Consumer Compliance Outlook
Regulation Z's Payment Crediting Rules for Open-End Credit, Credit Cards, and Closed-End Mortgage Payments
The Board of Governors of the Federal Reserve System (Board) adopted amendments to Regulation Z in 2008 and 2010 that impose new compliance requirements on loan servicers for crediting mortgage payments and on creditors for crediting open-end credit payments. The rules for mortgage payments appeared in the Board's July 2008 final rule issued under the Truth in Lending Act and the Home Ownership and Equity Protection Act of 1994,1 while the rules for open-end credit payments appeared in the Board's February 2010 final rule implementing the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act).2 To facilitate compliance, this article provides an overview of the Board's Regulation Z rules under §226.36(c) for mortgage loan servicers and §226.10 for open-end credit payments, including special rules for credit card payments required by the Credit CARD Act.
RULES FOR MORTGAGE LOANS
The Board's 2008 final rule added §226.36(c) to Regulation Z concerning mortgage loan servicing practices. This section applies to closed-end credit secured by a consumer's principal dwelling and contains several new compliance requirements for “servicers,” as defined in §3500.2(b) of Regulation X, the implementing regulation for the Real Estate Settlement Procedures ct.3 Home equity lines of credit are specifically excluded from coverage.4
Crediting Payments as of the Date of Receipt
Section 226.36(c) requires loan servicers to credit a payment to a consumer's loan account as of the date it is received. However, this does not mean that servicers must physically post a payment on the date received, provided the consumer is not penalized by the delay in posting. In other words, a servicer can have a delay between the time it receives a payment and posts it to the consumer's account, as long as the payment reflects the date of receipt when it is credited. The distinction is important because it may not be operationally feasible for a servicer to post a payment on the date it is received. Comment 226.36(c)(1)(i)-1 of the Official Staff Commentary (OSC) for Regulation Z clarifies this point: “A servicer that receives a payment on or before its due date (or within any grace period), and does not enter the payment on its books or in its system until after the payment's due date (or expiration of any grace period), does not violate this rule as long as the entry does not result in the imposition of a late charge, additional interest, or similar penalty to the consumer, or in the reporting of negative information to a consumer reporting agency” (emphasis added).
This requirement has raised questions for loan servicers. If a consumer pays electronically through a third-party service, when is a payment considered received? If a payment is made at the bank branch ATM of a servicer on the due date after the branch closes, does the payment have to be credited as of the due date? If the mortgage payment includes an amount to be placed into escrow for taxes and/or homeowners' insurance, and the consumer sends in a payment that covers the mortgage interest and principal, but not the escrow portion, must the payment be fully credited?
The OSC provides guidance on these complex issues. For the “date of receipt,” comment 226.36(c)(1)(i)-3 states that “payment by check is received when the mortgage servicer receives it, not when the funds are collected. If the consumer elects to have payment made by a third-party payor such as a financial institution, through a preauthorized payment or telephone bill-payment arrangement, payment is received when the mortgage servicer receives the third-party payor's check or other transfer medium, such as an electronic fund transfer” (emphasis added).
The OSC5 also states that loan servicers can establish reasonable requirements in writing for the consumer's payment, including the following:
- requiring that payments be accompanied by the account number or payment coupon;
- setting a cut-off hour for payment to be received, or setting different hours for payment by mail and payments made in person;
- specifying that only checks or money orders should be sent by mail;
- specifying that payment is to be made in U.S. dollars; or
- specifying one particular address for receiving payments, such as a post office box.6
The OSC further clarifies that a servicer's payment requirements must be “reasonable,” meaning that it should not be difficult for most consumers to make conforming payments. To facilitate compliance, the OSC includes a safe harbor for reasonable payment requirements: “It would be reasonable to require a cut-off time of 5 p.m. for receipt of a mailed check at the location specified by the servicer for receipt of such check.”7
DEFAULT CREDITING RULE WHEN SERVICER DOES NOT SPECIFY PAYMENT REQUIREMENTS
If servicers do not specify payment requirements, the OSC includes an omnibus payment crediting rule to address the myriad circumstances that can arise:
“Implied guidelines for payments. In the absence of specified requirements for making payments, payments may be made at any location where the servicer conducts business; any time during the servicer's normal business hours; and by cash, money order, draft, or other similar instrument in properly negotiable form, or by electronic fund transfer if the servicer and consumer have so agreed” (emphasis added).8
For servicers without payment requirements, this section of the OSC addresses the situations discussed earlier. For example, if a consumer makes a cash payment at a bank branch ATM while the branch is open, or makes a check payment at a bank's supermarket branch while the branch is open, the payment must be credited as of that day, even if it is entered into the system at a later date. But if a consumer makes a check payment at the bank branch ATM when the branch is closed, that payment does not have to be credited as of that day.
