Truth in Lending, 28866-28901 [E8-10242]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 73, Number 97 (Monday, May 19, 2008)]
[Proposed Rules]
[Pages 28866-28901]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-10242]



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Part II





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Proposed Rule

Federal Register / Vol. 73, No. 97 / Monday, May 19, 2008 / Proposed 
Rules

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1286]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: On June 14, 2007, the Board published proposed amendments to 
Regulation Z, which implements the Truth in Lending Act (TILA), and to 
the staff commentary to the regulation, following a comprehensive 
review of TILA's rules for open-end (revolving) credit that is not 
home-secured. The proposed revisions addressed disclosures provided 
with credit card applications and solicitations, at account-opening, on 
periodic statements, when terms are changed on an account, and in 
advertisements.
    The Board is seeking comment on a limited number of additional 
revisions to the regulation and commentary. New proposed amendments 
address creditors' responsibilities to establish reasonable 
instructions for receiving timely payments and when a due date falls on 
a weekend or holiday. Creditors' responsibilities when investigating a 
claim of unauthorized transactions or an allegation of a billing error 
are also addressed. Advertisements for deferred interest plans would be 
required to provide additional information about how interest could be 
imposed. Comments submitted to the Board in response to the June 2007 
proposed revisions remain under consideration by the Board and need not 
be submitted a second time.

DATES: Comments must be received on or before July 18, 2008.

ADDRESSES: You may submit comments, identified by Docket No. R-1286, by 
any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's web site at 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Benjamin K. Olson, Attorney, Amy Burke 
or Vivian Wong, Senior Attorneys, Krista Ayoub, Ky Tran-Trong, or John 
C. Wood, Counsels, or Jane Ahrens, Senior Counsel, Division of Consumer 
and Community Affairs, Board of Governors of the Federal Reserve 
System, at (202) 452-3667 or 452-2412; for users of Telecommunications 
Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background on TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that economic stability would be enhanced and competition among 
consumer credit providers would be strengthened by the informed use of 
credit resulting from consumers' awareness of the cost of credit. The 
purposes of TILA are (1) to provide a meaningful disclosure of credit 
terms to enable consumers to compare credit terms available in the 
marketplace more readily and avoid the uninformed use of credit; and 
(2) to protect consumers against inaccurate and unfair credit billing 
and credit card practices.
    TILA's disclosures differ depending on whether consumer credit is 
an open-end (revolving) plan or a closed-end (installment) loan. TILA 
also contains procedural and substantive protections for consumers. 
TILA is implemented by the Board's Regulation Z. An Official Staff 
Commentary interprets the requirements of Regulation Z. By statute, 
creditors that follow in good faith Board or official staff 
interpretations are insulated from civil liability, criminal penalties, 
or administrative sanction.

II. Review of Regulation Z's Rules for Open-End (Not Home-Secured) 
Plans

    The Board published proposed amendments to Regulation Z's rules for 
open-end plans that are not home-secured in June 2007 (June 2007 
Proposal). 72 FR 32948, June 14, 2007. The goal of the amendments is to 
improve the effectiveness of the disclosures that creditors provide to 
consumers at application and throughout the life of an open-end (not 
home-secured) account. The proposed changes affect the format, timing, 
and content requirements for the five main types of open-end credit 
disclosures governed by Regulation Z: (1) Credit and charge card 
application and solicitation disclosures; (2) account-opening 
disclosures; (3) periodic statement disclosures; (4) change-in-term 
notices; and (5) advertisements.
    The June 2007 Proposal was preceded by two advance notices of 
proposed rulemaking (ANPR). In December 2004, the Board announced its 
intent to conduct a review of Regulation Z in stages, starting with the 
rules for open-end (revolving) credit accounts that are not home-
secured, chiefly general-purpose credit cards and retail credit card 
plans (December 2004 ANPR). 69 FR 70925, December 8, 2004. The December 
2004 ANPR sought public comment on a variety of specific issues 
relating to three broad categories: the format of open-end credit 
disclosures, the content of those disclosures, and the substantive 
protections provided for open-end credit under the regulation.
    In October 2005, the Board published a second ANPR (October 2005 
ANPR). 70 FR 60235, October 17, 2005. The October 2005 ANPR solicited 
comment on implementing amendments to TILA contained in the Bankruptcy 
Abuse Prevention and Consumer Protection Act of 2005 (the ``Bankruptcy 
Act''). Public Law 109-8, 119 Stat. 23. The Bankruptcy Act's TILA 
amendments principally affect open-end credit accounts and require new 
disclosures on periodic statements, on credit card applications and 
solicitations, and in advertisements. In the October 2005 ANPR, the 
Board stated its intent to implement the Bankruptcy Act amendments as 
part of the Board's ongoing review of Regulation Z's open-end credit 
rules.
    In developing the June 2007 Proposal, the Board conducted consumer 
research, in addition to considering comments received on the two 
ANPRs. Specifically, the Board retained a research and consulting firm 
(Macro International) to assist the Board in using consumer testing to 
develop proposed model forms for the summary table disclosures provided 
in direct-mail solicitations and applications; disclosures provided at 
account opening; periodic statement disclosures; and subsequent 
disclosures, such as notices provided when key account

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terms are changed, and notices on checks provided to access credit card 
accounts. A report summarizing the results of the Board's testing 
efforts is available on the Board's Web site: https://
www.federalreserve.gov.
    The Board received over 2,500 comments on the June 2007 Proposal. 
About 85% of these were from consumers and consumer groups, and of 
those, nearly all (99%) were from individuals. Regarding comments from 
industry representatives, about 10% were from financial institutions or 
their trade associations. The vast majority (90%) of the industry 
letters were from credit unions and their trade associations. Those 
latter comments were mainly about a proposed revision to the definition 
of open-end credit that could affect how many credit unions currently 
structure their consumer loan products.
    A summary of comments received in response to the June 2007 
Proposal and this rulemaking (May 2008 Proposal) will be included in 
the Board's final revisions to Regulation Z's open-end credit rules. In 
general, commenters generally supported the June 2007 Proposal and the 
Board's use of consumer testing to develop revisions to disclosure 
requirements. There was opposition to some aspects of the proposal. For 
example, industry representatives opposed many of the format 
requirements for periodic statements, as being overly prescriptive. 
They also opposed the Board's proposal to require creditors to provide 
at least 45 days' advance notice before certain key terms change or 
interest rates are increased due to default or delinquency. Consumer 
groups opposed the Board's proposed alternative that would eliminate 
the effective annual percentage rate (APR) as a periodic statement 
disclosure. Consumers and consumer groups also believe the Board's 
proposal was too limited in scope and urged the Board to provide more 
substantive protections and prohibit certain card issuer practices.
    In early 2008, the Board worked with its testing consultant, Macro 
International, to revise model disclosures in response to comments 
received, and in March 2008, the Board conducted an additional round of 
one-on-one cognitive interviews on revised disclosures provided with 
applications and solicitations, on periodic statements, and with checks 
that access a credit card account. The results of these interviews are 
discussed throughout the section-by-section analysis below, to the 
extent the March 2008 testing influenced the matters being proposed in 
this May 2008 Proposal.
    The Board will continue to work with its consultant to revise the 
model disclosures, based on comments received on the June 2007 and May 
2008 Proposals. Macro International then will conduct additional rounds 
of cognitive interviews to test the revised disclosures. After the 
cognitive interviews, quantitative testing will be conducted. The goal 
of the quantitative testing is to measure consumers' comprehension and 
the usability of the newly-developed disclosures relative to existing 
disclosures and formats.

