maintaining evidence that the consumer affirmatively elected to purchase the insurance or coverage, also maintain reasonable procedures to provide the disclosures orally. The final rule does not contain the requirement to maintain procedures to provide the disclosures orally; this requirement is unnecessary because creditors must actually provide the disclosures orally in each case.

The Board proposed this approach pursuant to its exception and exemption authorities under TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uniformed use of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any class of transactions (with an exception not relevant here) from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to make this determination in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are

(1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or

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makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection.

As stated in the June 2007 Proposal, the Board has considered each of these factors carefully, and based on that review, believes it is appropriate to exempt, for open-end (not home-secured) plans, telephone sales of credit insurance or debt cancellation or debt suspension plans from the requirement to obtain a written signature or initials from the consumer. Requiring a consumer's written signature or initials is intended to evidence that the consumer is purchasing the product voluntarily; the proposal contained safeguards intended to insure that oral purchases are voluntary. Under the proposal and as adopted in the final rule, creditors must maintain tapes or other evidence that the consumer received required disclosures orally and affirmatively requested the product. Comment 4(d)(4)-1 indicates that a creditor does not satisfy the requirement to obtain an affirmative request if the creditor uses a script with leading questions or negative consent. In addition to oral disclosures, under the proposal consumers will receive written disclosures shortly after the transaction.

The fee for the credit insurance or debt cancellation or debt suspension coverage will also appear on the first monthly periodic statement after the purchase, and, as applicable, thereafter. Consumer testing conducted for the Board suggests that consumers review the transactions on their statements carefully. Moreover, as discussed in the section-by-section analysis under Sec. 226.7, under the final rule fees, including insurance and debt cancellation or suspension coverage charges, will be better highlighted on statements. Consumers who are billed for insurance or coverage they did not purchase may dispute the charge as a billing error. These safeguards are expected to ensure that purchases of credit insurance or debt cancellation or suspension coverage by telephone are voluntary.

At the same time, the amendments should facilitate the convenience to both consumers and creditors of conducting transactions by telephone. The amendments, therefore, have the potential to better inform consumers and further the goals of consumer protection and the informed use of credit for open-end (not home-secured) credit.

Section 226.5 General Disclosure Requirements

Section 226.5 contains format and timing requirements for open-end credit disclosures. In the June 2007 Proposal, the Board proposed, among other changes to Sec. 226.5, to reform the rules governing the disclosure of charges before they are imposed in open-end (not home- secured) credit. Under the proposal, all charges imposed as part of the plan would have had to be disclosed before they were imposed; however, while certain specified charges would have continued to be disclosed in writing in the account-opening disclosures, other charges imposed as part of the plan could have been disclosed orally or in writing at any time before the consumer becomes obligated to pay the charge. 5(a) Form of Disclosures

In the June 2007 Proposal, the Board proposed changes to Sec. 226.5(a) and the associated commentary regarding the standard to provide ``clear and conspicuous'' disclosures. In addition, in both the

June 2007 Proposal and the May 2008 Proposal, the Board proposed changes to Sec. 226.5(a) and the associated commentary with respect to terminology. To improve clarity, the Board also proposed technical revisions to Sec. 226.5(a) in the June 2007 Proposal. 5(a)(1) General

Clear and conspicuous standard. Under TILA Section 122(a), all required disclosures must be ``clear and conspicuous.'' 15 U.S.C. 1632(a). The Board has interpreted ``clear and conspicuous'' for most open-end disclosures to mean that they must be in a reasonably understandable form. Comment 5(a)(1)-1. In most cases, this standard does not require that disclosures be segregated from other material or located in any particular place on the disclosure statement, nor that disclosures be in any particular type size. Certain disclosures in credit and charge card applications and solicitations subject to Sec. 226.5a, however, must meet a higher standard of clear and conspicuous due to the importance of the disclosures and the context in which they are given. For these disclosures, the Board has required that they be both in a reasonably understandable form and readily noticeable to the consumer. Comment 5(a)(1)-1. In the June 2007 Proposal, the Board proposed to amend comment 5(a)(1)-1 to expand the list of disclosures that must be both in a reasonably understandable form and readily noticeable to the consumer.

Readily noticeable standard. Certain disclosures in credit and charge card applications and solicitations subject to Sec. 226.5a are currently required to be in a tabular format. In the June 2007

Proposal, the Board proposed to require information be highlighted in a tabular format in additional circumstances, including: In the account- opening disclosures pursuant to Sec. 226.6(b)(4) (adopted as Sec. 226.6(b)(1) below); with checks that access a credit card account pursuant to Sec. 226.9(b)(3); in change-in-terms notices pursuant to

Sec. 226.9(c)(2)(iii)(B); and in disclosures when a rate is increased due to delinquency, default or as a penalty pursuant to Sec. 226.9(g)(3)(ii). Because these disclosures would be highlighted in a tabular format similar to the table required with respect to credit card applications and solicitations under Sec. 226.5a, the Board proposed that these disclosures also be in a reasonably understandable form and readily noticeable to the consumer.

As discussed in further detail in the section-by-section analysis to Sec. Sec. 226.6(b), 226.9(b), 226.9(c), and 226.9(g), many commenters supported the Board's proposal to require certain information to be presented in a tabular format, and consumer testing showed that tabular presentation of disclosures improved consumer attention to, and understanding of, the disclosures. As a result, the

Board adopts the proposal to require a tabular format for certain information required by these sections as well as the proposal to amend comment 5(a)(1)-1. Technical amendments proposed under the June 2007

Proposal, including moving the guidance on the meaning of ``reasonably understandable form'' to comment 5(a)(1)-2, and moving guidance on what constitutes an ``integrated document'' to comment 5(a)(1)-4, are also adopted.

In the June 2007 Proposal, the Board also proposed to add comment 5(a)(1)-3 to provide guidance on the meaning of the readily noticeable standard. Specifically, the Board proposed that to meet the readily noticeable standard, the following disclosures must be given in a minimum of 10-point font: Disclosures for credit card applications and solicitations under Sec. 226.5a, highlighted account-opening disclosures under Sec. 226.6(b)(4) (adopted as Sec. 226.6(b)(1) below), highlighted disclosures accompanying checks that access a credit card account under

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Sec. 226.9(b)(3), highlighted change-in-terms disclosures under Sec. 226.9(c)(2)(iii)(B), and highlighted disclosures when a rate is increased due to delinquency, default or as a penalty under Sec. 226.9(g)(3)(ii).

The Board received numerous consumer comments that credit card disclosures are in fine print and that disclosures should be given in a larger font. Many consumer and consumer group commenters suggested that disclosures should be given in a minimum 12-point font. Several of these comments also suggested that the 12-point font minimum be applied to disclosures other than the highlighted disclosures proposed to be subjected to the readily noticeable standard as proposed in comment 5(a)(1)-1. Industry commenters suggested that there be no minimum font size or that the minimum should be 9-point font. One industry commenter stated that the 10-point font minimum should not apply to any disclosures on a periodic statement.

