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Truth in Lending: 7.7.4.1 No Cut-Off Time Before 5:00 p.m.

Prior to passage of the Credit CARD Act, issuers often used an early hour cut-off time, such as 9:00 or 10:00 a.m., for crediting payments received that day.787 In that case, if a consumer’s payment had been received on the payment due date it would have been considered late, because in all likelihood the U.S. Postal Service would not have delivered the mail so early in the morning.

Truth in Lending: 7.7.4.2 Same Due Date Each Month

The Credit CARD Act requires that the payment due date must be the same day of each month for credit card accounts.793 That means that the due date must be the same numerical date each month, e.g., the 25th of every month.794 A due date that is the same relative date but not the same numerical date each month, such as the third Tuesday of the month, generally would not comply, except the due date can be the last day of each month, even though it would not be the same numerical date.

Truth in Lending: 7.7.4.3 Weekend and Holiday Due Dates

If the payment due date falls on a day on which the creditor does not receive or accept payments by mail, it may not treat as late any payment received by mail on the next “business day.”798 The “next business day” is the next day on which the creditor accepts or receives payments by mail.799 This provision addresses prior problems that occurred when due dates fell on a weekend or holiday.

Truth in Lending: 7.7.5.1 Designation of Address for Payment; Change in Address

Regulation Z specifically permits the creditor to designate an address for payment, including a post office box.808 This sometimes creates a problem because it effectively prevents consumers from making timely payments late in the billing cycle by using overnight and other forms of high speed mail that will not deliver to post offices boxes.

Truth in Lending: 7.7.5.2 In-Person Payments

If a credit card issuer is a financial institution that maintains branches or offices, and the consumer makes a payment in person at a branch or office at which credit card payments are accepted in person, the date on which the consumer makes a payment at the branch or office must be considered to be the date on which the payment is made.819 This provision addresses abuses by issuers who failed to credit payments received at their retail branches on the day of receipt, which resulted in imposition of finance charges and/or late fees.

Truth in Lending: 7.7.6 Limit on Fees Related to Method of Payment

The Credit CARD Act limits fees that some issuers previously charged for services such as accepting a payment by telephone or at an internet website. Issuers may not impose a separate fee to allow the cardholder to make a payment on a credit card account, regardless of whether the payment is made by mail, electronic transfer, telephone authorization, or other means, unless the payment involves an expedited service by a customer service representative of the issuer.829

Truth in Lending: 7.7.7.1 General

Many credit card companies in their solicitations heavily advertise low APRs that are only applicable to one category of transactions, such as a balance transfer. In the past, these issuers would allocate payments first to the balance consisting of these transactions with the lower APR, thus maximizing time that the balances subject to higher APRs were outstanding.

Truth in Lending: 7.7.7.2 Minimum Payment Not Governed

The payment allocation rule does not govern the issuer’s ability to allocate the minimum payment, nor does it affect the amount of the minimum payment.848 The lender may apply the minimum payment to the balance with the lowest APR, which is a significant weakness. For example, assume the consumer has a cash advance balance of $300 at 20% APR, a purchase balance of $600 at 15% APR, and a $50 minimum payment. If the consumer makes a $150 payment, the lender may allocate $50 to the purchase balance with the lower APR.

Truth in Lending: 7.7.7.3 Deferred Interest Plans

If a deferred interest program is involved,850 special rules apply during the last two billing cycles immediately preceding the expiration of the deferred interest period. During these last two cycles, the creditor must allocate the entire payment in excess of the minimum to the balance on which interest is deferred.851

Truth in Lending: 7.7.7.5 When the Consumer Withholds Payment

If the consumer has exercised the right to withhold payment based on a billing error dispute or claims or defenses against a merchant, the issuer must allocate in a manner that avoids or minimizes any reduction in the amount of that claim or defense.864 For example, assume that a credit card account has a $500 cash advance balance with an APR of 25% and a $1,000 purchase balance at an APR of 17%, and that the consumer has asserted a billing error dispute with respect to $200 of the cash advance balance.

