Regulation Z

There may be a change on the horizon concerning the regulation of credit cards. The Federal Reserve Board has finalized a sweeping amendment in regulations governing the Truth in Lending Act. These amendments will affect creditors at both credit card companies and mortgage lenders. Small business owners who use their credit cards as a lifeline for their businesses should be concerned about how the new changes in these regulations, notably Regulation Z, will affect the way they do business, and why it is a good idea for those who wish to obtain a small business credit card to do so before the regulations come into effect.

It is first a good idea to find out exactly what Regulation Z is and how its review and amendments will affect it. Regulation Z is contained within the Truth in Lending Act of 1968, a US federal law which is designed to protect consumers in credit transactions by requiring clear disclosure of key terms in lending arrangements, as well as all of their costs. The Truth in Lending Act is contained in Title I of the Consumer Credit Protection Act (15 U.S.C. 1601 et seq). The regulations that actually implement this statute are known as Regulation Z. The Federal Reserve System Board of Governors Regulations are alphabetically lettered. Regulation Z, contained in 12 CFR 226.1-30, deals with the information that the banks must disclose concerning the two types of credit - "open-end" credit (i.e. credit cards), and "closed-end" credit.

For the first time in 23 years, the Federal Reserve Board is undergoing a complete review of Regulation Z. These amendments are intended to improve the effectiveness of disclosures consumers receive from card issuers concerning their credit card accounts and other revolving credit plans by ensuring that the disclosures consumers receive are communicated in a clear and concise format that is readily understandable and that these disclosures are received in a timely manner. The advent of greater clarity in credit card disclosures is intended to allow consumers to make more informed decisions regarding their credit and also enhance competition among credit card issuers. The effective date for the amendments to Regulation Z is currently set at July 1, 2010.

There are numerous amendments to Regulation Z that have been recently finalized. These new amendments include changes to the format and content of credit and charge card application and solicitation disclosures in order to present them in a much clearer and more meaningful form that can be readily understood by consumers. This includes format requirements for the credit card account terms summary table in regards to type size, as well as dictating the use of boldface type for certain key terms. The placement of information is also governed by these new changes. Content revisions are also being ordered as part of the new amendments. Now credit card issuers must disclose the duration that penalty rates may be in effect, as well as revise disclosures concerning when a grace period is offered on purchases or if a grace period will not be offered. Disclosures concerning variable rates will have to be simplified according to the new amendments.

Another proposed change to Regulation Z will add needed clarification to the term "fixed annual percentage rate" and put an end to the current practice of allowing card issuers to change advertised fixed credit card rates at any time for any reason the card issuer sees fit. According to the new changes set to be implemented, if there is no particular time period specified for a fixed annual percentage rate, the advertised rate will remain fixed as long as the account is open and payments are kept current. For example, if a credit card issuer applies a fixed annual percentage rate of 4.99% to a new customer, the card issuer must retain that fixed rate for that customer for as long as the card holder keeps his or her account open and financially up to par, unless there is a specified cut-off date for this fixed annual percentage rate. Card issuers must also provide a much longer prior notice period of 45 days before an issuer can increase a customer's annual percentage rate due to delinquency, default or as a penalty. This prior notice period was changed from the former prior notice period of 15 days to 45 days, in order to allow credit card members more time to either obtain other forms of financing or modify their credit card account usage.

Regulation Z will remove the need for credit card issuers to disclose an "effective annual percentage rate". The Federal Reserve Board decided that since there was a lack of understanding by consumers regarding the term "annual percentage rate", the need to disclose this item should be done away with in favor of disclosing interest charges and fee totals. Interest charges and fees must now be grouped separately, along with a monthly total for each item. Separate year-to-date totals for interest charges and fees are also required by this amendment. Interest charges must be itemized according to the type of transaction performed. This includes interest charged on purchases and interest charged on cash advances. The Federal Reserve Board feels that these new requirements to disclose interest charges and fee totals will be much more effective in letting consumers know about the total cost of credit.

Regulation Z will also change how credit card companies deal with cut-off times and due dates for mailed payments. According to changes in Regulation Z, credit card companies must now set reasonable cut-off hours for mailed payments, in order for these payments to be considered "timely" on the due dates specified. If the mailed payment cannot be accepted on the due date due to the date falling on a weekend or a holiday, credit card companies must consider the payment received on the next business day as "timely". This new measure is supposed to protect those who rely on mail in order to pay their accounts from facing late fees and other charges due to the payment being received after the due date because of either a cut-off hour or the payment being held up in transit due to lack of weekend or holiday mail service. The acceptable cut-off hour for mailed payments is currently set at 5:00 pm.