The Board adopts comment 5(a)(1)-3 as proposed. As discussed in the

June 2007 Proposal, the Board believes that for certain disclosures, special formatting requirements, such as a tabular format and font size requirements, are needed to highlight for consumers the importance and significance of the disclosures. The Board does not believe, however, that all TILA-required disclosures should be subject to this same standard. For certain disclosures, such as periodic statements, requiring all TILA-required disclosures to be highlighted in the same way could be burdensome for creditors because it would cause the disclosures to be longer and more expensive to provide to consumers. In addition, the benefits to consumers would not outweigh such costs. The

Board believes that a more balanced approach is to require such highlighting only for certain important disclosures. The Board, thus, declines to extend the minimum font size requirement to disclosures other than those listed in proposed comment 5(a)(1)-3. Similarly, for disclosures that may appear on periodic statements, such as the highlighted change-in-terms disclosures under Sec. 226.9(c)(2)(iii)(B) and highlighted disclosures when a rate is increased due to delinquency, default or as a penalty under Sec. 226.9(g)(3)(ii), the

Board believes that the minimum 10-point font size for these disclosures is appropriate because these are disclosures that consumers do not expect to see each billing cycle. Therefore, the Board believes that it is especially important to highlight these disclosures.

As discussed in the June 2007 Proposal, the Board proposed a minimum of 10-point font for these disclosures to be consistent with the approach taken by eight federal agencies (including the Board) in issuing a proposed model form that financial institutions may use to comply with the privacy notice requirements under Section 503 of the

Gramm-Leach-Bliley Act. 15 U.S.C. 6803(e); 72 FR 14940, Mar. 29, 2007.

Furthermore, in consumer testing conducted for the Board, participants were able to read and notice information in a 10-point font. Therefore, the Board adopts the comment as proposed.

Disclosures subject to the clear and conspicuous standard. The

Board proposed comment 5(a)(1)-5 in the June 2007 Proposal to address questions on the types of communications that are subject to the clear and conspicuous standard. The comment would have clarified that all required disclosures and other communications under subpart B of

Regulation Z are considered disclosures required to be clear and conspicuous, including the disclosure by a person other than the creditor of a finance charge imposed at the time of honoring a consumer's credit card under Sec. 226.9(d) and any correction notice required to be sent to the consumer under Sec. 226.13(e). No comments were received regarding the proposed comment, and the comment is adopted as proposed.

Oral disclosure. In order to give guidance about the meaning of

``clear and conspicuous'' for oral disclosures, the Board proposed in the June 2007 Proposal to amend the guidance on what constitutes a

``reasonably understandable form,'' in proposed comment 5(a)(1)-2.

Specifically, the Board proposed that oral disclosures be considered to be in a reasonably understandable form when they are given at a volume and speed sufficient for a consumer to hear and comprehend the disclosures. No comments were received on the Board's proposed guidance concerning clear and conspicuous oral disclosures. Comment 5(a)(1)-2 is adopted as proposed. The Board believes the comment provides necessary guidance not only for the oral disclosure of certain charges under

Sec. 226.5(a)(1)(ii), but also for other oral disclosure, such as radio and television advertisements. 5(a)(1)(ii)

Section 226.5(a)(1)(ii) provides that in general, disclosures for open-end plans must be provided in writing and in a retainable form.

Oral disclosures. As discussed in the June 2007 Proposal, the Board proposed that certain charges may be disclosed after account opening and that disclosure of those charges may be provided orally or in writing before the cost is imposed. Many industry commenters supported the Board's proposal to permit oral disclosure of certain charges while consumer group commenters opposed the Board's proposal. Some of these consumer group commenters acknowledged the usefulness of oral disclosure of fees at a time when the consumer is about to incur the fee but suggested that it should be in addition to, but not take the place of, written disclosure.

As the Board discussed in the June 2007 Proposal, in proposing to permit certain charges to be disclosed after account opening, the

Board's goal was to better ensure that consumers receive disclosures at a time and in a manner that they would be likely to notice them. As discussed in the June 2007 Proposal, at account opening, written disclosure has obvious merit because it is a time when a consumer must assimilate information that may influence major decisions by the consumer about how, or even whether, to use the account. During the life of an account, however, a consumer will sometimes need to decide whether to purchase a single service from the creditor that may not be central to the consumer's use of the account (for example, the service of providing documentary evidence of transactions). The consumer may become accustomed to purchasing such services by telephone, and will, accordingly, expect to receive an oral disclosure of the charge for the service during the same telephone call. Permitting oral disclosure of charges that are not central to the consumer's use of the account would be consistent with consumer expectations and with the business practices of creditors. For these reasons, the Board adopts its proposal to permit creditors to disclose orally charges not specifically identified in the account-opening table in Sec. 226.6(b)(2) (proposed as Sec. 226.6(b)(4)). Further, the Board adopts its proposal that creditors be provided with the same flexibility when the cost of such a charge changes or is newly introduced, as discussed in the section-by-section analysis to Sec. 226.9(c).

One industry commenter stated its concerns that oral disclosure may make it difficult for creditors to demonstrate compliance with TILA. As the Board discussed in the June 2007 Proposal, creditors may continue to comply with

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TILA by providing written disclosures at account opening for all fees.

The Board anticipates that creditors will likely continue to identify fees in the account agreement for contract and other reasons even if the regulation does not specifically require creditors to do so.

In technical revisions, as proposed in the June 2007 Proposal, the final rule moves to Sec. 226.5(a)(1)(ii)(A) the current exemption in footnote 7 under Sec. 226.5(a)(1) that disclosures required by Sec. 226.9(d) need not be in writing. Section 226.9(d) requires disclosure when a finance charge is imposed by a person other than the card issuer at the time of a transaction. Specific wording in Sec. 226.5(a)(1)(ii)(A) also has been amended from the proposal in order to provide greater clarity, with no intended substantive change from the

June 2007 Proposal. In another technical revision, the substance of footnote 8, regarding disclosures that do not need to be in a retainable form the consumer may keep, is moved to Sec. 226.5(a)(1)(ii)(B) as proposed.

Electronic communication. Commenters on the June 2007 Proposal suggested that for disclosures that need not be provided in writing at account opening, creditors should be permitted to provide disclosures in electronic form, without having to comply with 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., at the time an on-line or other electronic service is used. For example, commenters suggested, if a consumer wishes to make an on-line payment on the account, for which the creditor imposes a fee (which has not previously been disclosed), the creditor should be allowed to disclose the fee electronically, without E-Sign notice and consent, at the time the on- line payment service is requested. Commenters contended that such a provision would not harm consumers and would expedite transactions, and also that it would be consistent with the Board's proposal to permit oral disclosure of such fees.

Under section 101(c) of the E-Sign Act, if a statute or regulation requires that consumer disclosures be provided in writing, certain notice and consent procedures must be followed in order to provide the disclosures in electronic form. Accordingly because the disclosures under Sec. 226.5(a)(1)(ii)(A) are not required to be provided in writing, the Board proposed to add comment 5(a)(1)(ii)(A)-1 in May 2008 to clarify that disclosures not required to be in writing may be provided in writing, orally, or in electronic form without regard to the consumer consent or other provisions of the E-Sign Act.

Most commenters supported the Board's proposal. Some consumer group commenters, however, suggested that the Board require that any electronic disclosure be in a format that can be printed and retained.

