Compliance Bulletin

Summary and Analysis of Credit Card UDAP Rule
January 30, 2009

The Federal Reserve Board (“Board”), Office of Thrift Supervision (“OTS”), and National Credit Union Administration (“NCUA”) (collectively, the “Agencies”) jointly issued a final rule (“Rule”) prohibiting certain credit card practices. The Agencies developed the Rule pursuant to authority under the Federal Trade Commission Act (“FTC Act”), which proscribes unfair and deceptive acts and practices [1].


The Agencies’ joint action brings the FTC’s standards for unfairness and deception to the regulation of credit card practices. UDAP regulation had been applied retroactively on a case-by-case basis through enforcement actions but, through this rulemaking, is now being imposed prospectively through the regulation of specified acts and practices.

An act or practice is not unfair or deceptive within the meaning of the FTC Act unless: (1) it causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers themselves; and (3) the injury is not outweighed by countervailing benefits to consumers or to competition. In addition, the FTC may consider established public policy, but public policy may not serve as the primary basis for its determination that an act or practice is unfair. In adopting the Rule, the Agencies have determined that, with respect to each of the prohibitions identified, each of the UDAP factors is met.


The Rule relates to another revised rule covering credit cards issued simultaneously under Regulation Z, which implements the Truth in Lending Act. This Bulletin summarizes only the UDAP rule; a subsequent Bulletin will address the Regulation Z revisions.

The Rule sets out several credit card acts and practices deemed to be unfair and deceptive within the meaning of the FTC Act. They are: (i) treating a payment as late for any purpose (other than expiration of a grace period), unless the consumer has been provided a reasonable amount of time to make that payment; (ii) allocating amounts paid in excess of the required minimum periodic payment in a manner that maximizes balances with the highest APR; (iii) increasing the APR applicable to an outstanding balance except in specified circumstances; (iv) assessing interest charges on balances for days in prior billing cycles when such charges are imposed as a result of the loss of a grace period; and (v) charging security deposits or fees that exceed applicable limits for the issuance or availability of credit.

Time to make payment. It is considered unfair to treat a payment on a consumer credit card account as late unless the consumer is provided with a “reasonable amount of time” to make the payment [2]. A safe harbor is provided. This standard is presumed to be met if the institution adopts reasonable procedures designed to ensure that periodic statements are mailed or delivered at least 21 days before the payment due date. The idea is to allow seven days for the statement to reach the consumer, seven days for review and payment, and seven days for return delivery. Treating a payment as late includes increasing the APR as a penalty, reporting the consumer as delinquent to credit bureau, or assessing a late fee [3].

The institution is not required to determine the specific date that the statements are sent. A reasonable procedure may be to send statements no later than three days after the closing date of a billing cycle and establishing a payment due date of at least 24 days after the closing date [4]. Comment 22(b)-3 provides an example of how the “reasonable amount of time” standard could be met if the institution only provides statements and accepts payments electronically. Here, the 21-day rule would not strictly apply, as long as the time allowed for payment is reasonable.

Allocation of payments. To address concerns that institutions were applying card payments in a manner that maximized interest charges on accounts with balances subject to different APRs (i.e., by allocating payments first to the balance with the lowest rate in order to accrue interest at higher rates on other balances), institutions will be required to use either the high-to-low or pro-rata method of allocation, discussed below. However, an institution is not restricted from changing the method used for an account or from using a different allocation method for different accounts [5].

High-to-low. An institution may allocate the amount paid in excess of the required minimum to the balance with the highest APR and the remaining to the other balances in descending order by APR.

Pro rata. Alternatively, the amount paid in excess of the required minimum may be allocated among the balances in the same proportion as each balance bears to the total balance.

Examples are provided in the comments [6]. Payments may be allocated based on the balances and APRs on the date the preceding billing cycle ends, on the date the payment is credited to the account, or on any day in between those two dates [7]. If more than one balance on an account has the same APR and at least one other balance has a different APR, the balances with the same APR may be treated as a single balance for purposes of allocation [8].

This rule does not limit or otherwise address how the institution sets the minimum payment. That determination is to be made consistent with applicable law and regulatory guidance [9].

APR increases. At account opening, the institution must disclose the APR rates that will apply to each category of transactions on the credit card account. The APR may not be increased except in the following circumstances:

By account disclosure. An APR may be increased to a rate in accordance with a disclosure given at account opening upon expiration of a stated period of time [10]. An increase is not permitted, even if disclosed at account opening, if the increase is contingent on a particular event or occurrence or may be applied at the institution’s discretion (unless one of the other exceptions applies) [11]. This provision does not prohibit applying a lower rate on a balance than disclosed, but the rate may not be subsequently increased with respect to that balance unless the consumer is given advance notice of the increase pursuant to 12 CFR 226.9© [12].

Variable rate. An APR tied to an external index (one that is publicly available and not under the institution’s control) may be increased due to an increase in the index [13]. This provision does not permit an increase through a change in method used to determine a variable rate (such as by increasing the margin), even if that change will not result in an immediate increase [14].

Advance notice. An APR may be increased pursuant to a notice under 12 CFR 226.9© or (g) for transactions that occur more than seven days after provision of the notice. This exception is not available during the first year after the account is opened [15].

Delinquency. An APR may be increased if a required minimum payment is not received within 30 days after the due date [16].

Workouts. An APR may be increased due to the consumer’s failure to comply with the terms of a workout arrangement, but the resulting APR may not exceed the pre-workout rate. If the pre-workout rate was a variable rate, then the post-(failed) workout rate must be calculated using the same pre-workout formula [17]. A workout may not be used as the basis for altering any of the restrictions in Section 535.24 (i.e., the exceptions and protected balances) [18].

