The Federal Reserve Board (Board) has published a final rule amending Regulation Z to implement the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) effective August 22, 2010. These rules complete the last of three phases of rulemakings under the CARD Act. The first two phases have been finalized. See, e.g., 75 Fed. Reg. 7658 (Feb. 22, 2010) (finalizing rules implementing CARD Act provisions effective August 20, 2009 and February 22, 2010) and Alerts dated March 4, 2010, January 12, 2010 and July 16, 2009.

    These final rules implement CARD Act Sections 101(c) (the interest rate “look back” and decrease requirement) and 102(b) (regarding “reasonable and proportional” penalty fees).

    Interest Rate “Look Back”

    Proposed Section 226.59 (implementing the interest rate “look back” and decrease requirement) has been adopted generally as proposed, with some technical revisions and changes for clarity. The final rule generally provides that if an issuer increases an annual percentage rate on a not home-secured credit card account on or after January 1, 2009 and 45 days’ advance notice of the increase is required by Section 226.9(c)(2) or (g) (regarding change-in-terms and penalty rate notices), the issuer must evaluate at least every six months whether to reduce the APR applicable to the consumer’s account, based on the factors prompting the increase or factors the issuer currently considers in determining APRs applicable to new accounts, not later than 45 days after completion of the evaluation. The first such evaluation must be completed by February 22, 2011.

    Penalty Fees

    Proposed Section 226.52(b) (implementing the limitations on penalty fees) has been adopted with some substantive changes. The final rule generally prohibits card issuers from imposing any fee for violating the terms or other requirements of a not-home secured credit card account unless the fee amount is (i) based on a determination that the fee represents a reasonable proportion of the total costs incurred by the issuer as a result of that type of violation or (ii) consistent with safe harbor amounts of $25 for a first violation and $35 for subsequent violations of the same type during the next six billing cycles (or 3% of the delinquent balance for charge card accounts).

    Consistent with the proposed rule, the final rule also prohibits:

    • Fees exceeding the dollar amount associated with the violation;
    • Fees for a violation with no associated dollar amount (including fees for declined transactions and account inactivity, closure or termination); and
    • Multiple fees based on a single event or transaction.

    Other Changes

    The final rule also adds and revises model forms and amends existing rules regarding, inter alia:

    • Bolding of maximum fee amounts in application and solicitation and account-opening tables;
    • Use of “up to” in connection with penalty fee amounts in application and solicitation and account-opening tables and periodic statements; and
    • Content of change-in-terms or penalty rate notices when rates are increased.

    Effective Date and Mandatory Compliance Dates

    The final rule is effective and compliance with most provisions is mandatory on August 22, 2010. However, the mandatory compliance date for amendments to certain penalty fee disclosures is December 1, 2010. The final rule includes transition guidance and examples.

    Contact us for more information on the final rule.

    • Judy Scheiderer