The Board declines to impose such a requirement. Disclosures that the

Board permits to be made orally are not required to be in written or retainable form. The Board believes that the same standard should apply if such disclosures are made electronically. In order to clarify this point, the Board has amended Sec. 226.5(a)(1)(ii)(B) to specify that disclosures that need not be in writing also do not need to be in retainable form. This would encompass both oral and electronic disclosures. 5(a)(1)(iii)

In a final rule addressing electronic disclosures published in

November 2007 (November 2007 Final Electronic Disclosure Rule), the

Board adopted amendments to Sec. 226.5(a)(1) to clarify that creditors may provide open-end disclosures to consumers in electronic form, subject to compliance with the consumer consent and other applicable provisions of the E-Sign Act. 72 FR 63462, Nov. 9, 2007; 72 FR 71058,

Dec. 14, 2007. These amendments also provide that the disclosures required by Sec. Sec. 226.5a, 226.5b, and 226.16 may be provided to the consumer in electronic form, under the circumstances set forth in those sections, without regard to the consumer consent or other provisions in the E-Sign Act. These amendments have been moved to Sec. 226.5(a)(1)(iii) for organizational purposes.

Furthermore, in May 2008, the Board proposed comment 5(a)(1)(iii)-1 to clarify that the disclosures specified in Sec. 226.5(a)(1)(ii)(A) also may be provided in electronic form without regard to the E-Sign

Act when the consumer requests the service in electronic form, such as on a creditor's Web site. Consistent with the Board's decision to adopt comment 5(a)(1)(ii)(A)-1, as discussed above, the Board adopts comment 5(a)(1)(iii)-1. 5(a)(2) Terminology

Consistent terminology. As proposed in June 2007, disclosures required by the open-end provisions of Regulation Z (Subpart B) would have been required to use consistent terminology under proposed Sec. 226.5(a)(2)(i). The Board also proposed comment 5(a)(2)-4 to clarify that terms do not need to be identical but must be close enough in meaning to enable the consumer to relate the disclosures to one another.

The Board received no comments objecting to this proposal.

Accordingly, the Board adopts Sec. 226.5(a)(2)(i) and comment 5(a)(2)- 4 as proposed. The Board, however, received one comment requesting clarification on the implementation of this provision. Specifically, the commenter pointed out that creditors will likely phase in changes during a transitional period, and as a result, may not be able to align terminology in all their disclosures to consumers during this transitional period. The Board agrees; thus, some disclosures may contain existing terminology required currently under Regulation Z while other disclosures may contain new terminology required in this final rule or the final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register.

Therefore, during this transitional period, terminology need not be consistent across all disclosures. By the effective date of this rule, however, all disclosures must have consistent terminology.

Terms required to be more conspicuous than others. TILA Section 122(a) requires that the terms ``annual percentage rate'' and ``finance charge'' be disclosed more conspicuously than other terms, data, or information. 15 U.S.C. 1632(a). The Board has implemented this provision in current Sec. 226.5(a)(2) by requiring that the terms

``finance charge'' and ``annual percentage rate,'' when disclosed with a corresponding amount or percentage rate, be disclosed more conspicuously than any other required disclosure. Currently, the terms do not need to be more conspicuous when used under Sec. Sec. 226.5a, 226.7(d), 226.9(e), and 226.16. In June 2007, the Board proposed to expand this list to include the account-opening disclosures that would be highlighted under proposed Sec. 226.6(b)(4) (adopted as Sec. 226.6(b)(1) and (b)(2) below), the disclosure of the effective APR under proposed Sec. 226.7(b)(7) under one approach, disclosures on checks that access a credit card account under proposed Sec. 226.9(b)(3), the information on change-in-terms notices that would be highlighted under proposed Sec. 226.9(c)(2)(iii)(B), and the disclosures given when a rate is increased due to delinquency, default or as a penalty under proposed Sec. 226.9(g)(3)(ii). In addition, the

Board sought comment in the June 2007 Proposal on ways to address criticism by the United States Government Accountability Office (GAO) that credit card disclosure

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documents ``unnecessarily emphasized specific terms.'' \13\

\13\ United States Government Accountability Office, Credit

Cards: Increased Complexity in Rates and Fees Heightens Need for

More Effective Disclosures to Consumers, 06-929 (September 2006).

As discussed in the June 2007 Proposal, the Board agreed with the

GAO's assessment that overemphasis of these terms may make disclosures more difficult for consumers to read. One approach the Board had considered to remedy this problem was to prohibit the terms ``finance charge'' and ``annual percentage rate'' from being disclosed more conspicuously than other required disclosures except when the regulation so requires. However, the Board acknowledged in the June 2007 Proposal that this approach could produce unintended consequences.

Commenters agreed with the Board.

Many industry commenters suggested that in light of the Board's requirement to disclose APRs and certain other finance charges at account-opening and at other times in the life of the account in a tabular format with a minimum 10-point font size pursuant to comment 5(a)(1)-3 (or 16-point font size as required for the APR for purchases under Sec. Sec. 226.5a(b)(1) and 226.6(b)(2)), requiring the terms

``annual percentage rate'' and ``finance charge'' to be more conspicuous than other disclosures to draw attention to the terms was not necessary. Furthermore, commenters pointed out that the Board is no longer requiring use of the term ``finance charge'' in TILA disclosures to consumers for open-end (not home-secured) plans, and in fact, is requiring creditors to disclose finance charges as either ``fees'' or

``interest'' on periodic statements. As a result, creditors would, in many cases, no longer have the term ``finance charge'' to make more conspicuous than other terms.

For the reasons discussed above, the Board is eliminating for open- end (not home-secured) plans the requirement to disclose ``annual percentage rate'' and ``finance charge'' more conspicuously, using its authority under Section 105(a) of TILA to make ``such adjustments and exceptions for any class of transaction as in the judgment of the Board are necessary or proper to effectuate the purposes of the title, to prevent circumvention or evasion thereof, or to facilitate compliance therewith.'' 15 U.S.C. 1604(a). Therefore, the requirement in Sec. 226.5(a)(2)(ii) that ``annual percentage rate'' and ``finance charge'' be disclosed more conspicuously than any other required disclosures when disclosed with a corresponding amount or percentage rate applies only to home-equity plans subject to Sec. 226.5b. As is currently the case, even for home-equity plans subject to Sec. 226.5b, these terms need not be more conspicuous when used under Sec. 226.7(a)(4) on periodic statements and under section Sec. 226.16 in advertisements.

Other exceptions currently in footnote 9 to Sec. 226.5(a)(2), which reference Sec. Sec. 226.5a and 226.9(e), have been deleted as unnecessary since these disclosures do not apply to home-equity plans subject to Sec. 226.5b. The requirement, as it applies to home-equity plans subject to Sec. 226.5b, may be re-evaluated when the Board conducts its review of the regulations related to home-equity plans.

Use of the term ``grace period''. In the June 2007 Proposal, the

Board proposed Sec. 226.5(a)(2)(iii) to require that the term ``grace period'' be used, as applicable, in any disclosure that must be in a tabular format under proposed Sec. 226.5(a)(3). The Board's proposal was meant to make other disclosures consistent with credit card applications and solicitations where use of the term ``grace period'' is required by TILA Section 122(c)(2)(C) and Sec. 226.5a(a)(2)(iii). 15 U.S.C. 1632(c)(2)(C). Based on comments received as part of the June 2007 Proposal and further consumer testing, the Board proposed in the

May 2008 Proposal to delete Sec. 226.5a(a)(2)(ii) and withdraw the requirement to use the term ``grace period'' in proposed Sec. 226.5(a)(2)(iii).

