Consumer Compliance Outlook
Final Reminder for Overdraft Protection and Credit Card Rules
Consumer compliance regulations are changing at a fast pace, and the effective dates for overdraft protection rules and the implementation of the third phase of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) are rapidly approaching. Both new rules require procedural and system changes. Have you executed your implementation plans and tested your systems?
The new overdraft rules prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents or opts in to the overdraft service for those types of transactions. Before opting in, the consumer must be provided with a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices.
The final rules (along with a model opt-in notice) were issued under Regulation E, which implements the Electronic Fund Transfer Act, in November 2009. Final clarifications, addressing questions that have arisen since the final overdraft rules were published and providing further guidance regarding compliance with certain aspects of the rules, were released on May 28, 2010.
Financial institutions should carefully review the compliance requirements, since those continuing to offer overdraft protection services must obtain opt-in approval from new customers for all accounts opened after July 1 and for all existing customers by August 15.
Credit CARD Act
On June 15, 2010, the Board of Governors of the Federal Reserve System approved a final rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees and to require credit card issuers to reconsider increases in interest rates imposed since January 1, 2009.
The final rule is the third stage of the Federal Reserve’s implementation of the Credit CARD Act, which was enacted in May 2009. Among other things, the final rule:
- Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.
- Prohibits credit card issuers from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer’s violation of the account terms. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
- Bans inactivity fees, such as fees based on the consumer’s failure to use the account to make new purchases.
- Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Requires credit card issuers to inform consumers of the reasons for increases in rates.
- Requires issuers that have increased rates since January 1, 2009, to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.
The final rule will generally go into effect on August 22, 2010. The press release and the Federal Register notice are available at: http://www.federalreserve.gov/newsevents/press/bcreg/20100615a.htm.