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Jul 09, 2009
Categories: Consumer Lending

Credit CARD Act - Section 201

Posted by Steve Van Beek

Section 201 amends Section 127(b)(11) of the Truth in Lending Act (TILA) to require "Minimum Payment Warnings" on periodic statements.  The periodic statement must also include repayment information for the member (detailed below).

Background Information on Minimum Payment Warnings & Disclosures
These requirements should be no surprise to credit unions.  Congress had included similar language in the Bankruptcy Abuse and Consumer Protection Act of 2005 (Bankruptcy Act).  Section 1301 of the Bankruptcy Act added Section 127(b)(11) to TILA - which is now being amended by the Credit CARD Act.  The Bankruptcy Act included an effective date of 18 months after the Bankruptcy Act was enacted OR 12 months after the Federal Reserve issued regulations to implement Section 127(b)(11).  That 12 month period never expired - Congress did not wait.  

The Federal Reserve's upcoming changes to Regulation Z included the Bankruptcy Act requirements - and were to become effective July 1, 2010.  However, the Credit CARD Act replaces the Bankruptcy Act requirements with new requirements that credit unions need to follow.  The Federal Reserve will need to amend its amendments to reflect the Credit CARD Act requirements under Section 201.

The amendments the Fed had adopted to implement the Bankruptcy Act can be found here - 12 C.F.R. 226.7(b)(12) [would have been effective July 1, 2010].  While the Fed's language will be amended to reflect the requirements of Section 201 of the Credit CARD Act, it could be useful as a general reference.  For example, the Fed's implementation of the Bankruptcy Act requirements included exceptions for HELOCs and overdraft lines of credit.  12 C.F.R. 226.7(b)(12)(v).  It is not clear if the Fed will use the same exceptions when it implements Section 201 of the Credit CARD Act. 

Section 201 of the Credit CARD Act
Congress included new, stronger disclosure requirements for periodic statements.  The Bankruptcy Act provisions would have allowed creditors to provide a generic repayment example and include a toll-free number that consumers could call to obtain their actual repayment time period.  The Credit CARD Act removes this option and requires the actual repayment information.

Minimum Payment Warning.  Periodic statements will need to include the following warning for members:

"Minimum Payment Warning: Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance."

Repayment Information.  Periodic statements must also include the following repayment information:

  • The number of months (rounded to the nearest month) it would take for the member to pay the entire balance on the account, if the member makes only the minimum payment each month and conducts no further transactions.
  • The total cost to the member, including interest and principal payments, of paying off the balance on the account by making only minimum payments.   
  • The monthly payment amount that the member would need to make each month to repay the balance on the account in 36 months - assuming no further transactions are made on the account. 
  • The total cost to the member, including interest and principal payments, of paying the balance off over 36 months (using the calculated monthly payment amount).    
  • A toll-free telephone number that the member can call to receive information about accessing credit counseling services and debt management services. 
Which interest rate do credit unions use for the calculations?
The credit union would need to use the interest rate in effect on the date the disclosures are made (and assume the rate stays the same throughout the repayment period).  Thus, even if you have a variable-rate account - tied to an index that will most likely change in the future - your calculation would be based on the current, existing interest rate when the disclosures were made.

However, if the account has a stepped-rate or promotional rate with a lower interest rate, the calculation would need to take into consideration the future increased interest rate.  For example, if an account will have a 6% interest rate for 12 months, then raises to 9% - the repayment information would need to include this fact in the calculation.
   
Federal Reserve Regulations
The Fed will need to finalize amendments to Regulation Z which detail the form, manner and location of the required disclosures on the periodic statement.  The Fed's regulations must require credit unions to provide this information in a table format.  Model form G-18(F) from the Fed's earlier amendments (prior to the Credit CARD Act) provides some information on the probable location of the table on the periodic statement.  

Toll-Free Number for Credit Counseling and Debt Management
The Federal Reserve, along with Treasury, must issue guidelines by November 22, 2009 (6 months after Act) for the establishment and maintenance by creditors of a toll-free telephone number to provide information about accessing credit counseling and debt management services.  Remember, this toll-free number is one of the required disclosures listed above and will be located in or below the repayment information table.  

Which credit counseling and debt management companies?  The Fed's guidelines must flesh this out.  Section 201 requires that the toll-free number only refer consumers to "nonprofit budget and credit counseling agencies approved by a United States bankruptcy trustee."  

Effective Date.  The minimum payment warning and repayment information disclosures will need to be provided on statements after February 22, 2010.  The Federal Reserve will need to amend Regulation Z to provide further information and details.  

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