III. Effect of Additional Rulemaking on June 2007 Proposal

    The Board is publishing additional proposed revisions to a limited 
number of provisions affecting Regulation Z's rules for open-end credit 
(May 2008 Proposal). Proposed amendments to Regulation Z that were 
published in June 2007 and are not addressed in VI. Section-by-section 
Analysis below remain under the Board's consideration as proposed. 
Comments submitted to the Board in response to those June 2007 proposed 
revisions to Regulation Z need not be submitted a second time.
    The Board, along with the Office of Thrift Supervision and the 
National Credit Union Administration, is also publishing elsewhere in 
today's Federal Register a proposal to adopt rules prohibiting specific 
unfair acts or practices with respect to consumer credit card accounts 
under their authority under the Federal Trade Commission Act (FTC 
Act).\1\ See 15 U.S.C. 57a(f)(1). The Board's proposal would add a new 
Subpart C to the Board's Regulation AA, Unfair or Deceptive Acts or 
Practices (2008 Regulation AA Proposal). 12 CFR part 227. The proposal 
would, among others, (1) prohibit banks from treating payments on a 
consumer credit card account as late unless the consumer is provided 
with a reasonable amount of time to make a payment, (2) establish rules 
governing the allocation of payments on outstanding balances, (3) limit 
banks' ability to increase the rate of interest applicable to any 
outstanding balance, and (4) prohibit banks from computing finance 
charges based on balances for days in billing cycles preceding the most 
recent billing cycle.
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    \1\ For simplicity, this notice will refer only to the Board's 
proposal.
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    At the end of the period for public comment for the May 2008 
Proposal and the 2008 Regulation AA Proposal, the Board will review the 
comments received and continue to conduct additional consumer tests on 
revised disclosures to consider any appropriate changes. The comment 
period for this May 2008 Proposal is 60 days (rather than 75 days, as 
provided in the Regulation AA Proposal) after this notice is published 
in the Federal Register, to facilitate a timely resumption and 
completion of the Board's consumer testing efforts. Following the 
Board's analysis of the comments (including comments from the June 2007 
Proposal) and the results of consumer testing, the Board anticipates 
adopting at the same time final rules for these related proposals. The 
Board will provide creditors and processors with an adequate time to 
implement the necessary changes.

IV. Summary of Proposed Revisions

    Applications and Solicitations. The June 2007 Proposal contained 
changes to the format and content of credit and charge card application 
and solicitation disclosures to make them more meaningful and easier 
for consumers to use. The May 2008 Proposal would revise the content 
requirements on several disclosures, as follows:
     Grace period labels. The June 2007 proposed requirement to 
use the term ``grace period'' as a heading in the summary table 
provided at application (and elsewhere such as at account opening or 
with checks that access credit card accounts) would be eliminated. The 
phrase ``how to avoid interest'' (or ``paying interest'' if no grace 
period exists) or substantially similar terminology would be required 
instead.
     Minimum interest charge. The May 2008 Proposal would add a 
de minimis dollar amount trigger of $1.00 for disclosing minimum 
interest or finance charges. Currently, card issuers must disclose in 
the summary table at application and account opening any minimum 
interest or finance charge. The $1.00 trigger would be adjusted when 
cumulative percentage changes to the Consumer Price Index added to the 
$1.00 trigger equals or exceeds the next whole dollar.
     Foreign transaction fees. The May 2008 Proposal would 
require issuers to disclose fees for purchase transactions in a foreign 
currency or conducted outside the United States in the table provided 
at application or solicitation. The June 2007 Proposal required 
creditors to disclose these fees in the summary table provided at 
account-opening but not in the table provided at application or 
solicitation.
     Penalty rate when credit privileges are terminated. 
Currently, card issuers are not required to disclose in the

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application summary table increased rates that apply when credit 
privileges are terminated. The May 2008 Proposal would eliminate the 
exception.
     Oral disclosures. Card issuers generally must provide cost 
disclosures in oral applications or solicitations initiated by the 
issuer. The May 2008 Proposal would require additional oral disclosures 
for issuers that require fees or a security deposit to issue the card 
that are 25 percent or more of the minimum credit limit offered for the 
account. These issuers would be required to orally provide the amount 
of available credit the consumer would have after paying the fees or 
security deposit, assuming the consumer receives the minimum credit 
limit.
    Account-opening Disclosures. The May 2008 Proposal would require 
creditors assessing fees at account opening that are 25 % or more of 
the minimum credit limit to provide a notice of the consumer's right to 
reject the plan after receiving disclosures if the consumer has not 
used the account or paid a fee (other than certain application fees). 
Changes regarding ``grace period'' terminology and minimum interest 
charge disclosure requirements are proposed to conform the disclosure 
requirements for the account-opening table to the requirements for the 
table required with applications or solicitations. Model forms are 
proposed to ease compliance for creditors offering open-end (not home-
secured) plans that are not accessed by credit cards, such as lines of 
credit or overdraft plans.
    Checks that Access Credit Card Accounts. The June 2007 Proposal 
required creditors to disclose on the front of the page containing the 
checks that access credit card accounts information such as the rates 
that will apply if the checks are used, any transaction fees, and 
whether or not a grace period exists. The May 2008 Proposal would add a 
requirement to disclose any date by which consumers must use the check 
to receive the disclosed rates.
    Changes in Consumer's Interest Rate and Other Account Terms. The 
June 2007 Proposal required that when a change-in-terms notice 
accompanies a periodic statement, creditors provide a tabular 
disclosure on the front of the periodic statement of the key terms 
being changed. Consistent with the 2008 Regulation AA Proposal that 
restricts creditors' ability to apply increased rates to certain 
existing balances, creditors would be required to clarify how existing 
or new balances would be affected by any rate increase.
    Crediting Payments. Currently, creditors may require consumers to 
comply with reasonable payment instructions, including a cut-off hour 
for receiving payments. The May 2008 Proposal deems a cut-off hour for 
mailed payments before 5 p.m. on the due date to be an unreasonable 
instruction. Creditors that set due dates on a weekend or holiday but 
do not accept mailed payments on those days would not be able to 
consider a payment received on the next business day as late for any 
reason.
    Investigating Claims of Unauthorized Transactions or Allegations of 
Billing Errors. Currently, creditors must conduct a reasonable 
investigation before imposing liability for an unauthorized 
transaction, and may reasonably request a consumer's cooperation. The 
May 2008 Proposal clarifies that a creditor may not, however, deny a 
claim solely if the consumer does not comply with a request to sign a 
written affidavit or file a police report, and for consistency extends 
guidance for reasonably investigating claims of unauthorized 
transactions to allegations of billing errors.
    Advertising Provisions. For deferred interest plans that advertise 
``no interest'' or similar terms, the May 2008 Proposal would add 
notice and proximity requirements to require advertisements to state 
the circumstances under which interest is charged from the date of 
purchase and, if applicable, that the minimum payments required will 
not pay off the balance in full by the end of the deferral period. 
Model clauses are proposed to ease compliance.