During the comment period, some servicers expressed concern that problems could arise if they were required to credit partial payments. Comment 226.36(c) (1)(i)-2 addresses this, stating that “payments should be credited based on the legal obligation between the creditor and consumer. The legal obligation is determined by applicable state or other law.” The preamble to the final rule provided this example to clarify: “If under the terms of the legal obligations governing the loan, the required monthly payment includes principal, interest, and escrow, then consistent with those terms, servicers would not be required to credit payments that include only principal and interest payments.”9 Thus, in the event of a partial payment, a servicer would have to review the consumer's legal obligation with the creditor to determine how to credit the payment.10
Finally, the regulation addresses a circumstance many servicers are likely to encounter: If reasonable payment requirements are specified, how should a servicer credit a nonconforming payment that the servicer accepts? Section 226.33(c)(2) provides the answer: “If a servicer specifies in writing requirements for the consumer to follow in making payments, but accepts a payment that does not conform to the requirements, the servicer shall credit the payment as of 5 days after receipt” (emphasis added).
Pyramiding Late Fees
Pyramiding late fees refers to a creditor's practice of imposing a late fee when a consumer sends a timely payment in an amount sufficient to cover the regularly scheduled payment but insufficient to cover a prior unpaid late or delinquency fee. If the creditor allocates payments first to late fees, the consumer's payment only partially covers the currently scheduled payment, resulting in a new late fee. If the consumer continues to pay only the scheduled payment, late fees will continually be assessed (hence, the phrase pyramiding of late fees). Section 226.36(c)(1)(ii) requires that if a consumer sends a timely payment sufficient to cover the currently scheduled payment, the creditor cannot assess late fees.
Most financial institutions are familiar with this rule because pyramiding late fees is already prohibited by the credit practices rule issued by the Federal Trade Commission (FTC) and the federal banking agencies under the FTC Act.11 During the rulemaking, commenters questioned the need for this rule in light of these existing regulations. But the Board explained in the final rule that by “bringing the fee pyramiding rule under TILA Section 129(l)(2), state attorneys general would be able to enforce the rule through TILA, where currently they may be limited to enforcing the rule solely through state statutes (which statutes may not be uniform).”12
RULES FOR OPEN-END CREDIT, INCLUDING CREDIT CARDS
The payment crediting rules for open-end consumer credit in §226.10 are generally similar to the rules in §226.36(c) for loan servicers. In addition, §226.10 includes several requirements that apply only to credit card accounts that implement specific requirements of the Credit CARD Act.
In general, §226.10(a) applies to all open-end consumer credit and provides that a consumer's payment must be credited on the date of receipt. The OSC13 provides additional guidance on this requirement:
- The “received” date for a check payment is based on the date the check reaches the creditor, not when it clears.
- In a payroll deduction plan in which funds are deposited to an asset account held by the creditor and from which payments are made periodically to an open-end credit account, payment is received on the date debited to the asset account (rather than the date of the deposit), provided the payroll deduction method is voluntary and the consumer retains use of the funds until the contractual payment date.
- If the consumer uses a third-party payment service through preauthorized electronic payment or through telephone payment, payment is received when the creditor receives the third-party payor's check or other transfer medium, such as an electronic fund transfer.
- Payment through a creditor's website is received on the date on which the consumer authorizes the creditor to effect the payment, even if the consumer gives the instruction authorizing payment in advance of the date on which the creditor is authorized to effect payment. If the consumer authorizes the creditor to effect the payment immediately, but the consumer's instruction is received after 5 p.m. or any later cut-off time specified by the creditor, the date on which the consumer authorizes the creditor to effect the payment is deemed to be the next business day. (See additional discussion of payment crediting requirements for website payments below.)
Similar to closed-end credit, creditors may impose reasonable payment requirements that enable most consumers to make conforming payments. Section 226.10(b)(2) provides several examples:
- requiring that payments be accompanied by the account number or payment stub;
- setting a reasonable cut-off time for payments to be received by mail, by electronic means, by telephone, and in person (except as provided in §226.10(b)(3)), except the cut-off time cannot be earlier than 5 p.m. on the payment due date at the location specified by the creditor for the receipt of such payments;
- specifying that only checks or money orders should be sent by mail;
- specifying that payment is to be made in U.S. dollars; or
- specifying one particular address for receiving payments, such as a post office box.
