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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: 7.4.1 Double Cycle Billing Imposes Higher Costs on Consumers
Double cycle billing calculates the interest on a credit card based on the account balance for the past two billing cycles,319 resulting in significantly higher interest being charged to the cardholder. In addition, it eliminates the benefit of the grace period if a cardholder moves from non-revolving to revolving status.
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: 7.4.4.1 Statutory Exceptions
The Credit CARD Act provides for two exceptions to the prohibition against double cycle billing cycle.
Truth in Lending: 7.4.4.2 Exception for Deferred Interest Programs
The official interpretations create a third exception to the double cycle billing prohibition, for deferred interest programs. Deferred interest programs are often promoted as “no interest” or “zero percent interest” plans.
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: 7.2.3.4.3 Right to have former rate reinstated for six months of on-time payments
The Credit CARD Act gives consumers the right to have their pre-increase rate reinstated if they make six months of on-time payments. The issuer must terminate the increased APR not later than six months after imposition if it receives the required minimum payments on time during that time.149
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: 7.2.3.5.2 Rate increases permitted on future transactions—advanced notice exception
After the first year of an account, an issuer may apply an increased APR, fee, or charge to transactions that are not included in the protected balance, i.e., to transactions that occur fourteen days after giving notice of the increase.165 Regulation Z refers to this ability as “the advanced notice exception.”166
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
Truth in Lending: 7.2.3.7 Servicemembers Civil Relief Act Exception
Regulation Z creates an exception not found in the Credit CARD Act to the prohibitions against increases in an APR for a protected balance.200 The exception addresses accounts for which an APR has been reduced pursuant to the Servicemembers Civil Relief Act (SCRA), 50 U.S.C.
Truth in Lending: 7.2.4.2 When Is an Account Considered Newly Opened Versus a Substitution
Situations may arise in which a consumer already has a credit card account with an issuer, and then opens a second account with the same issuer or its affiliate or subsidiary.
Truth in Lending: 7.2.5.1 General
If the interest rate on a credit card account has been increased based on risk, market conditions, or other factors, the Credit CARD Act requires the card issuer to re-evaluate that account every six months to determine whether the rate should be reduced.225 Issuers must have reasonable written policies and procedures to conduct these re-evaluations.226
Truth in Lending: 7.2.5.2 Timing and Length of Obligation
Issuers are required to conduct rate re-evaluation every six months.232 The issuer has the option of:
Truth in Lending: 7.5.2.2 Scope
The penalty fee rule applies to:
any charge imposed by a card issuer based on an act or omission that violates the terms of the account or any other requirements imposed by the card issuer with respect to the account, other than charges attributable to periodic interest rates.384
Therefore, penalty rates or increases in the interest rate are not covered by the rule.
Examples of penalty fees covered by the rule are:385
Truth in Lending: 7.5.2.3.1 General
Credit card issuers are prohibited from imposing penalty fees unless the dollar amount of the fee is either (1) a reasonable proportion of the issuers’ total costs as a result of that type of violation or (2) is within the safe harbors that Regulation Z establishes.391 Deterrence and consumer conduct are not separate factors but are implicit in the safe harbor.392