CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2001 No. 13 November 3, 2001

Vol 2001 No. 13 November 3, 2001

New California Credit Card Disclosure (Revised)

Note: This is a reissue of Bulletin No. 2001-13 to make a clarification. The bill author's office suggests a reading of AB 865 that a credit card issuer actually does not have an option to provide a generic example when a cardholder has made no more than minimum payments for six months. For such cardholders, the issuer is required to provide the individualized disclosure and the referrals. The legislative analysis appears to corroborate this interpretation. The text of the bill itself, included at the end of this Bulletin, allows an issuer to avoid the individualized notice and the referral obligations by electing to provide generic disclosures. You may wish to consult with your legal counsel on this point. Please replace previous Bulletin 2001-13 with this Bulletin.
- Leland Chan

Last year when Governor Davis vetoed a bill to enhance disclosures relating to minimum credit card payments (AB 1963), he specified in his veto message the elements of a bill that he would sign. AB 865 was drafted to be consistent with the governor's requirements. The new law requires credit card issuers to specify in a written disclosure how long it would take a cardholder to pay off balances by making only the permitted minimum payments.

The bill is intended, by the use of the term "cardholder," to apply only to consumers.
While this term is not defined in the bill itself, cardholder is defined in Civil Code Section 1747.02(d) as a natural person to whom a credit card is issued for consumer credit purposes. New Civil Code Section 1748.13, which this bill creates, belongs in the same title as Section 1747.02(d). Thus, the meaning of cardholder is drawn from the existing definition.

The new law applies to a credit card issuer in any billing cycle in which the account agreement requires a minimum payment of less than 10 percent of the outstanding balance and a finance charge is imposed. In any billing where a finance charge is not imposed, the notice is not required.

Mandatory notice. In each billing statement, the issuer is required to provide a statutory example of how long it would take to repay the balance and how much the total repayment would be if only minimum payments were made. Alternatively, the issuer may provide an example based on the terms of the cardholder's account agreement.

The notice must be printed on the front of the first page of the billing statement in type "no smaller than that required for any other required disclosure," but no smaller than "8-point capitalized type." The bill does not specify whether, if the point size were larger than 8 points, the text must be capitalized. The notice must include the statement: "MINIMUM PAYMENT WARNING: MAKING ONLY THE MINIMUM PAYMENT WILL INCREASE THE INTEREST YOU PAY AND THE TIME IT TAKES TO REPAY YOUR BALANCE."

If the issuer elects to provide the statutory example, one of two means is available. The notice may be provided in the exact format immediately after the warning statement, as follows:

In the alternative, the issuer may furnish a notice using the same three specified amounts but substituting the actual APR and required minimum payment applicable to the cardholder's account.

The issuer may elect not to provide one of the two forms of statutory disclosure, and instead furnish an estimate of the number of years and months and the approximate total cost to pay off the actual balance due if only the minimum payments were made based upon the terms of the consumer's account agreement. If the account is subject to a variable rate, the notice may be based on the rate as of the date of the disclosure applied to the entire balance and must indicate that the rate may vary.(1)

Special rule for minimum payers. Notwithstanding the plain text of the new law, the legislative analysis to the bill suggests that an issuer must provide the individualized disclosure to any cardholder who has not paid more than the minimum payment for six consecutive months. In addition, the cardholder must be provided with "referrals" to credit counseling services in or near the cardholder's county of residence. No number of referrals is specified. The credit counseling service must be in good standing with the National Foundation for Credit Counseling or accredited by the Council on Accreditation for Children and Family Services. The issuer may satisfy this requirement to make referrals by providing the toll-free telephone number of the National Foundation for Credit Counseling, which can provide referrals. According to the group's website, www.nfcc.org, its "national toll- free crisis hotline" is 1-800-388-2227. (This information is provided by CBA and not by the bill.)

Toll-free help line. The bill includes significant disincentives against opting to provide statutory rather than individualized notices. If the issuer elects to provide a statutory examples, it must also make available a toll-free number to allow a cardholder to obtain an actual estimate based on actual balances and terms, and provide the following notice:

This statement comes immediately following the statutory example. The toll-free telephone number must be available between the hours of 8 a.m. and 9 p.m., pacific standard time, seven days a week, and must provide consumers with the opportunity to speak with a person rather than a recording.

Safe harbor. The bill creates a safe harbor for card issuers by requiring the Department of Financial Institutions to produce a table of "payoff times" that card issuers can rely upon when making the individualized estimates either in the disclosure or in response to a call through the toll-free number. The DFI-generated table is to contain numerous APRs, balances, and minimum payment amounts to illustrate the time needed and total repayment amounts assuming only minimum payments. The issuer may not include the full chart along with a billing statement to satisfy this obligation.

Effect of federal bankruptcy reform. If the federal Bankruptcy Reform Act of 2001(2) ("Federal Act") becomes law and includes existing Section 1301 (Enhanced Disclosures Under an Open End Credit Plan), then the disclosure requirement under AB 865 would be modified.