Truth in Lending: 7.8.1 Overview of Subprime Credit Cards

There are a number of credit card products targeted at the “subprime market,” which generally means consumers with lower credit scores and/or impaired credit histories. These include subprime specialty or “fee-harvester” cards, as well as secured cards.866

Truth in Lending: 7.8.2.1 25% Limit

The Credit CARD Act provides that the total amount of fees that a consumer is required to pay with respect to the account during the first year must not exceed 25% of the account’s credit limit.872 This 25% limit applies to both fees that the issuer charges to the account, as well as fees that the issuer requires the consumer to pay through other means.873 Thus, the issuer cannot avoid the 25% limit by requiring the consumer to pay an amount above 25% by direct payments to the issuer, such a

Truth in Lending: 7.8.2.2 Credit Limit for the Account

The Credit CARD Act’s limitation of 25% applies to the account’s initial credit limit, i.e., the limit in effect when the credit card account is first opened.880 However, if the lender increases the account’s limit during the year, the increase does not permit the lender to charge additional fees.881 Thus, for example, if the initial credit limit for the account is $400, the issuer cannot charge more than $100 in fees, even if the issuer increases the credit limit during the first year to $6

Truth in Lending: 7.8.2.3 Account Opening

For purposes of the 25% limit on fees, an account is considered “open” no earlier than the date on which it can be used to engage in transactions.885 The issuer may consider an account open on any of the following dates:886

Truth in Lending: 7.8.2.4.2 Excluded fees

The Credit CARD Act excludes certain fees from the 25% limit. These include late payment fees, over-the-limit fees, and fees for a returned payment.900 The Act itself only excludes fees for a payment returned for insufficient funds, but Regulation Z expands that exclusion to a fee for a payment returned for any reason.901

Truth in Lending: 7.8.2.4.3 Security deposits charged to the account

One type of abusive fee-harvester card involves a “secured” card in which the security deposit is charged to the card’s credit line, consuming most of the available credit for the account.904 To address this abuse, the official interpretations provide that a security deposit that is charged to a credit card account is a fee for purposes of the 25% limit.905 Thus, these faux security deposits are now limited to 25% of the credit line.

Truth in Lending: 7.8.2.5 Advance Fees

The Credit CARD Act provides that its 25% limitations should not be interpreted to permit the imposition of fees otherwise prohibited by law.907 The official interpretations cite as example certain advance fees that FTC Telemarketing Rule908 prohibits a telemarketer from charging for helping a consumer obtain credit in certain circumstances.909 This provision should also apply to certain advance fees prohibited by some state laws, such as for

Truth in Lending: 7.8.2.6 Applicability to Hybrid Prepaid-Credit Cards

The 25% limit on fees is applicable to hybrid prepaid-credit cards.920 Fees that are included in this 25% cap include any fees imposed on the separate credit feature other than a charge attributable to periodic interest,921 unless excluded as penalty fees or certain optional fees.922 Fees charged to the asset feature are also similarly covered, if they are “imposed as part of the plan” for purposes of the account opening disclosures.

Truth in Lending: 7.9.1 Introduction to FCBA

The Fair Credit Billing Act (FCBA)930 in 1974 added a number of important substantive protections for open-end credit to TILA.931 Most important are the billing error procedures at sections 1666 and 1666a, discussed in this section.

Truth in Lending: 7.9.2.3 Exemption for Transactions Governed by Regulation E

If an extension of credit involves an electronic fund transfer related to an overdraft line of credit agreement or an agreement between a consumer and a financial institution to extend credit to maintain a specified minimum balance in the consumer’s account, the error resolution procedures of Regulation E govern963 instead of Regulation Z.964 However, Regulation Z’s protections regarding withholding payment,965 adverse credit reports,