Protected balances. An institution is required to allow a consumer to repay a “protected balance” by amortizing the balance over a minimum period of five years beginning with the effective date of the increased rate [19]. Alternatively, the percentage of the total balance that was included in the required minimum payment before the rate increase may be doubled with respect to the outstanding balance [20]. A “protected balance” is the amount owed for a category of transactions to which an increased APR cannot be applied after the applicable rate has been increased pursuant to Section 535.24(b)(3) (advance notice exception) [21]. A different method of paying a protected balance than the two listed may be used as long as the method used is no less beneficial to the consumer [22].

Fees and charges. An institution may not assess a fee or charge based solely on a protected balance, on the rationale that protections would be undercut if fees can be used as a substitute for an increase in the APR. For example, an institution may not assess a monthly maintenance fee on the outstanding balance. However, an institution would not be prohibited from assessing a late fee or over-limit fee based in part on the outstanding balance [23].

Double-cycle billing. The Rule prohibits double-cycle billing, which is defined as imposing a finance charge based on balances for days in prior billing cycles when such charges are imposed as a result of the loss of a grace period. Examples of double-cycle billing are provided [24].

An exception is provided for adjustments to finance charges resulting from the resolution of a dispute under 12 CFR 226.12 or 226.13 of Regulation Z. Also, an adjustment to finance charges is permissible as a result of the return of a payment for insufficient funds [25].

Subprime card fees. During the first year of an account, security deposits and fees may not be imposed for the issuance or availability of credit [26] that, in total, is greater than half of the initial credit limit. The limit during the first billing cycle after the account is opened is 25 percent. Any additional security deposits and fees for the issuance or availability of credit must be charged in equal portions in no fewer than the five billing cycles immediately following the first billing cycle [27].

An institution may not evade these restrictions by providing the consumer with additional credit to fund the payment of security deposits and fees. However, it is not a violation for an institution to require the consumer to pay security deposits or fees using funds that are not obtained from the institution or an affiliate [28].

The Rule is effective on July 1, 2010. Congress may soon be considering legislation (Credit Cardholders’ Bill of Rights Act, which passed the House last year as H.R. 5244) that could, if enacted, make some of the Rule’s requirements applicable as soon as 90 days after enactment. Institutions should consider necessary preparations in case of an earlier effective date than July 1, 2010. The Rule should have no bearing on whether acts or practices it addresses are unfair or deceptive before the effective date. Acts or practices occurring before the effective date will be judged on the totality of the circumstances under applicable laws and regulations. View Rule.

  1. Section 18(f)(1) of the FTC Act provides authority for prescribing “regulations defining with specificity. . . unfair or deceptive acts or practices, and containing requirements prescribed for the purpose of preventing such acts or practices.” 15 U.S.C. 57a(f)(1).
  2. 12 CFR Section 535.22. Citations in this Bulletin are to the Office of Thrift Supervision regulation. The Federal Reserve Board version of the rule will be codified in 12 CFR 227. This is a link to the OTS Rule.
  3. Comment 22(a)-1.
  4. Comment 22(b)-1.
  5. Comment 23-4.
  6. See comments at 23(a) and 23(b).
  7. See Comment 23-3 for an example.
  8. Comment 23-6. See also Comments 23(a)-1.iv and 23(b)-2.iv.
  9. Comment 23-1.
  10. 535.24(b)(1).
  11. Comment 24(b)(1)-1. For example, an institution could provide a notice under 12 CFR 226.9© or (g) (as discussed in 535.24(b)(3)) informing the consumer of an increase applicable after the first year of the account.
  12. See Comment 24(b)(1)-3i.
  13. 535.24(b)(2).
  14. Comment 24(b)(2)-1. The index itself may be changed, together with the margin if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and if the replacement index and margin will produce a similar rate. See Comment 24(b)(2)-6.
  15. 535.24(b)(3). See comments at 24(b)(3)-3.
  16. 535.24(b)(4).
  17. Comment 24(b)(5)-2.
  18. Comment 24(b)(5)-1.
  19. The institution is not required to recalculate the required minimum periodic payment for the protected balance if, during the amortization period, that balance is reduced as a result of the allocation of amounts paid by the consumer in excess of the minimum payment consistent with 535.23 or any other practice permitted by these rules and other applicable law. Comment 24(c)(1)(i)-1. If the APR is variable, the institution may adjust the interest charges included in the minimum payment accordingly in order to ensure that the outstanding balance is amortized in five years. See Comment 24(c)(1)(i)-2.
  20. For example, if the required minimum periodic payment prior to the rate increase was one percent of the total amount owed plus accrued interest and fees, the institution would be permitted to increase the minimum payment for the outstanding balance to up to two percent of that balance plus accrued interest and fees.
  21. 535.24(c). Because rates cannot be increased pursuant to 535.24(b)(3) during the first year after account opening, this provision does not apply to balances during the first year. Comment 24(c)-1.
  22. See Comment 24(c)(1)-1 for examples.
  23. Comment 24(c)(2)-1.
  24. Comment 25(a)-2.
  25. 535.25(b).
  26. Fees for the issuance or availability of credit means: (i) any annual or other periodic fee imposed for the issuance or availability of a consumer credit card account, including any fee based on account activity or inactivity; and (ii) any non-periodic fee that relates to opening an account. 535.26(d).
  27. 535.26(a) and (b). Examples are provided at 26(b)-2.
  28. Comment .26(c)-2.

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.

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