V. The Board's Rulemaking Authority

    TILA mandates that the Board prescribe regulations to carry out the 
purposes of the act. TILA also specifically authorizes the Board, among 
other things, to do the following:

     Issue regulations that contain such classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for any class of transactions, that in 
the Board's judgment are necessary or proper to effectuate the 
purposes of TILA, facilitate compliance with the act, or prevent 
circumvention or evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of 
transactions if the Board determines that TILA coverage does not 
provide a meaningful benefit to consumers in the form of useful 
information or protection. The Board must consider factors 
identified in the act and publish its rationale at the time it 
proposes an exemption for comment. 15 U.S.C. 1604(f).
     Add or modify information required to be disclosed with 
credit and charge card applications or solicitations if the Board 
determines the action is necessary to carry out the purposes of, or 
prevent evasions of, the application and solicitation disclosure 
rules. 15 U.S.C. 1637(c)(5).
     Require disclosures in advertisements of open-end 
plans. 15 U.S.C. 1663.

    For the reasons discussed in this notice, the Board is using its 
specific authority under TILA, in concurrence with other TILA 
provisions, to effectuate the purposes of TILA, to prevent the 
circumvention or evasion of TILA, and to facilitate compliance with the 
act.

VI. Section-By-Section Analysis

Section 226.5 General Disclosure Requirements

5(a) Form of Disclosures
5(a)(1) General
Paragraph 5(a)(1)(ii)(A)
    Under Sec.  226.5(a)(1)(ii)(A) in the June 2007 Proposal, certain 
disclosures need not be written, including disclosures under Sec.  
226.6(b)(1) of charges that are imposed as part of the plan and may be 
provided at any time before the consumer agrees to pay or becomes 
obligated to pay for the charge, pursuant to the disclosure timing 
requirements of Sec.  226.5(b)(1)(ii). 72 FR 32948, 33043, June 14, 
2007. Under proposed Sec.  226.5(b)(1)(ii), these charges are charges 
that are imposed as part of the plan but that are not required to be 
disclosed in a tabular format under Sec.  226.6(b)(4). 72 FR 32948, 
33044, June 14, 2007. Such charges would include, for example, a charge 
to make an on-line payment on the account. In addition, under proposed 
Sec.  226.5(a)(1)(ii)(A), change-in-terms disclosures, under Sec.  
226.9(c)(2)(ii)(B), related to the disclosures discussed above (for 
example, an increase in the amount of an on-line payment charge) also 
need not be provided in writing.
    Commenters on the June 2007 Proposal suggested that creditors 
should be permitted to provide disclosures in electronic form, without 
having to comply with the consumer notice and consent procedures of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act), 
15 U.S.C. 7001 et seq., at the time an on-line or other electronic 
service is used. For example, commenters suggested, if a consumer 
wishes to make an on-line payment on the account, for which the 
creditor imposes a fee (which has not previously been disclosed), the 
creditor should be allowed to disclose the fee electronically, without 
E-Sign notice and consent, at the time the on-line payment service is 
requested.