As discussed in the section-by-section analysis to Sec. 226.5a(b)(5), the Board is exercising its authority under TILA Sections 105(a) and (f), and TILA Section 127(c)(5) to delete the requirement to use the term ``grace period'' in the table required by Sec. 226.5a. 15

U.S.C. 1604(a) and (f), 1637(c)(5). The purpose of the proposed requirement was to provide consistency for headings in a tabular summary. Accordingly, the Board withdraws the requirement to use the term ``grace period'' in proposed Sec. 226.5(a)(2)(iii).

Other required terminology. The Board proposed Sec. 226.5(a)(2)(iii) in the June 2007 Proposal to provide that if disclosures are required to be presented in a tabular format, the term

``penalty APR'' shall be used to describe an increased rate that may result because of the occurrence of one or more specific events specified in the account agreement, such as a late payment or an extension of credit that exceeds the credit limit. Therefore, the term

``penalty APR'' would have been required when creditors provide information about penalty rates in the table given with credit card applications and solicitations under Sec. 226.5a, in the summary table given at account opening under Sec. 226.6(b)(1) and (b)(2) (proposed as Sec. 226.6(b)(4)), if the penalty rate is changing, in the summary table given on or with a change-in-terms notice under Sec. 226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table given under Sec. 226.9(g)(3)(ii).

Commenters were generally supportive of the Board's efforts to develop some common terminology and the Board's proposal to require use of the term ``penalty APR'' to describe an increased rate resulting from the occurrence of one or more specific events. Some industry commenters, however, urged the Board to reconsider requiring use of the term ``penalty APR,'' especially when used to describe the loss of an introductory rate or promotional rate. As discussed in the June 2007

Proposal, the term ``penalty APR'' proved the most successful of the terms tested with participants in the Board's consumer testing efforts.

In the interest of uniformity, the Board adopts the provision as proposed, with one exception for promotional rates. To prevent consumer confusion over use of the term ``penalty rate'' to describe the loss of a promotional rate where the rate applied is the same or is calculated in the same way as the rate that would have applied at the end of the promotional period, the Board is amending proposed Sec. 226.5(a)(2)(iii) to provide that the term ``penalty APR'' need not be used in reference to the APR that applies with the loss of a promotional rate, provided the APR that applies is no greater than the

APR that would have applied at the end of the promotional period; or if the APR that applies is a variable rate, the APR is calculated using the same index and margin as would have been used to calculate the APR that would have applied at the end of the promotional period. In addition, the Board is also modifying the required disclosure related to the loss of an introductory rate as discussed below in the section- by-section analysis to Sec. 226.5a, which should also address these concerns.

Under the June 2007 Proposal, proposed Sec. 226.5(a)(2)(iii) also would have provided that if credit insurance or debt cancellation or debt suspension coverage is required as part of the plan and information about that coverage is required to be disclosed in a tabular format, the term ``required'' shall be used in describing the coverage and the program shall be identified by its name. No comments were received on this provision, and the provision is adopted as proposed.

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Consistent with the Board's proposal under the advertising rules in the June 2007 Proposal, proposed Sec. 226.5(a)(2)(iii), would have provided that if required to be disclosed in a tabular format, an APR may be described as ``fixed,'' or using any similar term, only if that rate will remain in effect unconditionally until the expiration of a specified time period. If no time period is specified, then the term

``fixed,'' or any similar term, may not be used to describe the rate unless the rate remains in effect unconditionally until the plan is closed. The final rule adopts Sec. 226.5(a)(2)(iii) as proposed, consistent with the Board's decision with respect to use of the term

``fixed'' in describing an APR stated in an advertisement, as further discussed in the section-by-section analysis to Sec. 226.16(f) below. 5(a)(3) Specific Formats

As proposed in June 2007, for clarity, the special rules regarding the specific format for disclosures under Sec. 226.5a for credit and charge card applications and solicitations and Sec. 226.5b for home- equity plans have been consolidated in Sec. 226.5(a)(3) as proposed.

In addition, as discussed below, the Board is requiring certain account-opening disclosures, periodic statement disclosures and subsequent disclosures, such as change-in-terms disclosures, to be provided in specific formats under Sec. 226.6(b)(1); Sec. 226.7(b)(6) and (b)(13); and Sec. 226.9(b), (c) and (g). The final rule includes these special format rules in Sec. 226.5(a)(3), as proposed in the

June 2007 Proposal, with one exception. Because the Board is not requiring disclosure of the effective APR pursuant to Sec. 226.7(b)(7), as discussed further in the general discussion on the effective APR in the section-by-section analysis to Sec. 226.7(b), the proposed special format rule relating to the effective APR is not contained in the final rule. 5(b) Time of Disclosures 5(b)(1) Account-opening Disclosures

Creditors are required to make certain disclosures to consumers

``before opening any account.'' TILA Section 127(a) (15 U.S.C. 1637(a)). Under Sec. 226.5(b)(1), these disclosures, as identified in

Sec. 226.6, must be furnished ``before the first transaction is made under the plan,'' which the Board has interpreted as ``before the consumer becomes obligated on the plan.'' Comment 5(b)(1)-1. There are limited circumstances under which creditors may provide the disclosures required by Sec. 226.6 after the first transaction, and the Board proposed in the June 2007 Proposal to move this guidance from comment 5(b)(1)-1 to proposed Sec. 226.5(b)(1)(iii)-(v). In the May 2008

Proposal, the Board proposed additional revisions to Sec. 226.5(b)(1)(iv) regarding membership fees.

The Board also proposed revisions in the June 2007 Proposal to the timing rules for disclosing certain costs imposed on an open-end (not home-secured) plan and in connection with certain transactions conducted by telephone. Furthermore, the Board proposed additional guidance on providing timely disclosures when the first transaction is a balance transfer. Finally, technical revisions were proposed to change references from ``initial'' disclosures required by Sec. 226.6 to ``account-opening'' disclosures, without any intended substantive change. 5(b)(1)(i) General Rule

Creditors generally must provide the account-opening disclosures before the first transaction is made under the plan. The renumbering of this rule as Sec. 226.5(b)(1)(i) is adopted as proposed in the June 2007 Proposal.

Balance transfers. Under existing commentary and consistent with the general rule on account-opening disclosures, creditors must provide account-opening disclosures before a balance transfer occurs. In the

June 2007 Proposal, the Board proposed to update this commentary to reflect current business practices. As the Board discussed in the June 2007 Proposal, some creditors offer balance transfers for which the

APRs that may apply are disclosed as a range, depending on the consumer's creditworthiness. Consumers who respond to such an offer, and are approved for the transfer later receive account-opening disclosures, including the actual APR that will apply to the transferred balance. The Board proposed to clarify in comment 5(b)(1)(i)-5 that a creditor must provide disclosures sufficiently in advance of the balance transfer to allow the consumer to review and respond to the terms that will apply to the transfer, including to contact the creditor before the balance is transferred and decline the transfer. The Board, however, did not propose a specific time period that would be considered ``sufficiently in advance.''

Industry commenters indicated that following the Board's guidance would cause delays in making transfers, which would be contrary to consumer expectations that these transfers be effected quickly. A consumer group commenter suggested that requiring the APR that will apply, as opposed to allowing a range, to be disclosed on the application or solicitation would be simpler. The Board notes that creditors may, at their option, provide account-opening disclosures, including the specific APRs, along with the balance transfer offer and account application to avoid delaying the transfer.

