Citibank Consent Order: An Analysis of APR Reevaluations (1026.59)
Written by André B. Cotten, NCCO, Regulatory Compliance Counsel, NAFCU
Hi, Compliance Friends! I hope that your summer is going well. I’ve been taking more time to read lately, and I recently finished “Men We Reaped: A Memoir” by a fellow Mississippian, Jesmyn Ward.
On to compliance issues, today’s blog will review and analyze the Bureau’s recent Consent Order with Citibank. The Bureau reviewed the credit card account management activities at Citibank after the bank self-reported deficiencies in its approach to rate –re-evaluations, the Bureau identified the following Truth in Lending Act (TILA) violations: 1) failing to reevaluate and reduce the annual percentage rates (APRs) for certain consumer credit card accounts consistent with the requirements of section 1026.59(a) of Regulation Z; and 2) failing to have reasonable written policies and procedures in place to conduct the APR reevaluations consistent with the requirements of section 1026.59(b) of Regulation Z. Citibank was required to pay $335 million to the 1.75 million affected consumer accounts, which was the amount of restitution owed. In fact, the Bureau “did not assess civil money penalties based on a number of factors, including that Citibank self-identified and self-reported the violations to the Bureau, and self-initiated” remediation.
This enforcement action presents an opportunity to remind credit unions about the scope of section 1026.59 and the requirements of factors to be used during the reevaluation process.
Scope and Timing Requirements of Section 1026.59
Regulation Z’s reevaluation rule comes from the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), which amended Truth in Lending Act (TILA) to require that “[i]f a [credit union] increases the annual percentage rate applicable to a credit card account under an open end consumer credit plan, based on factors including the credit risk of the [member], market conditions, or other factors, the [credit union] shall consider changes in such factors in subsequently determining whether to reduce the annual percentage rate for such obligor.” 15 U.S.C. § 1665c(a); CARD Act § 101(c) (adding section 148 to TILA, 15 U.S.C. § 1665c).
This is codified in section 1026.59(a) also adds that applicable increased rates would require a 45 day advance notice pursuant to § 1026.9(c)(2) or (g).
Section 1026.59(c) of Regulation Z also establishes a minimum timing requirement for reevaluation. A credit union that previously increased the APR on a credit card must review the account at least every six months to assess whether the factors that promoted the increase have changed, and reduce the account’s APR when indicated by the review. The rule also requires the credit union to maintain reasonable methodologies for assessing the factors at issue in the review. 12 C.F.R. 1026.59(b)
Regulation Z also specifies what factors a credit union may consider when reviewing an account subject to the rule. When reviewing accounts subject to the revaluation requirement, section 1026.59(d)(1) states that a credit union must review either: 1) the factors on which the increase in an annual percentage rate was originally based; or 2) the factors that the credit union currently considers when determining the annual percentage rates applicable to similar new credit card accounts under an open-end consumer credit plan. In the Consent Order, the Bureau uses the term “Original Factor” to describe the requirement in section 1026.59(d)(1)(i) and the term “Acquisition Factor” to describe the requirement in section 1026.59(d)(1)(ii).
Keep in mind that the rule is not particularly prescriptive here – rather, the credit union looks to its own existing underwriting methods. In the preamble to the final rule, which was finalized by the Federal Reserve Board, the regulator indicated an intent for flexibility. Specifically, “[t]he Board believes that this rule strikes the appropriate balance between providing flexibility for changing underwriting standards and ensuring that consumers receive the benefit of meaningful reviews of rate increases on their accounts. The Board believes that requiring a card issuer to consider the factors that it considers when setting the rates applicable to similar new accounts addresses concerns regarding issuers selectively identifying those factors that would permit them to maintain increased rates on existing accounts. In addition, the Board believes that this rule will permit consumers to benefit from competition among issuers in the market for new customers.”
So with a rule in place that is not terribly prescriptive, what went wrong? The Consent Order highlights numerous instances of Citibank incorrectly considering factors, including: Ability to Pay Analysis; Use of FICO Scores; Acquisition Rate Minimum; Mix of Original and Acquisition Factors; Fixed to Variable Accounts; Multiple Rate Increases; Acquisition Criteria.
Policies & Procedures
Lastly, section 1026.59(b) requires credit unions to maintain reasonable policies and procedures to implement the required reevaluations. A critical flaw common in Bureau findings is the lack of policies and procedures within compliance management systems. For example, Citibank’s application of deficient policies and procedures resulted in overcharges to consumers. However, as I previously mentioned, Citibank both self-identified and self-reported its deficiencies.
As a part of the Consent Order, Citibank agreed to implement and maintain reasonable written policies and procedures for making any future changes to the APR reevaluation process, ensuring the full involvement of its legal and compliance department in the development and implementation of any changes, ensuring that future compliance tests and audits assess whether Citibank is in compliance, and addressing any other deficiencies in its compliance management systems.
Credit unions may want to review their existing policies to ensure they adequately account for 1026.59(a) reevaluation requirements.