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Commenters contended that such a provision would not harm consumers and 
would expedite transactions, and also that it would be consistent with 
the Board's proposal to permit oral disclosure of such fees.
    Under section 101(c) of the E-Sign Act, if a statute or regulation 
requires that consumer disclosures be provided in writing, certain 
notice and consent procedures must be followed in order to provide the 
disclosures in electronic form. Since, under the Board's June 2007 
Proposal, the disclosures discussed above are not required to be 
provided in writing, the Board believes that the E-Sign notice and 
consent requirements do not apply when the consumer requests the 
service in electronic form. The Board proposes to add comment 
5(a)(1)(ii)(A)-1 to clarify this matter.
Paragraph 5(a)(1)(iii)
    Under Sec.  226.5(a)(1)(iii) in the June 2007 Proposal, certain 
disclosures may be provided in electronic form without regard to the 
consumer notice and consent provisions of the E-Sign Act. The Board 
proposes to add comment 5(a)(1)(iii)-1 to clarify that the disclosures 
specified in Sec.  226.5(a)(1)(ii)(A) also may be provided in 
electronic form without regard to the E-Sign Act when the consumer 
requests the service in electronic form, such as on a creditor's Web 
site.
5(a)(2) Terminology
    Use of the term ``grace period''. Under Sec.  226.5(a)(2)(iii) in 
the June 2007 Proposal, the term ``grace period'' would be required to 
be used, as applicable, in any disclosure that must be in tabular 
format under proposed Sec.  226.5(a)(3). 72 FR 32948, 33044, June 14, 
2007. TILA Section 122(c)(2)(C), which is implemented currently in 
Sec.  226.5a(a)(2)(ii), requires credit card applications and 
solicitations under Sec.  226.5a to use the term ``grace period'' to 
describe the date by which or the period within which any credit 
extended for purchases may be repaid without incurring a finance 
charge. 15 U.S.C. 1632(c)(2)(C). The Board's proposal was meant to 
promote uniformity in the use of this term across other disclosures and 
thereby improve consumer understanding of the concept.
    Some industry commenters argued, however, that the Board should 
reconsider requiring use of the term ``grace period.'' One industry 
commenter noted that research conducted by the Board and by the United 
States Government Accountability Office (GAO), as well as the 
commenter's own research, demonstrated that the term is confusing as a 
descriptor of the interest-free period between the purchase and the due 
date for customers who pay their balances in full.\2\ This commenter 
suggested that the Board revise the disclosure of the grace period in 
the credit card application and solicitation table to use the heading 
``interest-free period'' instead of ``grace period.''
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    \2\ United States Government Accountability Office, Credit 
Cards: Increased Complexity in Rates and Fees Heightens Need for 
More Effective Disclosures to Consumers, 06-929 (September 2006) 
(GAO Report on Credit Card Rates and Fees).
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    The Board further tested alternative disclosures for the grace 
period in March 2008. Based on the results from consumer testing, as 
discussed in greater detail in the section-by-section analysis to Sec.  
226.5a(b)(5) below, the Board is using its authority under TILA 
Sections 105(a) and (f), and TILA Section 127(c)(5) to delete the 
requirement to use the term ``grace period'' in the table required by 
Sec.  226.5a. 15 U.S.C. 1604(a) and (f), 1637(c)(5). To maintain 
consistent terminology across other disclosures, the Board is also 
withdrawing its proposal under Sec.  226.5(a)(2)(iii) to require the 
term ``grace period'' to be used, as applicable, in any disclosure that 
must be in tabular format under proposed Sec.  226.5(a)(3). If this 
approach is adopted as proposed, conforming changes will also be made 
to remove the term ``grace period'' from all model forms and associated 
commentary when the Board adopts revisions to the Regulation Z rules 
for open-end (not home-secured) plans.
    The Board also notes that with the removal of the term ``grace 
period'' from the table required by Sec.  226.5a, use of the term 
``grace period'' in subsequent disclosures to the consumer would not be 
appropriate pursuant to the proposed requirement that creditors use 
consistent terminology under proposed Sec.  226.5(a)(2)(i). While the 
use of identical language is not required under proposed comment 
5(a)(2)-4, creditors are still required to use terms close enough in 
meaning to enable the consumer to relate the different disclosures. As 
discussed further below with respect to the proposed revisions to Sec.  
226.5a(b)(5), the Board proposes to require using language focused on 
the terms ``how to avoid paying interest'' or ``paying interest.'' 
Consequently, subsequent disclosures to consumers should also use 
similar terms.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured) 
Plan
    Comment 5(b)(1)(ii)-1, under the June 2007 Proposal, states that 
charges that are imposed as part of an open-end (not home-secured) 
plan, other than those specified in Sec.  226.6(b)(4), may be disclosed 
orally or in writing at any time before a consumer agrees to pay the 
charge or becomes obligated for the charge. 72 FR 32948, 33104, June 
14, 2007. The Board proposes to revise the comment to clarify that 
electronic disclosure of these charges, without regard to the E-Sign 
Act notice and consent requirements, is also permissible as an 
alternative to oral or written disclosure, when a consumer requests a 
service in electronic form, such as on a creditor's Web site.
5(b)(1)(iv) Membership Fees
    TILA Section 127(a) requires creditors to provide specified 
disclosures ``before opening any account.'' 15 U.S.C. 1637(a). Section 
226.5(b)(1) requires these disclosures (identified in Sec.  226.6) to 
be furnished before the first transaction is made under the plan. In 
the June 2007 Proposal, guidance currently in comment 5(b)(1)-1 about 
creditors' ability to assess certain membership fees before consumers 
receive the account-opening disclosures was moved to Sec.  
226.5(b)(1)(iv). Currently and under the June 2007 Proposal, creditors 
may collect or obtain the consumer's promise to pay, a membership fee 
before the disclosures are provided, if the consumer can reject the 
plan after receiving the disclosures. If a consumer rejects the plan, 
the creditor must promptly refund the fee if it has been paid or take 
other action necessary to ensure the consumer is not obligated to pay 
the fee. 72 FR 32948, 33044, June 14, 2007.
    Comment 5(b)(1)-1 currently provides that if after receiving the 
account-opening disclosures, the consumer uses the account, pays a fee 
or negotiates a cash advance check, the creditor may consider the 
account not rejected. The comment, renumbered as comment 5(b)(1)(i)-1 
in the June 2007 Proposal, was amended to clarify that if the only 
activity on account is the creditor's assessment of fees (such as 
start-up fees), the consumer is not considered to have accepted the 
account until the consumer is provided with a billing statement and 
makes a payment. 72 FR 32948, 33103, June 14, 2007. The June 2007 
proposed clarification was intended to address concerns about some 
subprime card accounts that

[[Page 28870]]

