The Federal Reserve Board recently closed the comment period for its proposed changes to the open-end lending rules under Reg Z. This comprehensive proposal would change the way credit unions currently do business.
The extent of the impact ultimately rests on the final version of the new rules, but we do know the major areas that will be affected. Here is a look at each:
Closed-end Subaccounts under Multi-Featured Open-end Plans. The area of most concern to credit unions is whether they will be able to continue open-end lending under multi-featured plans. While many credit unions, regulators and service-providers submitted comments to the board asking it to continue to allow such plans, credit unions may need to go to a "Plan B." One common suggestion is to allow the continued use of closed-end subaccounts, but with increased disclosures at the time of the advance. It is hard to predict the precise impact to credit union lending practices until the board issues the final rule.
Periodic Statement Changes. The next most significant effect on credit union operations is the comprehensive changes proposed to the form, substance, and content of periodic statements. These are wholesale changes that would require a very specific format where purchases, cash advances, balance transfers, fees, and interest charged would be listed in separate, itemized categories. Additional disclosures include a late payment warning that alerts the member to possible late fees and penalty rates; and a minimum payment warning that shows how long it would take to pay off the balance if only the minimum payment were made. Also, if the credit union changes any terms contained in the tabular disclosures (i.e., Schumer Box), the change-in-terms notice must appear in tabular format on the periodic statement, above the transactions section.
Finally, the board is proposing to eliminate the use of statement stuffers to deliver a change-in-terms notice and require that the notice be printed directly on the periodic statement. One positive proposal would eliminate the effective APR (sometimes known as the historical APR). Comments submitted to the board overwhelmingly agreed with this proposal. This would eliminate the requirement to determine which fees are finance charges that must be included in calculating the APR because it would include only interest. However, the board's proposal would require massive, expensive, and time-consuming changes to the programming, format, and calculation requirements for the periodic statements.
New "Account Opening" Disclosures and Changes to the Credit Card Tabular Disclosures. The board's proposal also requires tabular disclosures when an open-end account is established. These tabular disclosures are similar to those used today for credit card applications and solicitations and will replace the initial disclosures currently required under Reg Z. Disclosures that we are used to seeing today include APRs for purchases, cash advances, and balance transfers; grace period; and fees. New disclosures include more information regarding penalty rates and a reference to a Federal Reserve Board website where consumers would find more information regarding the use of credit cards.
Another new disclosure specific to the credit card table is a payment allocation that explains that payments will be applied to the lowest APR first when a discounted initial rate is offered. The board has issued proposed model forms to illustrate the changes to the tables.
Change-in-Terms Notices. The board proposes extending from the current 15 days to 45 days the notice period for changing terms. Most industry commenters were concerned that this was too long and, because of timing of periodic statements, would actually force a credit union to wait 60-90 days to implement changes. Many commentaries suggested an alternative of 30 days.
Perhaps more significantly, the board is proposing to require the 45-day notice before a creditor can raise an APR because of late payments. The board argues this is warranted because consumers today do not realize that rates can rise due to delinquency. However, with the new disclosure requirements, consumers will receive notice of the penalty rates on the credit card application table, then again on the account opening table, and then once a month on the periodic statement. The industry is hoping the board withdraws this proposal.
Other Changes. There are many other minor changes to this comprehensive overhaul of Reg Z's open-end rules. The board's complete proposal, and the comments submitted, are at www.federalreserveboard.gov.
The next step for the board is to review the comments it received. Approximately 2,485 comments were submitted by consumers, financial institutions, trade groups and service providers, including about 250 letters from credit unions and several state leagues. The board will also perform additional consumer research, as it did before drafting its proposal. It will then determine whether to change the existing proposal, and then publish the changes in final form. This is expected to take several months, with the final rule published in 2008.
The board also sought comment on an appropriate compliance date. With the massive changes required in programming, loan forms, compliance programs and policies and procedures, most industry commenters requested a mandatory effective date of 18 months to two years from the date the final rule is published. While this pushes the compliance date to 2010, it's not a lot of time to react. Once the rule becomes final, there will be much work ahead for credit unions, forms vendors, and data processors to implement the changes prior to the effective date.
Catherine Klimek is Counsel with Securian Financial Group, Inc.