The Board believes that, consistent with the general rule, consumers should receive account-opening information, including the APR that will apply, before the first transaction, which is the balance transfer. Comment 5(b)(1)(i)-5 is adopted as proposed, and states that a creditor must provide the consumer with the annual percentage rate

(along with the fees and other required disclosures) that would apply to the balance transfer in time for the consumer to contact the creditor and withdraw the request. The Board has made one revision to comment 5(b)(1)(i)-5 as adopted. In response to commenters' requests for additional guidance, comment 5(b)(1)(i)-5 provides a safe harbor that may be used by creditors that permit a consumer to decline the balance transfer by telephone. In such cases, a creditor has provided sufficient time to the consumer to contact the creditor and withdraw the request if the creditor does not effect the balance transfer until 10 days after the creditor has sent out information, assuming the consumer has not canceled the transaction.

Disclosure before the first transaction. Comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, addresses a creditor's general duty to provide account-opening disclosures

``before the first transaction.'' In the May 2008 Proposal, the comment was proposed to be reorganized for clarity to provide existing examples of ``first transactions'' related to purchases and cash advances. Other guidance in current comment 5(b)(1)-1 was proposed to be amended and moved to proposed Sec. 226.5(b)(1)(iv) and associated commentary in the June 2007 and May 2008 Proposals, as discussed below in the section-by-section analysis to Sec. 226.5(b)(1)(iv).

The Board did not receive comment on the proposed reorganization but received many comments on the guidance that was amended and moved to proposed Sec. 226.5(b)(1)(iv). These comments are discussed below in the section-by-section analysis to Sec. 226.5(b)(1)(iv). Some consumer group commenters noted that the Board's reorganization of this comment made them realize that they opposed current guidance on cash advances in comment 5(b)(1)-1 (now renumbered as comment 5(b)(1)(i)-1), which permits creditors to

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provide account-opening disclosures along with the first cash advance check as long as the consumer can return the cash advance without obligation. The Board continues to believe that this approach is appropriate because of the lack of harm to consumers. Therefore, the

Board declines to amend its current guidance on cash advances in comment 5(b)(1)(i)-1, which is renumbered as proposed without substantive change. 5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)

Plan

Under the June 2007 Proposal, the Board proposed in new Sec. 226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 to except charges imposed as part of an open-end (not home-secured) plan, other than those specified in proposed Sec. 226.6(b)(4)(iii) (adopted as Sec. 226.6(b)(2)), from the requirement to disclose charges before the first transaction.

Creditors would have been permitted, at their option, to disclose those charges either before the first transaction or later, so long as they were disclosed before the cost was imposed. The current rule requiring the disclosure of costs before the first transaction (in writing and in a retainable form) would have continued to apply to certain specified costs. These costs are fees of which consumers should be aware before using the account, such as annual or late payment fees, or fees that the creditor would not otherwise have an opportunity to disclose before the fee is triggered, such as a fee for using a cash advance check during the first billing cycle.

Numerous industry commenters supported the Board's proposal.

Consumer group commenters, on the other hand, opposed the Board's proposal, arguing that all charges should be required to be disclosed at account opening before the first transaction. While consumer group commenters acknowledged that disclosure of the amount of the fee at a time when the consumer is about to incur it is a good business practice, the commenters indicated that the Board's proposal would encourage creditors to create new fees that are not specified to be given in writing at account-opening. The final rule adopts Sec. 226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 largely as proposed with some clarifying amendments and additional illustrative examples.

As the Board discussed in the June 2007 Proposal, the charges covered by the proposed exception from disclosure at account opening are triggered by events or transactions that may take place months, or even years, into the life of the account, when the consumer may not reasonably be expected to recall the amount of the charge from the account-opening disclosure, nor readily to find or obtain a copy of the account-opening disclosure or most recent change-in-terms notice.

Requiring such charges to be disclosed before account opening may not provide a meaningful benefit to consumers in the form of useful information or protection. The rule would allow flexibility in the timing of certain cost disclosures by permitting creditors to disclose such charges--orally or in writing--before the fee is imposed. As a result, creditors would be disclosing the charge when the consumer is deciding whether to take the action that would trigger the charge, such as purchasing a service, which is a time at which consumers would likely notice the charge. The Board intends to continue monitoring credit card fees and practices, and could add additional fees to the specified costs that must be disclosed in the account-opening table before the first transaction, as appropriate.

In addition, as discussed in the June 2007 Proposal, the Board believes the exception may facilitate compliance by creditors.

Determining whether charges are a finance charge or an other charge or not covered by TILA (and thus whether advance notice is required) can be challenging, and the rule reduces these uncertainties and risks. The creditor will not have to determine whether a charge is a finance charge or other charge or not covered by TILA, so long as the creditor discloses the charge, orally or in writing, before the consumer becomes obligated to pay it, which creditors, in general, already do for business and other legal reasons.

Electronic Disclosures. In the May 2008 Proposal, the Board proposed to revise comment 5(b)(1)(ii)-1 to clarify that for disclosures not required to be provided in writing at account opening, electronic disclosure, without regard to the E-Sign Act notice and consent requirements, is a permissible alternative to oral or written disclosure, when a consumer requests a service in electronic form, such as on a creditor's Web site. As discussed in the section-by-section analysis to comment 5(a)(1)(ii)(A)-1 above, the Board received many comments in support of permitting electronic disclosure, without regard to the E-Sign Act notice and consent requirements, for disclosures that are not required to be provided in writing at account opening. Some consumer group commenters objected to allowing any electronic disclosure without the protections of the E-Sign Act. As discussed in the May 2008 Proposal, since the disclosure of charges imposed as part of an open-end (not home-secured) plan, other than those specified in

Sec. 226.6(b)(2), are not required to be provided in writing, the

Board believes that E-Sign notice and consent requirements do not apply when the consumer requests the service in electronic form. The revision to comment 5(b)(1)(ii)-1 proposed in May 2008 is adopted as proposed. 5(b)(1)(iii) Telephone Purchases

In the June 2007 Proposal, the Board proposed Sec. 226.5(b)(1)(iii) to address situations where a consumer calls a merchant to order goods by telephone and concurrently establishes a new open-end credit plan to finance that purchase. Because TILA account- opening disclosures must be provided before the first transaction under the current timing rule, merchants must delay the shipment of goods until a consumer has received the disclosures. Consumers who want goods shipped immediately may use another method to finance the purchase, but they may lose any incentives the merchant may offer with opening a new plan, such as discounted purchase prices or promotional payment plans.

The Board's proposal was meant to provide additional flexibility to merchants and consumers in such cases.

Under proposed Sec. 226.5(b)(1)(iii), merchants that established an open-end plan in connection with a telephone purchase of goods initiated by the consumer would have been able to provide account- opening disclosures as soon as reasonably practicable after the first transaction if the merchant (1) permits consumers to return any goods financed under the plan at the time the plan is opened and provides the consumer sufficient time to reject the plan and return the items free of cost after receiving the written disclosures required by Sec. 226.6, and (2) informs the consumer about the return policy as a part of the offer to finance the purchase. Alternatively, the merchant would have been able to delay shipping the goods until after the account disclosures have been provided.