assess a large number of fees at account opening. Consumers who have 
not made purchases or otherwise obtained credit on the account would 
have an opportunity to review their account-opening disclosures and 
decide whether to reject the account and decline to pay the fees.
    Few comments were received on the June 2007 proposed interpretation 
regarding when a consumer is considered to have accepted an account. 
Consumer groups supported the proposal but urged the Board to require a 
disclosure on periodic statements that would inform consumers about 
their right to reject the plan and not pay fees agreed to prior to 
receiving account-opening disclosures. An industry commenter also 
supported the proposal but suggested the Board provide a safe harbor 
for considering the account as accepted, such as 30 days after a 
consumer received a new credit card and account-opening disclosures.
    The Board proposes additional clarifications to ease compliance and 
to address further the concerns raised in the June 2007 Proposal. 
Comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007 
Proposal, addresses a creditor's general duty to provide account-
opening disclosures ``before the first transaction.'' The comment is 
reorganized for clarity to provide existing examples of ``first 
transactions.''
    The Board further clarifies consumers' right not to pay fees that 
were assessed or agreed to be paid before the consumer received 
account-opening disclosures, if a consumer rejects a plan after 
receiving the disclosures, as stated in Sec.  226.5(b)(1)(iv) of the 
June 2007 Proposal. Currently and under the June 2007 Proposal, 
creditors may collect or obtain the consumer's agreement to pay 
``membership fees'' before providing account-opening disclosures if the 
consumer may reject the plan after receiving the disclosures, but the 
term ``membership fee'' is not defined. The Board proposes in revised 
Sec.  226.5(b)(1)(iv) and new comment 5(b)(1)(iv)-1 that ``membership 
fee'' has the same meaning as fees for issuance or availability of a 
credit or charge card under Sec.  226.5a(b)(2), for consistency and 
ease of compliance. Such fees include annual or other periodic fees, or 
``start-up'' fees such as account-opening fees. 72 FR 32948, 33046, 
33108, June 14, 2007.
    Comment 5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 
2007 Proposal, currently provides that home equity lines of credit 
(HELOCs) are not subject to the prohibition on the payment of fees 
other than application or refundable membership fees before account-
opening disclosures are provided. See Sec.  226.5b(h) regarding 
limitations on the collection of fees. This existing guidance is moved 
to revised Sec.  226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for 
clarity.
    Also, under revised Sec.  226.5(b)(1)(iv), the Board proposes to 
clarify that if a consumer rejects an open-end (not home-secured) plan 
as permitted under that provision (i.e., if the creditor collects or 
obtains the consumer's agreement to pay ``membership fees'' before 
providing account-opening disclosures), consumers are not obligated to 
pay any membership fee, or any other fee or charge (other than an 
application fee that is charged to all applicants whether or not they 
receive the credit). The revision is intended to remove ambiguity that 
if a consumer rejects a plan under Sec.  226.5(b)(1)(iv), the consumer 
could nevertheless be obligated for fees or charges (including interest 
on unpaid fee balances) other than a ``membership fee'' or certain 
application fees.
    Comments 5(b)(1)(iv)-2 and -3 are proposed to provide guidance on 
when a consumer is considered to have rejected the plan. Comment 
5(b)(1)(iv)-2 provides guidance currently in comment 5(b)(1)-1, 
renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, that a 
consumer who has received account-opening disclosures and uses the 
account or makes a payment on the account after receiving a billing 
statement is deemed not to have rejected the plan. The Board proposes 
to provide a safe harbor: A creditor may deem the plan to be rejected 
if, 60 days after the creditor mailed the account-opening disclosures, 
the consumer has not used the account or made a payment on the account. 
The Board requests comment on whether another time period would be more 
appropriate.
    New comment 5(b)(1)(iv)-3 provides guidance currently in comment 
5(b)(1)-1, renumbered as comment 5(b)(1)(i)-1 in the June 2007 
Proposal, regarding when a consumer is considered to have ``used'' the 
account. The Board proposes to add that a consumer is not considered to 
use an account when, for example, a consumer receives a credit card in 
the mail and calls to activate the card for security purposes. This is 
added in response to requests for Board staff to provide guidance on 
the issue. The Board also proposes additional guidance about the 
assessment of creditors' fees, as a further response to concerns raised 
in the June 2007 Proposal. The comment would clarify that a consumer 
does not ``use'' an account when the creditor assesses fees (such as 
start-up fees or fees associated with credit insurance or debt 
cancellation or suspension programs agreed to as a part of the 
application and before the consumer receives account-opening 
disclosures) to the account. Similarly, the consumer does not ``use'' 
an account when, for example, a creditor sends a billing statement with 
start-up fees, there is no other activity on the account, the consumer 
does not pay the fees, and the creditor subsequently assesses a late 
fee or interest on the unpaid fee balances.
    As discussed in the section-by-section analysis to Sec.  
226.6(b)(4)(vii), the Board also proposes a disclosure requirement for 
creditors that require substantial fees at account opening and leave 
consumers with a limited amount of available credit. Those creditors 
would be required to provide a notice of the consumer's right to reject 
the plan and not pay fees unless the consumer uses the account or pays 
the fees. The proposed revision to the timing rules in Sec.  
226.5(b)(1)(iv) regarding the collection of fees prior to the delivery 
of account-opening disclosures would apply to all open-end (not home-
secured) plans, although the Board believes the impact of the proposal 
would primarily affect some subprime credit card issuers. The Board 
solicits comment on the appropriate scope.

Section 226.5a Credit and Charge Card Applications and Solicitations

    TILA Section 127(c), implemented by Sec.  226.5a, requires card 
issuers to provide certain cost disclosures on or with an application 
or solicitation to open a credit or charge card account.\3\ 15 U.S.C. 
1637(c). The format and content requirements differ for cost 
disclosures in card applications or solicitations, depending on whether 
the applications or solicitations are given through direct mail, 
provided electronically, provided orally, or made available to the 
general public such as in ``take-one'' applications and in catalogs or 
magazines. Disclosures in applications and solicitations provided by 
direct mail or electronically must be presented in a table. For oral 
applications and solicitations, certain cost disclosures must be 
provided orally, except that issuers in some cases are allowed to 
provide the disclosures later in a written form. Applications and 
solicitations made available to the general public, such as in a take-
one application, must contain one of the

[[Page 28871]]

following: (1) The same disclosures as for direct mail presented in a 
table; (2) a narrative description of how finance charges and other 
charges are assessed, or (3) a statement that costs are involved, along 
with a toll-free telephone number to call for further information.\4\
---------------------------------------------------------------------------

    \3\ Charge cards are a type of credit card for which full 
payment is typically expected upon receipt of the billing statement. 
To ease discussion, this memorandum will refer simply to ``credit 
cards.''
    \4\ In the June 2007 Proposal, the Board proposed revising the 
rule applicable to take-ones to delete the option to satisfy the 
provisions of Sec.  226.5a by including a narrative description of 
how finance charge and other charges are assessed. See proposed 
Sec.  226.5a(e), 72 Fr 32948, 33048, June 14, 2007.
---------------------------------------------------------------------------