Section 226.10(b) and the accompanying commentary provide additional guidance on creditor payment requirements by specifying the following restrictions:14
- Payment by electronic fund transfer. Pursuant to §913 of the Electronic Fund Transfer Act, creditors cannot condition an extension of credit on the requirement that a consumer use pre-authorized electronic fund transfers for repayment.15
- Payment via creditor's website. When a creditor promotes electronic payment via its website (for example, by stating on the website that payments can be made electronically through the website), a payment made on the website prior to any cutoff time specified by the creditor is considered a conforming payment.16
- Acceptance of nonconforming payments. If a creditor accepts a nonconforming payment (for example, mailing to a branch office when the creditor specified a different location for mailed payments), the creditor must credit the payment within five days of receipt and can impose finance charges for the period between receipt and crediting of the payment.17
- Payments made at point of sale. If a card issuer is a financial institution and has a card that can be used only with a particular merchant or merchants or is cobranded with the name of a particular merchant or merchants, and a consumer can pay the card account at a retail location maintained by such a merchant, the retail location is not considered to be a branch or office of the card issuer for purposes of §226.10(b)(3).18
- In-person payments on credit card accounts. When a consumer makes a credit card payment at a branch or office of a financial institution before the close of business of the branch or office, the payment is considered received on the date on which the consumer made the payment. A financial institution card issuer cannot impose a cut-off time earlier than the close of business for any such payments made in person at any branch or office of the card issuer at which such payments are accepted. But a card issuer may impose a cut-off time earlier than 5 p.m. for such payments if the branch or office closes earlier than 5 p.m. In addition, if a consumer makes a credit card payment at a branch or office with the direct assistance of a branch or office employee, that payment constitutes an “in-person payment” and is considered received on the date of payment. But a card payment made at the bank branch or office without the direct assistance of a branch or office employee, for example, a payment placed in a branch or office mail slot, is not an in-person payment for purposes of §226.10(b)(3)19 (emphasis added).
- In-person payments at an affiliate of a financial institution card issuer. If a financial institution card issuer (such as “ABC Bank”) shares a name with an affiliate (such as “ABC Mortgage”), and the affiliate accepts in-person payments on the card issuer's credit card accounts, those payments are subject to the requirements of §226.10(b)(3) and are considered received on the date of payment.20
The discussion above addressed the payment crediting rules when a creditor specifies payment requirements. However, if the creditor does not impose specific payment requirements, comment 226.10(b)-4 of the OSC establishes three payment crediting rules that apply by default:
- Payments may be made at any location where the creditor conducts business.
- Payments may be made any time during the creditor's normal business hours.
- Payments may be made by cash, money order, draft, or other similar instrument in properly negotiable form, or by electronic fund transfer if the creditor and consumer have so agreed.
These bright-line rules provide clarity for creditors and consumers in circumstances when the creditor did not specify payment requirements.
If a creditor fails to credit a payment in accordance with the rules in §226.10 in time to avoid imposing finance charges, the creditor is required under §226.10(c) to provide an adjustment to the consumer's account during the next billing cycle.
Payment Due Date When Creditor Cannot Receive Payment
Section 226.10 also addresses the circumstances when a payment due date is a day on which the creditor does not receive or accept payments by mail. For example, the creditor may specify that payment is due on a Sunday, and the creditor does not receive mailed payments on Sundays. Section 226.10(d) provides that the creditor cannot treat a payment received the next business day by any method as late for any purpose (late fee, finance charge, reporting to consumer reporting agencies, etc.). However, if the creditor accepts or receives payments by a method other than mail, such as electronic or telephone payments, on a due date on which the creditor did not receive or accept payments by mail, it is not required to treat a payment made by that method on the next business day as timely.
Card Issuer's Change of Address for Receiving Payment
Another important rule addresses material changes in the address or procedures for receiving credit card payments, which are defined as “any change in the address for receiving payment or procedures for handling
cardholder payments which causes a material delay in the crediting of a payment.”21 When this occurs, and it causes a material delay in crediting payments during the 60-day period following the change, the card issuer cannot impose late fees or finance charges for a late payment during the 60-day period following the date on which the change took effect.22 For this purpose, “material delay” means a delay in crediting a payment that results in a late payment and imposition of a late fee or finance charge. A delay that does not result in a late fee or finance charge is not material.23
One additional requirement of the regulation concerns fees imposed by card issuers to make a payment (for example, a fee to pay by telephone). The Credit CARD Act generally prohibits card issuers from imposing a separate fee to allow a consumer to repay an extension of credit or pay a finance charge, unless the payment involves an expedited service by a customer service representative. Section 226.10(e) implements this requirement and defines “expedited payment” as crediting a payment to the account on the same day or, if the payment is received after the creditor's cutoff time, the next business day.
Financial institutions should establish controls and have appropriate policies and procedures in place to reflect the new payment crediting requirements. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.