The Board also proposed comment 5(b)(1)(iii)-1 to provide that a return policy is of sufficient duration if the consumer is likely to receive the disclosures and have sufficient time to decide about the financing plan. A return policy includes returns via the United States

Postal Service for goods delivered by private couriers. The proposed commentary also clarified that retailers' policies regarding the return of merchandise need not provide a right to return goods if the consumer consumes or damages the goods. As discussed in

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the June 2007 Proposal, the regulation and commentary would not have affected merchandise purchased after the plan was initially established or purchased by another means of financing, such as a credit card issued by another creditor.

Consumer group commenters opposed the proposal arguing that providing a right to cancel is much less protective of consumers' rights than requiring that a consumer receive disclosures before goods are shipped. As discussed above and in the June 2007 Proposal, the

Board believes proposed Sec. 226.5(b)(1)(iii) would provide consumers with greater flexibility. Consumers may have their goods shipped immediately, and in some cases, take advantage of merchant incentives, such as discounted purchase prices or promotional payment plans, but still retain the right to reject the plan, without cost, after receiving account-opening disclosures.

Industry commenters were supportive of the Board's proposal, but several commenters asked for additional extensions or clarifications to the policy. First, commenters requested clarification that the exception is available for third-party creditors that are not retailers, arguing that few merchants are themselves creditors and that the same flexibility should be available to creditors offering private label or co-brand credit arrangements in connection with the purchase of a merchant's goods. The Board agrees, and revisions have been made to Sec. 226.5(b)(1)(iii) accordingly. Industry commenters also suggested that the provision in Sec. 226.5(b)(1)(iii) be available not only for telephone purchases ``initiated by the consumer,'' but also telephone purchases where the merchant contacts the consumer. Outbound calls to a consumer may raise many telemarketing issues and concerns about questionable marketing tactics. As a result, the Board declines to extend Sec. 226.5(b)(1)(iii) to telephone purchases that have not been initiated by the consumer.

A few industry commenters also suggested that this exception be available for all creditors opening an account by telephone, regardless of whether it is in connection with the purchase of goods or not. These commenters stated that for certain consumers, such as active duty military members, immediate use of the account after it is opened may be necessary to take care of personal or family needs. The Board notes that the exception under Sec. 226.5(b)(1)(iii) turns on the ability of consumers to return any goods financed under the plan free of cost after receiving the written disclosures required by Sec. 226.6. In the case of an account opened by telephone that is not in connection with the purchase of goods from the creditor or an affiliated third party, a creditor would likely have no way to reverse any purchases or other transactions made before the disclosures required by Sec. 226.6 are received by the consumer should the consumer wish to reject the plan if the purchase was made with an unaffiliated third party. Thus, the Board declines to extend Sec. 226.5(b)(1)(iii) to accounts opened by telephone that are not in connection with the contemporaneous purchase of goods.

The Board also received comments requesting that Sec. 226.5(b)(1)(iii) be made applicable to the on-line purchase of goods or that merchants have the option to refer consumers purchasing by telephone to a Web site to obtain disclosures required by Sec. 226.6.

This issue has been addressed in the November 2007 Final Electronic

Disclosure Rule. The E-Sign Act clearly states that any consumer to whom written disclosures are required to be given must affirmatively consent to the use of electronic disclosures before such disclosures can be used in place of paper disclosures. The November 2007 Final

Electronic Disclosure Rule created certain instances where E-Sign consent does not need to be obtained before disclosures may be provided electronically. Specifically, open-end credit disclosures required by

Sec. Sec. 226.5a (credit card applications and solicitations), 226.5b

(HELOC applications), and 226.16 (open-end credit advertising) may be provided to the consumer in electronic form, under the circumstances set forth in those sections, without regard to the consumer consent or other provisions of the E-Sign Act. Disclosures required by Sec. 226.6, however, may only be provided electronically if the creditor obtains consumer consent consistent with the E-Sign Act. 72 FR 63462,

Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.

The Board also received comments requesting clarification of the return policy; in particular, whether this would cause creditors to provide those consumers who open a new credit plan concurrently with the purchase of goods over the telephone with a different return policy from other customers. For example, assume a merchant's customers are normally charged a restocking fee for returning goods, and the merchant does not wish to wait until the disclosures under Sec. 226.6 are sent out before shipping the goods. A commenter asked whether this means that a customer opening a new credit plan concurrently with the purchase of goods over the telephone is exempted from paying that restocking fee if the goods are returned. As proposed in the June 2007

Proposal, the final rule requires that in order to use the exception from providing disclosures under Sec. 226.6 before the consumer becomes obligated on the account, the consumer must have sufficient time to reject the plan and return the items free of cost after receiving the written disclosures required by Sec. 226.6. This means that there can be no cost to the consumer for returning the goods even if for the merchant's other customers, a fee is normally charged. As the Board discussed in the June 2007 Proposal, merchants always have the option to delay shipping of the goods until after the disclosures are given if the merchant does not want to maintain a potentially different return policy for consumers opening a new credit plan concurrently with the purchase of goods over the telephone.

Commenters also requested guidance on what would be considered

``sufficient time'' for the consumer to reject the plan and return the goods. Because the amount of time that would be deemed to be sufficient would depend on the nature of the goods and the transaction, and the locations of the various parties to the transaction, the Board does not believe that it is appropriate to specify a particular time period applicable to all transactions.

The Board also received requests for other clarifications. One commenter suggested that the Board expressly acknowledge that if the consumer rejects the credit plan, the consumer may substitute another reasonable form of payment acceptable to the merchant other than the credit plan to pay for the goods in full. This clarification has been included in comment 5(b)(1)(iii)-1. Furthermore, this commenter also suggested that the exception in comment 5(b)(1)(iii)-1 allowing for no return policy for consumed or damaged goods should be revised to expressly cover installed appliances or fixtures, provided a reasonable repair or replacement policy covers defective goods or installations.

The Board concurs and changes have been made to comment 5(b)(1)(iii)-1 accordingly. 5(b)(1)(iv) Membership Fees

TILA Section 127(a) requires creditors to provide specified disclosures ``before opening any account.'' 15 U.S.C. 1637(a). Section 226.5(b)(1) requires these disclosures (identified in Sec. 226.6) to be furnished before the first transaction is made under the plan.

Currently and under the June 2007 and

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May 2008 Proposals, creditors may collect or obtain the consumer's promise to pay a membership fee before the account-opening disclosures are provided, if the consumer can reject the plan after receiving the disclosures. If a consumer rejects the plan, the creditor must promptly refund the fee if it has been paid or take other action necessary to ensure the consumer is not obligated to pay the fee. In the June 2007

Proposal, guidance currently in comment 5(b)(1)-1 about creditors' ability to assess certain membership fees before consumers receive the account-opening disclosures was moved to Sec. 226.5(b)(1)(iv).

In the June 2007 and May 2008 Proposals, the Board proposed clarifications to the consumer's right not to pay membership fees that were assessed or agreed to be paid before the consumer received account-opening disclosures, if a consumer rejects a plan after receiving the account-opening disclosures. In the May 2008 Proposal, the Board proposed in revised Sec. 226.5(b)(1)(iv) and new comment 5(b)(1)(iv)-1 that ``membership fee'' has the same meaning as fees for issuance or availability of a credit or charge card under Sec. 226.5a(b)(2), including annual or other periodic fees, or ``start-up'' fees, such as account-opening fees. The Board also proposed in the May 2008 Proposal under revised Sec. 226.5(b)(1)(iv) to clarify that if a consumer rejects an open-end (not home-secured) plan as permitted under that provision, consumers are not obligated to pay any membership fee, or any other fee or charge (other than an application fee that is charged to all applicants whether or not they receive the credit).

