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Truth in Lending: 7.2.3.1.3 Protections apply to closed or acquired accounts

The protections against increases in the APR, fee, or charge continue to apply to an account after it is closed or acquired by another creditor.60 This provision includes prohibiting any periodic fee based solely on the outstanding or “protected” balance that was not imposed before the account was closed, e.g., a closed account fee.61 A closed account fee is also prohibited by the penalty fee restrictions in Regulation Z.62

Truth in Lending: 7.2.3.2.1 General

The Credit CARD Act permits an issuer to increase an APR applicable to an outstanding or “protected”66 balance at the expiration of a specified period of time, if:

Truth in Lending: 7.2.3.2.2 Six-month minimum

The Credit CARD Act requires that all promotional rates have a minimum period of six months.81 Regulation Z incorporates this six-month minimum into the exception itself, i.e., in order to qualify for the promotional rate exception, the promotional period must last six months or longer.82 However, the issuer is permitted to limit the promotional rate to a particular category of transactions, e.g., balances transfers over $100.83

Truth in Lending: 7.2.3.2.3 Contingent increases prohibited

The promotional rate exception does not permit an issuer to disclose and apply a rate increase that is conditioned on a contingent circumstance or is at the issuer’s discretion.84 Permitting a contingent or discretionary rate increase would create a loophole to the general prohibition against rate increases for outstanding or “protected” balances and during the account’s first year.85

Truth in Lending: 7.2.3.2.4 Deferred interest programs

Issuers that offer credit cards through retailers often offer deferred interest programs. These plans permit the consumer to defer the interest on the balance, which will be waived or refunded, or the consumer will not be obligated for the interest, if the balance is paid off by the end of the deferred interest period.88 If the balance is not repaid by then, the consumer will obligated for all of the interest that accrued between the date of purchase and the end of the deferred interest period.

Truth in Lending: 7.2.3.3.1 Generally

An issuer may increase an APR on an outstanding or “protected”103 balance due to the operation of a variable rate.104 Variable rates are generally computed by adding a margin to an index.105 If the index increases, the rate increases correspondingly.

Truth in Lending: 7.2.3.4.1 General

An issuer may increase an APR, fee, or charge if it does not receive the consumer’s required minimum payment within sixty days after the due date for that payment.136 This increase may apply to the outstanding or “protected” balance. The issuer must provide an appropriate notice,137 and reinstate the former rate if six months of on-time payments are received.138

Truth in Lending: 7.2.3.4.2 Required disclosures

In order to impose the increased APR or fee on an outstanding or “protected” balance, the issuer must first provide a change-in-terms or penalty rate notice forty-five days in advance.146 This disclosure must comply with the provisions of either section 1026.9(c) or (g) of Regulation Z.147 In particular, the notice must disclose:148

Truth in Lending: 7.3.4.2 Prohibition on Applying the Change or Imposing Fees or Charges As a Penalty for Rejection

When a consumer submits a valid notice rejecting a change-in-terms for an account, the issuer is generally prohibited from imposing that change or rate increase to the account.306 Furthermore, the issuer is prohibited from imposing a fee or charge or treating an account as in default solely as a result of the consumer’s rejection.307 However, the issuer is permitted to terminate or suspend the availability of the credit from an account, i.e., the ability of the consumer to use the card, as a

Truth in Lending: 7.3.4.3 Method of Repayment

If an issuer received a properly submitted rejection of a change-in-terms, the issuer cannot require the consumer to repay the account in full.311 The issuer may increase the minimum payment on the account, but the issuer must follow the same repayment rules that are applicable to protected balances.312 These rules are discussed at §

Truth in Lending: 7.3.5 Use of the Account Following the Notice of Rejection

If a consumer rejects a change-in-terms or rate increase, the issuer is permitted to terminate or suspend the availability of credit for that account.317 However, the issuer is not required to do so. If a consumer uses the account prior to the effective date of the change, such use does not waive or forfeit the rejection. The consumer also does not revoke the rejection by using the account for transactions after the rejection is received.318

Truth in Lending: 7.4.2 Prohibition on Imposing Finance Charges Based on Prior Billing Cycles

The Credit CARD Act eliminates double cycle billing. It prohibits credit card issuers from imposing finance charges as a result of the loss of a grace period based on balances from a previous billing cycle.321 In other words, when the consumer ceases to be eligible for a grace period, the lender cannot compute the finance charge based on any days in a billing cycle that preceded the most recent billing cycle.322

Truth in Lending: 7.5.2.1 General

In response to penalty fee abuses, the Credit CARD Act establishes a requirement that penalty fees be “reasonable and proportional” to the consumer’s omission or violation.377

Truth in Lending: 7.2.3.5.1 Definition

The Credit CARD Act limits increases in the APR, fees, or charges that are applied to the “outstanding” balance.”158 This is defined as the amount owed on a credit card account as of the fourteenth day after the issuer provides a change-in-terms or penalty rate notice increasing the APR, fee, or charge.159 Regulation Z also refers to this balance as the “protected balance,” and defines it slightly differently as “the amount owed for a category of transactions to which an increased annual per

Truth in Lending: 7.2.3.5.3 Repayment protections for protected balances

To prevent the issuer from requiring accelerated payment of the protected balance, the issuer is limited in how much it can change the repayment terms of that balance. The issuer must provide the consumer with one of the following methods or formulas for repaying the protected balance, or a method that is no less favorable:175

Truth in Lending: 7.2.3.6 Workout or Temporary Hardship Arrangement Exception

In some cases, an issuer will reduce an APR for a delinquent or financially distressed consumer pursuant to a workout or temporary hardship arrangement.187 An issuer is permitted to increase an APR, fee, or finance charge if the consumer fails to comply with the terms of the workout or temporary arrangement, or after the consumer has completed the arrangement.188