Changes to Credit Card Practices and Federal Cost of Borrowing Disclosure
Final versions of the Credit Business Practices Regulations (CBP Regs) and the Cost of Borrowing Regulations (COB Regs) that apply to federally regulated financial institutions were published in September 2009. Drafts of both sets of regulations had previously been submitted for public comment in May 2009, and after submissions by industry groups remained largely intact. Some of the changes came into force on January 1, 2010. Other changes that require substantial system changes will be delayed until September 1, 2010.
The CBP Regs address certain practices regarding credit cards and debt collection. The new debt collection practices are intended to provide uniformity for federally regulated financial institutions in place of the patchwork of provincial regulations. The more important and visible changes made by the CBP Regs relate to some fundamental elements of the credit card agreement, such as the following:
- The practice (referred to as M2) that required a cardholder to pay a prior statement balance in full in order to avoid interest charges on purchases charged in a current billing period will no longer be permitted. Beginning on September 1, 2010, cardholders may not be charged interest on purchases made during a billing period provided that they pay the balance in full on their credit card statement by the payment due date. The period from the date of the credit card statement to the payment due date (the grace period) may not be less than 21 days.
- Also, beginning on September 1, 2010, payments on a credit card in excess of the minimum payment must be allocated either (i) to the portion of the balance carrying the highest interest rate, and then to other portions in descending order of the rate of interest payable on those portions; or (ii) pro rata based on the relative proportion of each part of the balance bearing a different rate. It remains to be seen what effect this will have on promotional and introductory offers that carry lower rates.
- Beginning January 1, 2010, credit card issuers are no longer permitted to increase a cardholder’s credit limit without first obtaining the cardholder’s express consent, which may be given orally if confirmed in writing (paper or electronically) before the next statement date. Use of a card does not constitute express consent. This change does not appear to restrict the authorization of any transaction over a credit limit, as the CBP Regs sanction overlimit fees, except where an overlimit occurs as a result of a hold that is placed on a credit card.
Changes to the COB Regs substantially increase the level of disclosure required with respect to all types of consumer credit — not just credit cards. The most visible change is the requirement that there be a "summary box" in addition to the disclosure statement in order to provide a snapshot of the most important aspects of the credit arrangement. It is to be provided at the beginning of the credit agreement (if the disclosure statement is part of the credit agreement) or at the beginning of the disclosure statement (if the disclosure statement is separate from the credit agreement). Even credit card applications must have a summary box, although it may be used in substitution for the required disclosure. Both the form and content of the summary boxes have been prescribed. It is also now abundantly clear in the COB Regs that a disclosure statement must be presented in a single location and in a consolidated manner if it is contained in the credit agreement.
In addition, the changes to the COB Regs clarify the rules for providing disclosure to co-borrowers and require that:
- Monthly credit card statements include an estimate of the time that would be required to repay the outstanding balance at the annual interest rate if only the minimum payment were made on the due date each month. This change comes into effect on September 1, 2010.
- If the interest rate payable by a cardholder could increase in the next billing period, the circumstances that would give rise to that increase and the new rate of interest that would apply in the next billing period as a result of the increase be disclosed. Accordingly, advance notice of the expiry of an introductory rate must be given.
Unfortunately, a number of the provisions in the changes to the COB Regs are subject to various interpretations, and therefore the goal of uniformity of disclosure may not be achieved.