Some consumer group commenters opposed the Board's clarification on the term ``membership fee'' and argued that the definition could expand the ability of creditors to charge additional types of fees prior to sending out account-opening disclosures. These consumer group commenters, however, supported that the Board's clarification could allow for a greater number of fees that consumers would not be obligated to pay should they reject the plan. One industry commenter opposed the Board's reference to annual fees as ``membership fees.''

The Board notes that the term ``membership fee'' is not currently defined, and, therefore, there is little guidance as to what fees would be covered by that term. As discussed in the May 2008 Proposal, the

Board proposed that ``membership fee'' have the same meaning as fees for issuance or availability under Sec. 226.5a(b)(2) for consistency and ease of compliance. The Board continues to believe this clarification is warranted, and Sec. 226.5(b)(1)(iv) is adopted generally as proposed, with one change discussed below.

The final rule expands the types of fees for which consumers must not be obligated if they reject an open-end (not home-secured) plan as permitted under Sec. 226.5(b)(1)(iv) to include application fees charged to all applicants. The Board believes that it is important that consumers have the opportunity, after receiving the account-opening disclosures which set forth the fees and other charges that will be applicable to the account, to reject the plan without being obligated for any charges. It is the Board's understanding that some creditors may debit application fees to the account, and thus these fees should be treated in the same manner as other fees debited at account opening.

Conforming changes have been made to Sec. 226.5a(d)(2).

Furthermore, in May 2008, the Board proposed to revise and move to comment 5(b)(1)(iv)-2, guidance in current comment 5(b)(1)-1

(renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal) regarding instances when a creditor may consider an account not rejected. In the May 2008 Proposal, the Board proposed to revise the guidance to provide that a consumer who has received the disclosures and uses the account, or makes a payment on the account after receiving a billing statement, is deemed not to have rejected the plan. In the

May 2008 Proposal, the Board also proposed to provide a ``safe harbor'' that a creditor may deem the plan to be rejected if, 60 days after the creditor mailed the account-opening disclosures, the consumer has not used the account or made a payment on the account.

The Board received mixed comments on the 60 day ``safe harbor'' proposal. Some industry commenters opposed the ``safe harbor'' citing operational complexity and uncertainty in account administration procedures. Some consumer group commenters and an industry trade group commenter supported the Board's proposal. These commenters also suggested that the Board either require or encourage as a ``best practice'' a notice to be given to consumers stating that inactivity for 60 days will cause an account to be closed. After considering comments on the proposal, the Board is amending comment 5(b)(1)(iv)-2 to delete the 60 day ``safe harbor'' because the Board believes the potential confusion this guidance may cause and the operational difficulties the guidance could impose outweigh the benefits of the guidance.

In the June 2007 Proposal, the Board proposed to provide guidance in comment 5(b)(1)(i)-1 on what it means to ``use'' the account. The

June 2007 proposed clarification was intended to address concerns about some subprime card accounts that assess a large number of fees at account opening. In the May 2008 Proposal, this provision was moved to new proposed comment 5(b)(1)(iv)-3 and revised to clarify that a consumer does not ``use'' an account when the creditor assesses fees to the account (such as start-up fees or fees associated with credit insurance or debt cancellation or suspension programs agreed to as a part of the application and before the consumer receives account- opening disclosures). The May 2008 Proposal also clarified in comment 5(b)(1)(iv)-3 that the consumer does not ``use'' an account when, for example, a creditor sends a billing statement with start-up fees, there is no other activity on the account, the consumer does not pay the fees, and the creditor subsequently assesses a late fee or interest on the unpaid fee balances. In the May 2008 Proposal, the Board also proposed to add that a consumer is not considered to ``use'' an account when, for example, a consumer receives a credit card in the mail and calls to activate the card for security purposes.

The Board received several comments regarding the guidance on whether activation of the card constitutes ``use'' of the account. Some commenters supported the Board's proposed guidance. Other commenters opposed the proposal noting that a consumer will have received account- opening disclosures at the time the consumer activates the card. These commenters also stated that when a consumer affirmatively activates a card, it should constitute acceptance of the account. Some consumer group commenters suggested that the Board also include guidance that payment of fees on the first billing statement should not constitute acceptance of the account and that consumers should only be considered to have used an account by affirmatively using the credit, such as by making a purchase or obtaining a cash advance.

The Board is adopting comment 5(b)(1)(iv)-3 as proposed with one modification. The Board believes that what constitutes ``use'' of the account should be consistent with consumer understanding of the term. A consumer is likely to think he or she has not ``used'' the account if the only action he or she has taken is to activate the account.

Conversely, a consumer who has made a purchase or a payment on the account would likely believe that he

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or she is ``using'' the account. The Board, however, is amending the comment to delete the phrase ``such as for security purposes'' in relation to the discussion about card activation. One industry commenter, while supportive of the Board's general guidance that activation alone does not indicate a consumer's acceptance of a credit plan, was concerned about any suggestion that a customer should activate, for security purposes, an account that a consumer does not intend to use.

In technical revisions, comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, currently addresses a creditor's general duty to provide account-opening disclosures ``before the first transaction'' and provides that HELOCs are not subject to the prohibition on the payment of fees other than application or refundable membership fees before account-opening disclosures are provided. See

Sec. 226.5b(h) regarding limitations on the collection of fees. In the

May 2008 Proposal, the existing guidance about HELOCs was moved to revised Sec. 226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for clarity. The Board received no comment on the proposed reorganization, and the reorganization of the guidance regarding HELOCs is adopted as proposed. 5(b)(2) Periodic Statements

TILA Sections 127(b) and 163 set forth the timing requirements for providing periodic statements for open-end credit accounts. 15 U.S.C. 1637(b) and 1666b. In the June 2007 Proposal, the Board proposed to retain the existing regulation and commentary related to the timing requirements for providing periodic statements for open-end credit accounts, with a few changes and clarifications as discussed below. 5(b)(2)(i)

TILA Section 127(b) establishes that creditors generally must send periodic statements at the end of billing cycles in which there is an outstanding balance or a finance charge is imposed. 15 U.S.C. 1637(b).

Section 226.5(b)(2)(i) provides for a number of exceptions to a creditor's duty to send periodic statements.

De minimis amounts. Under the current regulation, creditors need not send periodic statements if an account balance, whether debit or credit, is $1 or less and no finance charge is imposed. The Board proposed no changes to and received no comments on this provision. As a result, the Board retains this provision as currently written.

Uncollectible accounts. Creditors are not required to send periodic statements on accounts the creditor has deemed ``uncollectible,'' which is not specifically defined. In the June 2007 Proposal, the Board sought comment on whether guidance on the term ``uncollectible'' would be helpful.

