Recommendations for the Credit CARD Act
The sky is not falling, but let any more legislation like this go through Congress and things just might get a little tight…
During the last 3 months we have all been anxiously awaiting the Federal Reserve’s final interpretation of the Credit CARD Act. In the middle of January the third interpretation of the Act came through as a revision of the January 2009 proposed Regulation Z change. The proposed Unfair and Deceptive Practices Act has since been rescinded and NCUA’s version is expected to hit the skids as well in the near future. New interpretations of the regulation by compliance attorneys and subsequent advice pieces from the Federal Reserve appear on our radar almost daily.
Where does that leave us? With a new 1,155 page document to interpret, analyze, and turn into meaningful software specifications and a solid recommendation for credit unions to use in loan configurations. We have completed 100% of our review to date. We continue to receive new interpretations of the regulation such as the variable rate floor as well as allowing a grace period on partial payments.
As a resource for you, I would encourage all clients that use CU*BASE Online Credit Cards to:
- Review the changes and recommendations we published on January 29th in a special announcement.
- Review the recorded one hour web conference from February 5th that can be downloaded from the AuditLink Advisor site.
- Go to the AuditLink Advisor site, which allows you to send your strategies, concerns, and even policies so we can share with others in the network.
What did we do for the end of February?
- Statement changes (examples sent to all clients on February 22):
- New late payment warning with late fees
- All three minimum payment warnings
- Consumer counseling number
- Coordinating with Sage, CoWWW, and eDOC for graphical presentation
- Discussed the changes you should be making if you are printing up-front disclosures from the CU*BASE system.
There are a couple of nuances of these changes that you should understand:
Late fees, if configured as a percentage, will always display as a calculated dollar amount, as outlined in the regulation. They are always rounded to the nearest full dollar. Remember these are estimates based on the balance at the time the statement is created.
Minimum payment warnings have amortization calculations in them that follow the guidelines of the regulation. Remember the only time your members will see both the length of time that it will take to pay off the balance and the amount of time it will take to pay off the balance is when amortizations are both in excess of 2.5 years. To fully understand all the rounding requirements we would encourage you to read the regulation as it is extensive and it is simply not possible to describe all the possible scenarios in this document.
As a side note, we discovered at least one instance where a credit union set up the category with such a low monthly percentage amount that the balance was actually negatively amortizing. I would encourage all of you to evaluate if you have set the percentages to under 2% and allow limits in excess of $5,000, or have interest rates over 10%, that you review a number of those accounts. Understanding the amortization of your products is important and up to now may have been overlooked in some cases.
What’s Coming Next?
Here is a list of the additional changes that we are working now:
- Addressing when payment dates fall on a day the credit union is closed expected to be in production by the end of April. (We had originally anticipated this being done for March statements but need a little more time to complete the required work, test, and coordinate with all print and e-statement vendors.)
- Altering the interest calculation to understand when there is a grace period on partial payments. This change will affect the interest your members pay during the next statement cycle. This change is expected to go into production at the end of March.
- Although there are very few fees being charged on credit cards, the regulation does state that they must now be broken out by type and annual total. At this time we are evaluating all potential fees which clients have been charging and we will begin programming for that change including the statement changes. Also included in this change will be the addition of total year-to-date interest charges. This change is expected to be implemented for the end of March cycle.
Nuances of these changes that you should understand:
- When evaluating payment dates against dates on which your branches are closed, we will be looking at the standard Federal holidays and/or any holidays you have entered into your Non-Business Days configuration (MNCNFD #23). If you have not done so already, make sure you have reviewed and updated this configuration (see the instructions in the January 29th announcement). Remember that when the due date falls on a day your branches are closed, the system treats the account as if the due date is instead the next date on which you are open. This change will process interest calculations at the end of the month as if the payment was made on the due date.
- As another side note, we discovered loans that had a 5% repayment calculation, where the minimum payment was actually more than the required payment to pay off the loan in 36 months. Your staff must understand that the minimum payment amount each month decreases in accordance with the outstanding principal balance. However, the amount required to pay off the balance in three years is simply an amortized amount calculated as of the time the statement is generated.
- Grace period on partial payments is a whole different animal and it will impact the yield on your portfolio. The best way to explain the workings of this change is by example:
Mr. Member has paid his credit card purchase balance off every month. During the current cycle he makes a purchase of $600. On the next cycle he also pays off his purchases from the prior cycle. On the billing cycle in which his $600 is tested for a grace period he only pays $500. The regulation states that the excess amount over his minimum payment must be applied to the purchases and backed off the average daily balance calculation.
Also remember in the above example that if you have another bucket with a higher interest rate and it has a balance, the payment must be applied to that bucket first, and in this case no grace period would apply. The application of payments to the highest interest rate bucket supersedes this rule.
What remains on the plate for our product development team is to make program changes that allow the transfer of funds from one bucket to another when the credit union has configured the product as a fixed rate (or variable rate with a floor). I would encourage you to read our January 29th announcement to better understand the nuances of that change and when it is going into production.
What Should You Be Doing Now?
Here are the things you should be evaluating in your configurations for online credit cards right now:
- Change your credit card category configurations to make sure that the bucket with the highest interest rate has the highest priority. Ninety percent of our clients have similar rates for all buckets but it is worth the time to review those configuration screens one more time.
- Delete your over-limit fee from the configuration. Even American Express has removed their over-limit fee. There is absolutely no way to monitor for these even if you got creative and sent out the opt-in notices.
- If you charge a penalty rate, set your default rate change date out far enough that you can get a 45-day advance notice that meets the minimum 60-day requirement. Utilize the delinquency notice configuration to update the verbiage on the notice to meet the requirements of the regulation. The exact verbiage is published in Appendix G of the regulation. Also remember that it is now required that you set the rate to be monitored. Set the flag on the configuration screen to verify if timely payments are made for six months that the rate should go back to the normal rate.
- If you have variable rates with floors and the rate is currently sitting at the floor, you now have a fixed rate card. You have a number of choices but every one requires a new disclosure moving forward. I would encourage you to speak to Lender*VP on your options and implications of your decisions as it relates to the configuration of the system.
- Update your agreements and disclosures. The format for your agreements has been outlined in the regulation as well. Use them, copy them, and then get them completed as soon as possible. Share them on the AuditLink Advisor site https://auditlinksuite.com/ so others in your peer group can compare notes.
With these apparently never-ending changes and the continuous flow opinions, we fully expect our programming efforts will not end in a few months. We would like you to continue to feed us what you are hearing and seeing on the street. Please send us your legal opinions, your comments from other partners, and any other details you gather. Our strategy moving forward will be to communicate these findings back into the network.
There continues to be a great deal of interpretation and reinterpretation going on and with final rules now published we will continue making enhancements to our tools. Over the next year we will all continue to look at best practices for evaluating and maximizing our credit card programs as a positive part of our credit union loan portfolio.
Post your ideas and concerns on the
Advisor Credit CARD Act Open forum: