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Regulations Spotlight: Several Regulation Z (Truth in Lending) and Regulation E Changes Coming in 2010

Thursday, January 1, 2009

Bankers should keep in mind that federal agencies are currently making and proposing several changes to Regulation Z (Truth in Lending) and Regulation E. These include:

1. Questions about Repayment of Higher-Priced Mortgages

You may have questions about what steps bankers should take to verify a consumer’s ability to repay certain higher-priced mortgages.

The Board released new guidelines designed to protect consumers in the mortgage market from unfair, abusive or deceptive lending and servicing practices, especially when the consumer’s ability to repay has not been considered. The changes apply protections to the higher-priced mortgages category, which includes virtually all closed-end subprime loans secured by a consumer’s principal dwelling.

Bankers have had questions regarding these new guidelines, which became effective Oct. 1.

2. More Credit Card Act Provisions

Look for more provisions of the 2008 Credit Card Reform Act to come in February. The Act, being implemented in three stages, is designed to protect consumers from harmful practices and give them greater transparency with credit card account terms and conditions.

On Nov. 13, the Board of Governors accepted the final rule that requires creditors to obtain a consumer’s consent before charging fees for overdraft transactions. This means that consumers will have better information to help them decide whether to apply for overdraft protection. At the same time, creditors cannot penalize consumers for declining overdraft protection.

The Board's consumer testing indicated that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions unless they give permission. The testing also indicated that most consumers want overdraft services to cover important bills, such as checks payable for rent, utilities and telephone bills.

The other second stage proposals, which become effective on Feb. 22, also include:

  • protecting consumers from certain unexpected credit card interest rate increases;
  • requiring creditors to get consumer consent before charging fees for transactions that exceed the credit limit;
  • prohibiting creditors from issuing a credit card to consumer under age 21 (with exceptions);
  • limiting the high fees associated with subprime credit cards;
  • banning creditors from using the two-cycle billing method to impose interest charges; and
  • prohibiting creditors from allocating payments in ways that maximize interest charges.

The first provisions went into effect on Aug. 20, 2009, and the remaining provisions, if finalized, become effective Aug. 22, 2010.

3. Declining Overdraft Protection without Penalty

In a move related to the credit card provisions, the Board of Governors on Nov. 13 accepted the final rule under Regulation E that requires creditors to obtain a consumer’s consent before charging fees for overdraft transactions.

Essentially, consumers will need to affirm whether they want the overdraft protection on ATM and one-time debit transactions before a creditor can assess overdraft fees. Creditors can’t penalize consumers for refusing the protection, and need to offer the same features, services, etc., as those who accept overdraft protection. The rules do not cover check transactions, ACH transactions and recurring account debits.
A bank can choose to pay an ATM or one-time debit card overdraft even if the consumer has not opted in to the service, but the bank cannot then charge a fee for covering the overdraft. Conversely, even if a consumer opts in to the overdraft service, the new regulation does not require a bank to pay an overdraft on an ATM or one-time debit card transaction.

The rule becomes effective July 1, 2010.