5a(b) Required Disclosures
5a(b)(1) Annual Percentage Rate
    Currently, Sec.  226.5a(b)(1), which implements TILA Section 
127(c)(1)(A)(i)(I), requires issuers to disclose each APR that may be 
used to compute the finance charge on an outstanding balance for 
purchases, a cash advance, or a balance transfer. Comment 5a(b)(1)-7 
requires that if a rate may increase upon the occurrence of one or more 
specific events, such as a late payment or an extension of credit that 
exceeds the credit limit, the card issuer must disclose the increased 
penalty rate that may apply and the specific event or events that may 
result in the increased rate. The specific event or events must be 
described outside the table with an asterisk or other means to direct 
the consumer to the additional information. Comment 5a(b)(1)-7 also 
specifies that an issuer need not disclose an increased rate that would 
be imposed if credit privileges are permanently terminated.
    In the June 2007 Proposal, the Board proposed a number of changes 
to how penalty rates are disclosed in the table to enhance consumers' 
awareness of these rates and the specific event or events that may 
result in the increase of rates. See proposed Sec.  226.5a(b)(1)(iv) 
and new comment 5a(b)(1)-4 (previously comment 5a(b)(1)-7). 72 FR 
32948, 33046, June 14, 2007. For example, the Board proposed to require 
card issuers to briefly disclose in the table the specific event or 
events that may result in the penalty rate. In addition, the Board 
proposed that the penalty rate and the specific events that cause the 
penalty rate to be imposed must be disclosed in the same row of the 
table. See proposed Model Form G-10(A), 72 FR 32948, 33069, June 14, 
2007. The Board proposed to retain the current provision that an issuer 
need not disclose an increased rate that would be imposed if credit 
privileges are permanently terminated, but proposed to move this 
provision from current comment 5a(b)(1)-7 to proposed Sec.  
226.5a(b)(1)(iv).
    In response to the June 2007 Proposal, some consumer groups 
requested that the Board delete the statement that the card issuer need 
not disclose the increased rate that would be imposed if credit 
privileges are permanently terminated. They viewed this provision as 
inconsistent with the Board's other efforts to ensure that consumers 
are aware of penalty rates. They believed card issuers should be 
required to disclose this information in the table if the rate is 
different than the penalty rate that otherwise applies.
    The Board proposes to delete the current provision that an issuer 
need not disclose an increased rate that would be imposed if credit 
privileges are permanently terminated. The provision may be 
unnecessary. The Board is not aware of any issuers that are imposing an 
increased rate when credit privileges are permanently terminated that 
is different from the penalty rate. Moreover, the Board agrees that to 
the extent an issuer is charging a different rate when credit is 
permanently terminated than the penalty rate, this different rate 
should be disclosed along with the penalty rate.
    Elsewhere in today's Federal Register the Board proposes under 
Regulation AA that card issuers making firm offers of credit and 
offering a range of APRs or credit limits must also disclose clearly 
and conspicuously that if the consumer is approved for the credit, the 
APR and credit limit on the account will depend on the specific 
criteria bearing on creditworthiness. Model language is proposed that 
issuers may use to comply with the requirements. Under the June 2007 
Proposal, card issuers offering APRs that will depend on a later 
determination of the consumer's creditworthiness must disclose in the 
table provided with applications or solicitations, within prescribed 
format requirements, either specific rates or a range of rates, and a 
statement that the rate for which the consumer may qualify at account 
opening depends on the creditor's creditworthiness. 72 FR 32948, 33045, 
33046, June 14, 2007. If the approach under Regulation AA is adopted as 
proposed, appropriate conforming changes will be made to ensure 
consistency among the regulatory requirements and to facilitate 
compliance when the Board adopts revisions to the Regulation Z rules 
for open-end (not home-secured) credit.
5a(b)(3) Minimum Finance Charge
    Currently, Sec.  226.5a(b)(3), which implements TILA Section 
127(c)(1)(A)(ii)(II), requires that card issuers must disclose any 
minimum or fixed finance charge that could be imposed during a billing 
cycle. Card issuers typically impose a minimum charge (e.g., $.50) in 
lieu of interest in those months where a consumer would otherwise incur 
an interest charge that is less than the minimum charge (a so-called 
``minimum interest charge''). In response to the December 2004 ANPR, 
one industry commenter suggested that the Board no longer require that 
the minimum finance charge be disclosed in the table because these fees 
are typically small and consumers do not shop on them. Another industry 
commenter suggested that the Board only require that the minimum 
finance charge be included in the table if the charge is a significant 
amount. On the other hand, some consumer groups urged the Board to 
continue to include the minimum finance charge in the table because 
this charge can have a significant effect on the cost of credit.
    In the June 2007 Proposal, the Board proposed to retain the minimum 
finance charge disclosure in the table. Although minimum charges 
currently may be small, the Board was concerned that card issuers may 
increase these charges in the future. Also, the Board noted that it was 
aware of at least one credit card product for which no APR is charged, 
but each month a fixed charge is imposed based on the outstanding 
balance (for example, $6 charge per $1,000 balance). If the minimum 
finance charge disclosure was eliminated from the table, card issuers 
that offer this type of pricing would no longer be required to disclose 
the fixed charge in the table. The Board also did not propose to 
require the minimum finance charge only if it is a significant amount. 
The Board was concerned that this approach could undercut the 
uniformity of the table, and could be misleading to consumers. The 
Board also proposed to amend Sec.  226.5a(b)(3) to require card issuers 
to disclose in the table a brief description of the minimum finance 
charge, to give consumers context for when this charge will be imposed. 
72 FR 32948, 33046, June 14, 2007.
    In response to the June 2007 Proposal, several industry commenters 
again recommended that the Board delete this disclosure from the table 
unless the minimum finance charge is over a certain nominal amount. 
They indicated that in most cases, the minimum interest charge is so 
small as to be irrelevant to consumers. They believed that it should 
only be in the table if the minimum finance charge is a significant 
amount. Also, they believed that the purpose of the summary table is to 
highlight the most relevant terms that

[[Page 28872]]