Commenters to the June 2007 Proposal stated that guidance would be helpful but differed on what that guidance should be. Several consumer group commenters suggested that an account should be deemed

``uncollectible'' only when a creditor has ceased collection efforts, either directly or through a third party. These commenters stated that for a consumer whose account is delinquent but still subject to collection, a periodic statement is important to show the consumer when and how much interest is accruing and whether the consumer's payments have been credited. Industry commenters suggested instead that an account should be deemed ``uncollectible'' once the account is charged off in accordance with loan-loss provisions.

Based on the plain language of the term ``uncollectible'' and the importance of periodic statements to show consumers when interest accrues or fees are assessed on the account, the Board is adopting new comment 5(b)(2)(i)-3 (accordingly, as discussed below comment 5(b)(2)(i)-3 as proposed in the June 2007 Proposal is adopted as 5(b)(2)(i)-4). The comment clarifies that an account is

``uncollectible'' when a creditor has ceased collection efforts, either directly or through a third party.

In addition, if an account has been charged off in accordance with loan-loss provisions and the creditor no longer accrues new interest or charges new fees on the account, the Board believes that the value of a periodic statement does not justify the cost of providing the disclosure because the amount of a consumer's obligation will not be increasing. As a result, the Board is modifying Sec. 226.5(b)(2)(i) to state that in such cases, the creditor also need not provide a periodic statement. However, this provision does not apply if a creditor has charged off the account but continues to accrue new interest or charge new fees.

Instituting collection proceedings. Creditors need not send statements if ``delinquency collection proceedings have been instituted'' under Sec. 226.5(b)(2)(i). In the June 2007 Proposal, the

Board proposed to add comment 5(b)(2)(i)-3 to clarify that a collection proceeding entails a filing of a court action or other adjudicatory process with a third party, and not merely assigning the debt to a debt collector. Several consumer groups strongly supported the Board's proposal while industry commenters recommended that the Board provide greater flexibility in interpreting when delinquency collection proceedings have been instituted. In particular, an industry commenter stated that the minimum payment warning could conflict with the creditor's collection demand and create consumer confusion.

Nonetheless, as discussed in more detail in the section-by-section analysis to Sec. 226.7(b)(12), the minimum payment disclosure is not required where a fixed repayment period has been specified in the account agreement, such as where the account has been closed due to delinquency and the required monthly payment has been reduced or the balance decreased to accommodate a fixed payment for a fixed period of time designed to pay off the outstanding balance.

The Board believes that clarifying that a collection proceeding entails the filing of a court action or other adjudicatory process with a third party provides clear and uniform guidance to creditors as to when periodic statements are no longer required. Accordingly, the Board adopts the comment as proposed, though for organizational purposes, the comment is renumbered as comment 5(b)(2)(i)-4.

Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors must continue to comply with all the rules for open-end credit, including sending a periodic statement, when credit privileges end, such as when a consumer stops taking draws and pays off the outstanding balance over time. Another comment provides that ``if an open-end credit account is converted to a closed-end transaction under a written agreement with the consumer, the creditor must provide a set of closed- end credit disclosures before consummation of the closed-end transaction.'' Comment 17(b)-2.

To provide flexibility and reduce burden and uncertainty, the Board proposed to clarify in the June 2007 Proposal that creditors entering into workout agreements for delinquent open-end plans without converting the debt to a closed-end transaction comply with the regulation if creditors continue to comply with the open-end provisions for the work-out period. The Board received only one comment concerning workout arrangements, which supported the Board's proposal. Therefore, amendments to comment 5(b)(2)(i)-2 are adopted as proposed. 5(b)(2)(ii)

TILA Section 163(a) requires creditors that provide a grace period to send statements at least 14 days before the

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grace period ends. 15 U.S.C. 1666b(a). The 14-day period runs from the date creditors mail their statements, not from the end of the statement period nor from the date consumers receive their statements. As discussed in the June 2007 Proposal, the Board has anecdotal evidence that some consumers receive statements relatively close to the payment due date, which leaves consumers with little time to review the statement before payment must be mailed to meet the due date. As a result, the Board requested comment on (1) whether it should recommend to Congress that the 14-day period be increased to a longer time period, so that consumers will have additional time to receive their statements and mail their payments to ensure that payments will be received by the due date, and (2) if so, what time period the Board should recommend to Congress.

The Board received numerous comments on this issue. Consumer and consumer group commenters complained that the time period from when consumers received their statements to the payment due date was too short, causing consumers often to incur late fees and lose the benefit of the grace period, and creditors to raise consumers' rates to the penalty rate. Industry commenters, on the other hand, stated that the 14-day period under TILA Section 163(a) was appropriate and that the

Board should not recommend a longer time frame to Congress.

Based in part on these comments, the Board and other federal banking agencies proposed in May 2008 to prohibit institutions from treating a payment as late for any purpose unless the consumer has been provided a reasonable amount of time to make that payment. Treating a payment as late for any purpose includes increasing the APR as a penalty, reporting the consumer as delinquent to a credit reporting agency, or assessing a late or any other fee based on the consumer's failure to make payment within the amount of time provided. 73 FR 28904, May 19, 2008. The Board is opting not to address the 14-day period under TILA Section 163(a) and is retaining Sec. 226.5(b)(2)(ii) as currently written. Consumer comment letters mainly focused on the due date with respect to having their payments credited in time to avoid a late fee and an increase in their APR to the penalty rate and not with the loss of a grace period. Therefore, the Board has chosen to address these concerns in final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal

Register.

Technical Revisions. Changes conforming with final rules issued by the Board and other federal banking agencies published elsewhere in today's Federal Register have been made to comment 5(b)(2)(ii)-1. In addition, the substance of comment 5(c)-4, which was inadvertently placed as commentary to Sec. 226.5(c), has been moved and renumbered as comment 5(b)(2)(ii)-2. 5(b)(2)(iii)

As proposed in the June 2007 Proposal, the substance of footnote 10 is moved to the regulatory text. 5(c) Through 5(e)

Sections 226.5(c), (d), and (e) address, respectively: The basis of disclosures and the use of estimates; multiple creditors and multiple consumers; and the effect of subsequent events.

In the June 2007 Proposal, the Board did not propose any changes to these provisions, except the addition of new comment 5(d)-3, referencing the statutory provisions pertaining to charge cards with plans that allow access to an open-end credit plan maintained by a person other than the charge card issuer. TILA 127(c)(4)(D); 15 U.S.C. 1637(c)(4)(D). (See the section-by-section analysis to Sec. 226.5a(f).) No comments were received on comment 5(d)-3. The Board adopts this comment as proposed. In addition, comment 5(c)-4 is redesignated as comment 5(b)(2)(ii)-2 to correct a technical error in placement.

Section 226.5a Credit and Charge Card Applications and Solicitations

TILA Section 127(c), implemented by Sec. 226.5a, requires card issuers to provide certain cost disclosures on or with an application or solicitation to open a credit or charge card account.\14\ 15 U.S.C. 1637(c). The format and content requirements differ for cost disclosures in card applications or solicitations, depending on whether the applications or solicitations are given through direct mail, provided electronically, provided orally, or made available to the general public such as in ``take-one'' applications and in catalogs or magazines. Disclosures in applications and solicitations provided by direct mail or electronically must be presented in a table. For oral applications and solicitations, certain cost disclosures must be provided orally, except that issuers in some cases are allowed to provide the disclosures later in a written form. Applications and solicitations made available to the general public, such as in a take- one application, must contain one of the following: (1) The same disclosures as for direct mail presented in a table; (2) a n