Adventures in Open-End / Revolving Credit Accounts

Payday Loan Bar Association Annual Meeting

November 12-14, 2008

Sabrina Rose-SmithJeremy RosenblumBlake Sims

©2008. Goodwin Procter LLP

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OverviewI. Introduction to Open End Credit

A. Basic OperationB. Key DefinitionsC. Regulatory Framework

II. Regulatory RequirementsA. TILAB. EFTAC. FTCD. State laws

III. ImplementationA. FeesB. Grace PeriodC. Monthly Statements

IV. Lessons LearnedA. PA, VAB. Unfair & Deceptive Trade Practices

V. Questions

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INTRODUCTION

• What is an open end credit transaction?- Agreement or preapproved loan subject to a

particular limit, under which a borrower may make repeated purchases or obtain multiple loans

- Payments may be made in full or in installments

- Finance Charges- Computed on unpaid balance of an account- Subject to state law (for financial institutions),

and agreement of both parties

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INTRODUCTION – Key Definitions

• Billing cycle - 12 CFR 226.2(4)

• Grace Period – 12 CFR 226.(5)

• Open-end credit - 12 CFR 226.2(20)

• Periodic Rate – 12 CFR 226.2(21)

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REGULATORY FRAMEWORK

• Truth In Lending Act/Regulation Z

• Regulation B (Adverse Action/ECOA)

• Electronic Funds Transfer Act/Regulation E

• FTC (Fair Credit Billing Act, Unfair & Deceptive Trade Practices)

• State laws (e.g., VA Code Title 6.1)

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TILA REQUIREMENTS

• Initial Disclosures

- Conditions under which finance charge may be imposed

- Method of calculating the finance charge- Method of calculating the balance upon which a finance

charge will be imposed- Multiple rates (teaser, cash advance, default)- Other charges (issuance fees/transaction charges)- If secured, statement that a security interest will be

taken

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TILA REQUIREMENTS

• Periodic Statement Contents- Outstanding Balance @ Start- Amount, Date, Description of each extension of credit- Total amount of payments credited- Finance charges added (and disclosure of more than one

rate if needed)- Total finance charge billed as an APR- Balance (and statement of how it was calculated)- Outstanding Balance @ End- Payment Date- Address for Billing Inquiries

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EFTA REQUIREMENTS

• Regulation E Overview

• Recurring Payments

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FTC REGULATION

• Fair Credit Billing Act (codified as amendment to TILA)- Enforced by the Federal Trade Commission (for

financial institutions)

- FCBA Requirements- Billing statements sent at least 14 days before

payment is due- Customer right to dispute billing errors (e.g.

incorrect charges or credits, calculation errors, statements sent to incorrect address)

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IMPLEMENTATION

• Consumer Agreement- Conditions Under Which Finance Charges Will Be

Imposed- Grace Period- Calculation Of Finance Charge- Periodic Rate And Corresponding APR- Minimum Payment- Additional Charges- Annual Fees- Security Interests- Consumer Right To Dispute Billing Errors

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IMPLEMENTATION – Monthly Statements

• When must a statement be provided?- Each billing statement where account is open and

unpaid credit balance is greater than $1.00

• What must statement disclose?- Outstanding balance- Transactions posted to account- Amount and date of each payment, refund, rebate, or

adjustments- Amount of finance charge- Balance on which finance charge computed- Closing date and outstanding balance- Grace period

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IMPLEMENTATION – Grace Period

• Assessment of cash advance fee immediately upon issuance of cash advance

• Assessment of membership fees on day that account is opened

• Separate grace period for advances across billing cycles

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IMPLEMENTATION – Fees

• Membership Fees - Finance charge?

- Pro rata return at termination?

• Cash Advance Fees– Finance charge?

– Assessable if amount paid in full?

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REGULATORY ISSUES

• Credit Line Terminations- Adverse Action Notice- Can line be terminated if borrower repeatedly

pays in full?

• Application of Payments

• Aggressive Default Remedies

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REGULATORY ISSUES

• Additional Fee Concerns- When do additional fees become “interest”?

• Section 5 of FTC Act, State Consumer Protection laws