consumers use in evaluating credit card applications. They suggested 
that it is unlikely that consumers would choose a card based on a 
minimal charge. Also, they believed that the retention of an irrelevant 
fee clutters the summary table, detracting from other more important 
terms. One commenter recommended that minimum interest charges under 
$2.00 should be excluded from disclosure in the table, and another 
commenter recommended a cut off of $1.00. Consumer groups agreed with 
the Board's proposal to require the disclosure of the minimum interest 
charge in all cases and not to allow issuers to exclude the minimum 
interest charge from the table if the charge was under a certain 
specific amount.
    The Board proposes to revise proposed Sec.  226.5a(b)(3) to provide 
that an issuer must disclose in the table any minimum or fixed finance 
charge in excess of $1.00 that could be imposed during a billing cycle 
and a brief description of the charge, pursuant to its authority under 
TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). The $1.00 amount would be 
adjusted to the next whole dollar amount when the sum of annual 
percentage changes in the Consumer Price Index in effect on the June 1 
of previous years equals or exceeds $1.00. See proposed comment 
5a(b)(3)-2. This approach in adjusting the dollar amount that triggers 
the disclosure of a minimum or fixed finance charge is similar to 
TILA's rules for adjusting a dollar amount of fees that trigger 
additional protections for certain home-secured loans. TILA 103(aa), 15 
U.S.C. 1602(aa). At the issuer's option, the issuer may disclose in the 
table any minimum or fixed finance charge below the threshold. This 
flexibility is intended to facilitate compliance when adjustments are 
made to the dollar threshold. For example, if an issuer has disclosed a 
$1.50 minimum finance charge in its application and solicitation table 
at the time the threshold is increased to $2.00, the issuer could 
continue to use forms with the minimum finance charge disclosed, even 
though the issuer would no longer be required to do so.
    The Board recognizes that most issuers currently charge a minimum 
interest charge of $1.00 or less. In consumer testing conducted by the 
Board in March 2008, participants were asked to compare disclosure 
tables for two credit card accounts and decide which account they would 
choose. In one of the disclosure tables, a small minimum interest 
charge was disclosed. In the other disclosure table, no minimum 
interest charge was disclosed. None of the participants indicated that 
they would choose the account where no minimum interest charge was 
disclosed because of this fact. Thus, the Board agrees that when the 
minimum interest charge is a de minimis amount (i.e., $1.00 or less, as 
adjusted for inflation), disclosure of the minimum interest charge is 
not information that consumers will use to shop for a card. The rule 
would continue to require disclosure in the table if the minimum 
interest charge is over this de minimis amount to ensure that consumers 
are aware of significant minimum interest charges that might impact 
them. The Board requests comment on whether $1.00 is the appropriate 
initial threshold amount.
5a(b)(4) Transaction Charges
    Section 226.5a(b)(4), which implements TILA Section 
127(c)(1)(A)(ii)(III), requires that card issuers disclose any 
transaction charge imposed on purchases. In the June 2007 Proposal, the 
Board proposed to amend Sec.  226.5a(b)(4) to explicitly exclude from 
the table fees charged for transactions in a foreign currency or that 
take place in a foreign country. 72 FR 32948, 33046, June 14, 2007. In 
an effort to streamline the contents of the table, the Board proposed 
to highlight only those fees that may be important for a significant 
number of consumers. In consumer testing for the Board, participants 
did not tend to mention foreign transaction fees as important fees they 
use to shop. In addition, there are few consumers who may pay these 
fees with any frequency. Thus, the Board proposed to except foreign 
transaction fees from disclosure of transaction fees. The Board 
proposed to include foreign transaction fees in the account-opening 
summary table that is required under proposed Sec.  226.6(b)(4), so 
that interested consumers can learn of the fees before using the card.
    In response to the June 2007 Proposal, some consumer groups 
recommended that the Board require foreign transaction fees in the 
table required under Sec.  226.5a. They questioned the utility of the 
Board requiring foreign transaction fees in the account-opening table 
required under Sec.  226.6, but prohibiting those fees to be disclosed 
in the table under Sec.  226.5a. They believed that consumers as well 
as the industry would be better served by eliminating the few 
differences between the disclosures required at the two stages. In 
addition, one industry commenter recommended that the table required 
under Sec.  226.5a include foreign transaction fees. This commenter 
believed that the foreign transaction fee is relevant to any consumer 
who travels in other countries, and the ability to choose a credit card 
based on the presence of the fee is important. In addition, the 
commenter noted that the large amount of press attention that the issue 
has received suggests that the presence or absence of the fee is now of 
interest to a significant number of consumers.
    The Board proposes to require that foreign transaction fees must be 
disclosed in the table required under Sec.  226.5a. Specifically, the 
Board proposes to withdraw proposed Sec.  226.5a(b)(4)(ii) that would 
have prevented a card issuer from disclosing a foreign transaction fee 
in the table required by Sec.  226.5a. In addition, the Board proposes 
to add comment 5a(b)(4)-2 to indicate that foreign transaction fees 
charged by the card issuer are considered transaction charges for the 
use of a card for purchases, and thus must be disclosed in the table 
required under Sec.  226.5a. The Board is concerned about the 
inconsistency in requiring foreign transaction fees in the account-
opening table required by Sec.  226.6, but prohibiting that fee in the 
table required by Sec.  226.5a. In the June 2007 Proposal, the Board 
proposed that issuers may substitute the account-opening table for the 
table required by Sec.  226.5a. See proposed comment 5a-2, 72 FR 32948, 
33105, June 14, 2007. The Board is concerned about those cases where 
one issuer substitutes the account-opening table for the table required 
under Sec.  226.5a (and thus is required to disclose the foreign 
transaction fee) but another issuer provides the table required under 
Sec.  226.5a (and thus is prohibited from disclosing the foreign 
transaction fee). If a consumer was comparing the disclosures for these 
two offers, it may appear to the consumer that the issuer providing the 
account-opening table charges a foreign transaction fee and the issuer 
providing the table required under Sec.  226.5a does not, even though 
the second issuer may charge the same or higher foreign transaction fee 
than the first issuer. Thus, to promote uniformity, the Board proposes 
to require issuers to disclose the foreign transaction fee in both the 
account-opening table required by Sec.  226.6 and the table required by 
Sec.  226.5a. See proposed comment 5a(b)(4)-2. The Board also proposes 
that foreign transaction fees would be disclosed in the table required 
by Sec.  226.5a similar to how those fees are disclosed in the proposed 
account-opening tables published in the June 2007 Proposal. See Model 
Forms and Samples G-17(A), (B) and (C) 72 FR

[[Page 28873]]

