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Credit Cards

Category: Lending
By Andrea Stritzke    No Comments

The CARD Act seems like it was issued so long ago, given all the regulatory changes we have had since then. And, given the time that has passed, you would think we would have the Act all figured out. Well, it seems there is still some confusion about what happens when you change the member’s card, for example going from non-rewards to rewards and the rewards card has a higher APR. Here’s some information that should help you make that determination.

There are three separate places in Regulation Z that might impact a change in the type of card the member is carrying, such as a change from a non-rewards to rewards.

The first consideration is identifying which disclosures you provide if a member goes from a non-rewards to rewards card. Do you provide a change in terms or new account opening disclosures? Section 1026.5 of Regulation Z states:

ii. Relevant facts and circumstances. When most of the facts and circumstances listed below are present, the substitution or replacement likely constitutes the opening of a new account for which §1026.6(b) disclosures are appropriate. When few of the facts and circumstances listed below are present, the substitution or replacement likely constitutes a change in the terms of an existing account for which §1026.9(c)(2) disclosures are appropriate.

A. Whether the card issuer provides the consumer with a new credit card;

B. Whether the card issuer provides the consumer with a new account number;

C. Whether the account provides new features or benefits after the substitution or replacement (such as rewards on purchases);

D. Whether the account can be used to conduct transactions at a greater or lesser number of merchants after the substitution or replacement (such as when a retail card is replaced with a cobranded general purpose credit card that can be used at a wider number of merchants);

E. Whether the card issuer implemented the substitution or replacement on an individualized basis (such as in response to a consumer’s request); and

F. Whether the account becomes a different type of open-end plan after the substitution or replacement (such as when a charge card is replaced by a credit card).

The second consideration is determining whether the APR can be increased in the first year the rewards account is opened. So, if your rewards card has a higher APR than your non-rewards and the member is switching from non-rewards to rewards and the account has been open for less than a year, you must consider Reg Z section 1026.55(b). In summary, the section provides the following: For non-rewards accounts where the consumer then opens a rewards account, you cannot increase the APR on the rewards account during the first year the rewards account is open if the member can use both the non-rewards account and the rewards account for more than 30 days after the rewards account is opened. If the non-rewards card is closed and the member can only use the rewards card, the rewards card would not be a new account and would be a a substitute/consolidation for the existing card because it is a credit card being replaced with another credit card offering different features. This conclusion only applies to whether you can increase the APR during the first year the account is opened. You can increase the APR during the first year on the rewards card, so long as the non-rewards card has been open for more than 1 year. If the non-rewards card has been opened for less than a year, then you cannot increase the APR until the account using the opening date of the non-rewards (which is substituted by the rewards) has been open for at least one year. The commentary to section 1026.55(b) states:

3. Account opening. i. Multiple accounts with same card issuer. When a consumer has a credit card account with a card issuer and the consumer opens a new credit card account with the same card issuer (or its affiliate or subsidiary), the opening of the new account constitutes the opening of a credit card account for purposes of §1026.55(b)(3)(iii) [provision prohibiting increasing APR during first year account is opened] if, more than 30 days after the new account is opened, the consumer has the option to obtain additional extensions of credit on each account. For example, assume that, on January 1 of year one, a consumer opens a credit card account with a card issuer. On July 1 of year one, the consumer opens a second credit card account with that card issuer. On July 15, a $1,000 balance is transferred from the first account to the second account. The opening of the second account constitutes the opening of a credit card account for purposes of §1026.55(b)(3)(iii) so long as, on August 1, the consumer has the option to engage in transactions using either account. Under these circumstances, the card issuer could not increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) on the second account pursuant to §1026.55(b)(3) until July 1 of year two (which is one year after the second account was opened).

ii. Substitution, replacement or consolidation. A. Generally. A credit card account has not been opened for purposes of §1026.55(b)(3)(iii) when a credit card account issued by a card issuer is substituted, replaced, or consolidated with another credit card account issued by the same card issuer (or its affiliate or subsidiary). Circumstances in which a credit card account has not been opened for purposes of §1026.55(b)(3)(iii) include when:

1. A retail credit card account is replaced with a cobranded general purpose credit card account that can be used at a wider number of merchants;

2. A credit card account is replaced with another credit card account offering different features;

3. A credit card account is consolidated or combined with one or more other credit card accounts into a single credit card account; or

4. A credit card account acquired through merger or acquisition is replaced with a credit card account issued by the acquiring card issuer.

B. Limitation. A card issuer that replaces or consolidates a credit card account with another credit card account issued by the card issuer (or its affiliate or subsidiary) may not increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) in a manner otherwise prohibited by §1026.55. For example, assume that, on January 1 of year one, a consumer opens a credit card account with an annual percentage rate of 15% for purchases. On July 1 of year one, the account is replaced with a credit card account that offers different features (such as rewards on purchases). Under these circumstances, §1026.55(b)(3)(iii) prohibits the card issuer from increasing the annual percentage rate for new purchases to a rate that is higher than 15% pursuant to §1026.55(b)(3) until January 1 of year two (which is one year after the first account was opened).

The third consideration is whether you must protect the balance on the non-rewards account if you are increasing the APR to move the member to the rewards account. Whether you close the non-rewards account or transfer the balance from the non-rewards account, you still have to protect the balance on the non-rewards account. Reg Z would consider the balance being transferred if the credit card account is substituted with another account offering different features (which is a rewards account). Thus, the balance transferred from the non-rewards to rewards must be protected. The commentary to section 1026.55(d) states:

1. Closed accounts. If a credit card account under an open-end (not home-secured) consumer credit plan with a balance is closed, §1026.55 continues to apply to that balance. For example, if a card issuer or a consumer closes a credit card account with a balance, §1026.55(d)(1) prohibits the card issuer from increasing the annual percentage rate that applies to that balance or imposing a periodic fee based solely on that balance that was not charged before the account was closed (such as a closed account fee) unless permitted by one of the exceptions in §1026.55(b).

3. Balance transfers. i. Between accounts issued by the same creditor. If a balance is transferred from a credit card account under an open-end (not home-secured) consumer credit plan issued by a creditor to another credit account issued by the same creditor or its affiliate or subsidiary, §1026.55 continues to apply to that balance. For example, if a credit card account has a $2,000 purchase balance with an annual percentage rate of 15% and that balance is transferred to another credit card account issued by the same creditor that applies an 18% rate to purchases, §1026.55(d)(2) prohibits the creditor from applying the 18% rate to the $2,000 balance unless permitted by one of the exceptions in §1026.55(b). However, the creditor would not generally be prohibited from charging a new periodic fee (such as an annual fee) on the second account so long as the fee is not based solely on the $2,000 balance and the creditor has notified the consumer of the fee either by providing written notice 45 days before imposing the fee pursuant to §1026.9(c) or by providing account-opening disclosures pursuant to §1026.6(b). See also §1026.55(b)(3)(iii); comment 55(b)(3)–3; comment 5(b)(1)(i)–6. Additional circumstances in which a balance is considered transferred for purposes of §1026.55(d)(2) include when:

A. A retail credit card account with a balance is replaced or substituted with a cobranded general purpose credit card account that can be used with a broader merchant base;

B. A credit card account with a balance is replaced or substituted with another credit card account offering different features;

C. A credit card account with a balance is consolidated or combined with one or more other credit card accounts into a single credit card account; and

D. A credit card account is replaced or substituted with a line of credit that can be accessed solely by an account number.

 

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