Since the Federal Act also requires the introductory warning statement (beginning with "Minimum Payment Warning:") and the disclosure of the toll-free number to request an individualized calculation, the Federal Act versions of these notices would supercede the corresponding AB 865 provisions upon passage of the Federal Act. Also, the first sentence of the statutory disclosure ("A one thousand dollar ($1,000) balance will take 17 years and three months to pay off at a total cost of two thousand five hundred ninety dollars and thirty-five cents [$2,590.35]") would be eliminated. However, the remainder of that disclosure would still be required and inserted after a statement required by Section 1301.

Section 1301 provides two versions of a notice--one applicable where the required minimum payment is not more than 4% of the outstanding balance, and a corresponding notice for minimum payments of more than 4%. Thus, for example, if the Federal Act passed, the required disclosure under AB 865 where the required minimum payment is greater than 4% would read as follows:

[Federal act portion:] "MINIMUM PAYMENT WARNING: MAKING ONLY THE REQUIRED MINIMUM PAYMENT WILL INCREASE THE INTEREST YOU PAY AND THE TIME IT TAKES TO REPAY YOUR BALANCE. MAKING A TYPICAL 5% MINIMUM MONTHLY PAYMENT ON A BALANCE OF $300 AT AN INTEREST RATE OF 17% WOULD TAKE 24 MONTHS TO REPAY THE BALANCE IN FULL.(3) FOR AN ESTIMATE OF THE TIME IT WOULD TAKE TO REPAY YOUR BALANCE, MAKING ONLY MINIMUM MONTHLY PAYMENTS, CALL THIS TOLL-FREE NUMBER: XXXXXX.
[AB 865 portion:] A TWO THOUSAND FIVE HUNDRED DOLLAR ($2,500) BALANCE WILL TAKE 30 YEARS AND THREE MONTHS TO PAY OFF AT A TOTAL COST OF SEVEN THOUSAND SEVEN HUNDRED THIRTY-THREE DOLLARS AND FORTY-NINE CENTS ($7,733.49).
A FIVE THOUSAND DOLLAR ($5,000) BALANCE WILL TAKE 40 YEARS AND TWO MONTHS TO PAY OFF AT A TOTAL COST OF SIXTEEN THOUSAND THREE HUNDRED FIVE DOLLARS AND THIRTY-FOUR CENTS ($16,305.34).
THIS INFORMATION IS BASED ON AN ANNUAL PERCENTAGE RATE OF 17 PERCENT AND A MINIMUM PAYMENT OF 2 PERCENT OR TEN DOLLARS ($10), WHICHEVER IS GREATER."

The effective date of the new law is July 1, 2002. If you have any questions, please contact James Clark, CBA VP/State Government Relations, at 916- 441-7377 ext. 209.