32948, 33074, 33075, 33076, June 14, 2007.
5a(b)(5) Grace Period
    Currently, Sec.  226.5a(b)(5), which implements TILA Section 
127(c)(A)(iii)(I), requires that card issuers disclose in the table 
required by Sec.  226.5a, the date by which or the period within which 
any credit extended for purchases may be repaid without incurring a 
finance charge. Section 226.5a(a)(2)(ii), which implements TILA Section 
122(c)(2)(C), requires credit card applications and solicitation under 
Sec.  226.5a to use the term ``grace period'' to describe the date by 
which or the period within which any credit extended for purchases may 
be repaid without incurring a finance charge. 15 U.S.C. 1632(c)(2)(C). 
In the June 2007 Proposal, the Board proposed new Sec.  
226.5(a)(2)(iii) to extend this requirement to use the term ``grace 
period'' to all references to such a term for the disclosures required 
to be in the form of a table, such as the account-opening table. 72 FR 
32948, 33044, June 14, 2007.
    In response to the June 2007 Proposal, one industry commenter 
recommended that the Board no longer mandate the use of the term 
``grace period'' in the table. Although TILA specifically requires use 
of the term ``grace period,'' this commenter urged the Board to use its 
exception authority to choose a term that is more understandable to 
consumers. This commenter pointed out that research conducted by the 
Board, by the GAO and by that commenter demonstrated that the term is 
confusing as a descriptor of the interest-free period between the 
purchase and the due date for customers who pay their balances in full. 
This commenter suggested that the Board revise the disclosure of the 
grace period in the table to use the heading ``interest-free period'' 
instead of ``grace period.''
    As discussed in the section-by-section analysis to Sec.  
226.5(a)(2), the Board proposes to use its exemption authority to 
delete the requirement to use the term ``grace period'' in the table 
required by Sec.  226.5a. 15 U.S.C. Sec. Sec.  1604(a) and (f) and 
1637(c)(5). As the Board discussed in the June 2007 Proposal, consumer 
testing conducted for the Board prior to that proposal indicated that 
some participants misunderstood the word ``grace period'' to mean the 
time after the payment due date that an issuer may give the consumer to 
pay the bill without charging a late-payment fee. The GAO in its Report 
on Credit Card Rates and Fees found similar misunderstandings by 
consumers in its consumer testing. Furthermore, many participants in 
the GAO testing incorrectly indicated that the grace period was the 
period of time promotional interest rates applied. Nonetheless, in 
consumer testing conducted for the Board prior to the June 2007 
Proposal, the Board found that participants tended to understand the 
term grace period more clearly when additional context was added, such 
as describing that if the consumer paid the bill in full each month, 
the consumer would have some period of time (e.g., 25 days) to pay the 
new purchase balance in full to avoid interest. Thus, the Board 
proposed to retain the term ``grace period.''
    As discussed above, in response to the June 2007 Proposal, one 
commenter performed its own testing with consumers on the grace period 
disclosure proposed by the Board. This commenter found that the term 
``grace period'' was still confusing to the consumers it tested, even 
with the additional context given in the grace period disclosure 
proposed by the Board. The commenter found that consumers understood 
the term ``interest-free period'' to more accurately describe the 
interest-free period between the purchase and the due date for 
customers who pay their balances in full.
    In consumer testing conducted by the Board prior to issuing the 
June 2007 Proposal, the Board tested the phrase ``interest-free 
period.'' The Board found that some consumers believed the phrase 
``interest-free period'' referred to the period of time that a 0% 
introductory rate would be in effect, instead of the grace period. In 
consumer testing conducted by the Board in March 2008, the Board tested 
disclosure tables for a credit card solicitation that used the phrase 
``How to Avoid Paying Interest on Purchases'' as the heading for the 
row containing the information on the grace period. Participants in 
this testing generally seemed to understand this phrase to describe the 
grace period. In addition, in the March 2008 consumer testing, the 
Board also tested the phrase ``Paying Interest'' in the context of a 
disclosure relating to a check that accesses a credit card account, 
where a grace period was not offered on this access check. 
Specifically, the phrase ``Paying Interest'' was used as the heading 
for the row containing information that no grace period was offered on 
the access check. Likewise, participants seemed to understand this 
phrase to mean that no grace period was being offered on the use of the 
access check. Thus, the Board proposes to revise proposed Sec.  
226.5a(b)(5) to require that issuers use the phrase ``How to Avoid 
Paying Interest on Purchases,'' or a substantially similar phrase, as 
the heading for the row describing the grace period. If no grace period 
on purchases is offered, when an issuer is disclosing this fact in the 
table, the issuer must use the phrase ``Paying Interest,'' or a 
substantially similar phrase, as the heading for the row describing 
that no grace period is offered.
    As discussed above, Sec.  226.5a(b)(5) requires that card issuers 
disclose in the table required by Sec.  226.5a, the date by which or 
the period within which any credit extended for purchases may be repaid 
without incurring a finance charge. Comment 5a(b)(5)-1 provides that a 
card issuer may, but need not, refer to the beginning or ending point 
of any grace period and briefly state any conditions on the 
applicability of the grace period. For example, the grace period 
disclosure might read ``30 days'' or ``30 days from the date of the 
periodic statement (provided you have paid your previous balance in 
full by the due date).''
    In the June 2007 Proposal, the Board proposed to amend Sec.  
226.5a(b)(5) to require card issuers to disclose briefly any conditions 
on the applicability of the grace period. 15 U.S.C. 1637(c)(5). 72 FR 
32948, 33046, June 14, 2007. The Board also proposed to amend comment 
5a(b)(5)-1 to provide guidance for how issuers may meet the 
requirements in proposed Sec.  226.5a(b)(5). Specifically, proposed 
comment 5a(b)(5)-1 provided that an issuer that conditions the grace 
period on the consumer paying his or her balance in full by the due 
date each month, or on the consumer paying the previous balance in full 
by the due date the prior month will be deemed to meet requirements in 
disclosing the grace period by providing the following disclosure: ``If 
you pay your entire balance in full each month, you have [at least] --
-- days after the close of each period to pay your balance on purchases 
without being charged interest.'' 72 FR 32948, 33109, June 14, 2007.
    In response to the June 2007 Proposal, several commenters suggested 
that the Board revise the model language provided in proposed comment 
5a(b)(5)-1 to describe the grace period. One commenter suggested the 
following language: ``Your due date is [at least] 25 days after your 
bill is totaled each month. If you don't pay your bill in full by your 
due date, you will be charged interest on the remaining balance.'' 
Other commenters also recommended that the Board revise the disclosure 
of the grace period to make clearer that the consumer must pay the 
total balance in full each month by the due date to avoid

[[Page 28874]]

paying interest on purchases. In addition, some consumer groups 
commented that if the issuer does not provide a grace period, the Board 
should mandate specific language that draws the consumer's attention to 
this fact.
    In the March 2008 consumer testing, the Board tested the following 
language to describe a grace period: ``Your due date is [at least] ---- 
days after the close of each billing cycle. We will not charge you 
interest on purchases if you pay your entire balance (excluding 
promotional balances) by the due date each month.'' Participants that 
read this language appeared to understand it correctly. Thus, the Board 
proposes to amend comment 5a(b)(5)-1 to provide this language as 
guidance to issuers on how to disclose a grace period. The Board notes 
that currently issuers typically require consumers to pay their entire 
balance in full each month to qualify for a grace period on purchases. 
Nonetheless, the Board proposes elsewhere in today's Federal Register 
to prohibit most issuers from requiring consumers to pay off 
promotional balances in order to receive any grace period offered on 
purchases. Thus, consistent with this proposed prohibition, the 
language in proposed comment 5a(b)(5)-1 indicates that the entire 
balance (excluding promotional balances) must be paid each month to 
avoid interest charges on purchases.
    Also, in the March 2008 consumer testing, the Board tested language 
to describe that no grace period was being offered. Specifically, in 
the context of testing a disclosure related to an access check where a 
grace period was not offered on this access check, the Board tested the 
following language: ``We will begin charging interest on these check 
transactions on the transaction date.'' Most participants that read 
this language understood there was no way to avoid paying interest on 
this check transaction, and therefore, that no grace period was being 
offered on this check transaction. Thus, the Board proposes to add 
comment 5a(b)(5)-2 to provide guidance on how to disclose the fact that 
no grace period on purchases is offered on the account. Specifically, 
proposed comment 5a(b)(5)-2 would provide that issuers may use the 
following language to describe that no grace period on purchases is 
offered, as applicable: ``We will begin charging interest on purchases 
on the transaction date.''
5a(b)(6) Balance Computation Method
    TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more 
than five of the most common balance computation methods used by credit 
card issuers to calculate the balance on which finance charges are 
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the 
balance computation methods named by the Board, Sec.  226.5a(b)(6) 
requires that issuers must disclose the name of that balance 
computation method in the table as part of the disclosures required by 
Sec.  226.5a, and issuers are not required to provide a description of 
the balance computation method. If the issuer uses a balance 
computation method that is not named by the Board, the issuer must 
disclose a detailed explanation of the balance computation method. See 
current Sec.  226.5a(b)(6); Sec.  226.5a(a)(2)(i). In the June 2007 
Proposal, the Board proposed to retain a brief reference to the bala