SECTION 1. Section 1748.13 is added to the Civil Code, to read:
1748.13. (a) A credit card issuer shall, with each billing statement provided to a cardholder in this state, provide the following on the front of the first page of the billing statement in in type no smaller than that required for any other required disclosure, but in no case in less than 8-point capitalized type:
(1) A written statement in the following form: "Minimum Payment Warning: Making only the minimum payment will increase the interest you pay and the time it takes to repay your balance."
(2) Either of the following:
(A) A written statement in the form of and containing the information described in clause (i) or (ii), as applicable, as follows:
(i) A written three-line statement, as follows:
"A one thousand dollar ($1,000) balance will take 17 years and three months to pay off at a total cost of two thousand five hundred ninety dollars and thirty-five cents ($2,590.35).
A two thousand five hundred dollar ($2,500) balance will take 30 years and three months to pay off at a total cost of seven thousand seven hundred thirty-three dollars and forty-nine cents ($7,733.49).
A five thousand dollar ($5,000) balance will take 40 years and two months to pay off at a total cost of sixteen thousand three hundred five dollars and thirty-four cents ($16,305.34).
This information is based on an annual percentage rate of 17 percent and a minimum payment of 2 percent or ten dollars ($10), whichever is greater."
In the alternative, a credit card issuer may provide this information for the three specified amounts at the annual percentage rate and required minimum payment which are applicable to the cardholder's account. The statement provided shall be immediately preceded by the statement required by paragraph (1).
(ii) Instead of the information required by clause (i), retail credit card issuers shall provide a written three-line statement to read, as follows:
"A two hundred fifty dollar ($250) balance will take two years and eight months to pay off a total cost of three hundred twenty-five dollars and twenty-four cents ($325.24).
A five hundred dollar ($500) balance will take four years and five months to pay off at a total cost of seven hundred nine dollars and ninety cents ($709.90).
A seven hundred fifty dollar ($750) balance will take five years and five months to pay off at a total cost of one thousand ninety-four dollars and forty-nine cents ($1,094.49).
This information is based on an annual percentage rate of 21 percent and a minimum payment of 5 percent or ten dollars ($10), whichever is greater."
In the alternative, a retail credit card issuer may provide this information for the three specified amounts at the annual percentage rate and required minimum payment which are applicable to the cardholder's account. The statement provided shall be immediately preceded by the statement required by paragraph (1). A retail credit
card issuer is not required to provide this statement if the cardholder has a balance of less than five hundred dollars ($500).
(B) A written statement providing individualized information indicating an estimate of the number of years and months and the approximate total cost to pay off the entire balance due on an open-end credit card account if the cardholder were to pay only the minimum amount due on the open-ended account based upon the terms of the credit agreement. For purposes of this subparagraph only, if the account is subject to a variable rate, the creditor may make disclosures based on the rate for the entire balance as of the date of the disclosure and indicate that the rate may vary. In addition, the cardholder shall be provided with referrals or, in the alternative, with the "800" telephone number of the National Foundation for Credit Counseling through which the cardholder can be referred, to credit counseling services in, or closest to, the cardholder's county of residence. The credit counseling service shall be in good standing with the National Foundation for Credit Counseling or accredited by the Council on Accreditation for Children and Family Services. The creditor is required to provide, or continue to provide, the information required by this paragraph only if the cardholder has not paid more than the minimum payment for six consecutive months, after July 1, 2002.
(3) (A) A written statement in the following form: "For an estimate of the time it would take to repay your balance, making only minimum payments, and the total amount of those payments, call this toll-free telephone number: (Insert toll-free telephone number)."
This statement shall be provided immediately following the statement required by subparagraph (A) of paragraph (2). A credit card issuer is not required to provide this statement if the disclosure required by subparagraph (B) of paragraph (2) has been provided.
(B) The toll-free telephone number shall be available between the hours of 8 a.m. and 9 p.m., Pacific standard time, seven days a week, and shall provide consumers with the opportunity to speak with a person, rather than a recording, from whom the information described in subparagraph (A) may be obtained.
(C) The Department of Financial Institutions shall establish a detailed table illustrating the approximate number of months that it would take and the approximate total cost to repay an outstanding balance if the consumer pays only the required minimum monthly payments and if no other additional charges or fees are incurred on the account, such as additional extension of credit, voluntary credit insurance, late fees, or dishonored check fees by assuming all of the following:
(i) A significant number of different annual percentage rates.
(ii) A significant number of different account balances, with the difference between sequential examples of balances being no greater than one hundred dollars ($100).
(iii) A significant number of different minimum payment amounts.
(iv) That only minimum monthly payments are made and no additional charges or fees are incurred on the account, such as additional extensions or credit, voluntary credit insurance, late fees, or dishonored check fees.
(D) A creditor that receives a request for information described in subparagraph (A) from a cardholder through the toll-free telephone number disclosed under subparagraph (A), or who is required to provide the information required by subparagraph (B) of paragraph (2), may satisfy its obligation to disclose an estimate of the time it would take and the approximate total cost to repay the cardholder' s balance by disclosing only the information set forth in the table described in subparagraph (C). Including the full chart along with a billing statement does not satisfy the obligation under this section.
(b) For purposes of this section:
(1) "Credit card" has the same meaning as in paragraph (2) of subdivision (a) of Section 1748.12.
(2) "Open-end credit card account" means an account in which consumer credit is granted by a creditor under a plan in which the creditor reasonably contemplates repeated transactions, the creditor may impose a finance charge from time to time on an unpaid balance, and the amount of credit that may be extended to the consumer during the term of the plan is generally made available to the extent that any outstanding balance is repaid and up to any limit set by the creditor.
(3) "Retail credit card" means a credit card is issued by or on behalf of a retailer, or a private label credit card that is limited to customers of a specific retailer.
(c) (1) This section shall not apply in any billing cycle in which the account agreement requires a minimum payment of at least 10 percent of the outstanding balance.
(2) This section shall not apply in any billing cycle in which finance charges are not imposed.
SEC. 2. If the federal Bankruptcy Reform Act of 2001, as proposed by H.R. No. 333 of the 107th Congress, is enacted and includes the provisions of Section 1301 (Enhanced Disclosures Under an Open End Credit Plan) as it read on July 17, 2001, credit card issuers and retail credit card issuers shall be exempt from the following provisions of Section 1748.13 of the Civil Code:
(a) The provisions of paragraph (1) of subdivision (a).
(b) (1) The provisions of clause (i) of subparagraph (A) of paragraph (2) of subdivision (a) as it relates to that portion of the statement describing the payments made on a balance of one thousand dollars ($1,000). However, the portion of the statement describing the payments made on balances of two thousand five hundred dollars ($2,500) and five thousand dollars ($5,000) shall be inserted immediately after the statement required by Section 1301 (Enhanced Disclosures Under an Open End Credit Plan) of the federal act.
(2) For retail credit card issuers, the provisions of clause (ii) of subparagraph (A) of paragraph (2) of subdivision (a) as it relates to that portion of the statement describing the payments made on a balance of two hundred fifty dollars ($250). However, the portion of the statement describing the payments made on balances of five hundred dollars ($500) and seven hundred fifty dollars ($750) shall be inserted immediately after the statement required by Section 1301 (Enhanced Disclosures Under an Open End Credit Plan) of the federal act.
(c) The provisions of subparagraph (A) of paragraph (3) of subdivision (a).
SEC. 3. Except for the provisions of subparagraph (C) of paragraph (3) of subdivision (a) of Section 1748.13 which shall become operative on January 1, 2002, this act shall become operative on July 1, 2002.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.