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Federal Legislative Developments
In May 2009, President Obama signed into law two significant pieces of legislation that include provisions affecting the Federal Reserve: the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Pub. L. No. 111-24) (the "Credit Card Act"), which aims to improve practices in the credit card market, and the Helping Families Save Their Homes Act of 2009 (Pub. L. No. 111-22), which seeks to restore stability to the housing markets. Following is a summary of the key provisions of these laws as they relate to Federal Reserve System functions.
The Credit Card Act
The Federal Reserve played a key role in the development of the Credit Card Act, which introduces new substantive and disclosure requirements for creditors in an effort to strengthen consumer protections in the credit card market. Among other things, the Credit Card Act amends the Truth in Lending Act and the Electronic Fund Transfer Act, which are administered by the Board.
Several provisions of the Credit Card Act build on protections previously adopted by the Board. Specifically, in December 2008, the Board adopted two final rules pertaining to open-end credit (other than credit secured by a home):
- The first rule made comprehensive changes to Regulation Z (which implements the Truth in Lending Act), including amendments that affect credit card applications and solicitations, account-opening disclosures, periodic statements, notices of changes in terms, and advertisements.
- The second rule protected consumers by prohibiting certain unfair acts or practices, such as unexpected increases in interest rates, with respect to consumer credit card accounts.
The requirements of the Credit Card Act that pertain to credit cards or other open-end credit for which the Board has rulemaking authority become effective in three stages. The first set of provisions requires creditors to provide written notice to consumers 45 days before the creditor increases the annual percentage rate (APR) on a credit card account or makes a significant change to the terms of a credit card account. These notices also must inform consumers of their right to cancel the credit card account before the increase or change goes into effect. If a consumer exercises this right, the creditor generally is prohibited from applying the increase or change to the account prior to account closure. In addition, creditors are required to mail or deliver periodic statements for credit cards at least 21 days before payment is due. These Credit Card Act provisions became effective on August 20, 2009 (90 days after enactment). The Board approved interim final rules to implement these provisions on July 15, 2009.
A second set of Credit Card Act provisions protects consumers from certain types of increases in credit card interest rates and changes in terms. It does so by prohibiting, with certain exceptions, increases to an interest rate during the first year after an account has been opened, as well as increases to an interest rate that applies to an existing credit card balance. In addition, if a consumer makes a payment in excess of the minimum payment amount, creditors are required to allocate those excess funds first to the card balance with the highest interest rate, and then to each successive balance with the next highest rate, until the payment is exhausted. Creditors also are prohibited from
- using the "two-cycle" billing method to impose interest charges;1
- charging over-the-limit fees unless the cardholder has agreed to allow the issuer to complete over-the-limit transactions; and
- charging excessive fees on cards with low credit limits.
The Credit Card Act also requires that before opening a credit card account, or increasing the account limit, creditors consider the consumer's ability to make the required payments under the card agreement. Furthermore, the Credit Card Act prohibits creditors from issuing a credit card to, or establishing an open-end credit plan on behalf of, a consumer who is younger than the age of 21, unless the creditor either determines that the consumer has the independent ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so. Creditors are further prohibited from offering a tangible item on or near a college campus to induce college students to apply for or participate in an open-end consumer credit plan.
In addition, for each credit card account, creditors must provide the consumer with a payment due date that is the same day each month, and with a disclosure setting forth the time and cost of paying off the card balance if only minimum monthly payments are made. This second set of provisions became effective on February 22, 2010 (nine months after enactment). The Board approved final rules to implement these provisions on January 12, 2010.
A third group of Credit Card Act provisions addresses the reasonableness and proportionality of penalty fees and periodic review of rate increases by creditors. Under these provisions, the Board is charged with establishing standards for creditors to use in assessing whether or not a penalty fee or charge is reasonable and proportional to the corresponding violation or omission. In developing these standards, the Board must consider the cost sustained by the creditor for the violation or omission, the effect of the fee in deterring omissions or violations by the cardholder, the cardholder's conduct, and other factors the Board considers necessary or appropriate. In addition, under certain circumstances, a credit card issuer who increases a cardholder's interest rate is required to review the cardholder's account at least every six months and assess whether a decrease in the rate is warranted due to a change in such factor(s). On March 3, 2010, the Board issued a proposed rule to implement the third group of Credit Card Act provisions. These provisions will become effective on August 22, 2010 (15 months after enactment).
The Credit Card Act also amends provisions of the Electronic Fund Transfer Act and generally prohibits the imposition of dormancy, inactivity, or service fees with respect to a gift certificate, store gift card, or general-use prepaid card. The Credit Card Act provides an exception to this general prohibition if there has been at least one year of inactivity, no more than one fee is charged per month, and the consumer is provided with clear and conspicuous disclosures about the fees. In addition, the Credit Card Act prohibits the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that is subject to an expiration date of less than five years. These provisions will become effective on August 22, 2010. The Board finalized rules to implement these provisions on March 23, 2010.
The Credit Card Act also mandates that creditors post their credit card agreements on their Internet sites, and provide these agreements to the Board. The Board is required to establish and maintain a central repository so that the public may easily access and retrieve these agreements. Finally, the Credit Card Act requires the Board to conduct and complete several studies, and to make several reports to Congress, on college credit card agreements, the reduction of consumer credit availability, and the use of credit cards by small businesses.
The Helping Families Save Their Homes Act
On May 20, 2009, President Obama signed into law the Helping Families Save Their Homes Act (the "Helping Families Act") (Pub. L. No. 111-22), which, among other things, introduced new measures to aid families facing foreclosure. The Helping Families Act included a variety of provisions intended to encourage modification of home mortgages either in default or facing imminent default, including through the HOPE for Homeowners Program previously established by the Housing and Economic Recovery Act of 2008 (HERA) (Pub. L. No. 110-289). For example, the Helping Families Act included provisions that permit the Secretary of Housing and Urban Development (HUD) to authorize the modification of federally guaranteed rural housing loans and loans guaranteed by the Federal Housing Administration (FHA) either in default or facing imminent default, and to make payments to residential mortgage lenders in order to offset certain costs associated with modification. The Helping Families Act also provides certain liability protections to loan servicers who make modifications in compliance with the Act.
Described below are three provisions of the Act that directly relate to the activities and functions of the Federal Reserve or the banking organizations supervised by the Federal Reserve.
GAO Audit Authority
Title VIII of the Helping Families Act authorizes the Comptroller General of the U.S. Government Accountability Office (GAO) to conduct audits, including on-site examinations, of all the credit facilities authorized by the Board under section 13(3) of the Federal Reserve Act (12 U.S.C. § 343) for a single and specific partnership or corporation in order to protect financial stability and promote the flow of credit during the financial crisis.
Under this provision, the GAO has full authority to audit the special lending facilities that the Federal Reserve established under section 13(3) for American International Group, Inc.; Citigroup, Inc.; and Bank of America Corporation, and to facilitate the acquisition of The Bear Stearns Company, Inc. by JP Morgan Chase & Co., including Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC. The Helping Families Act prohibits an officer or employee of the GAO from disclosing to any person outside the GAO information obtained in audits or examinations conducted under this authority and maintained as confidential by the Board or the Federal Reserve Banks.
Title VI of the Helping Families Act also clarifies the GAO's authority to audit the programs established by the Treasury Department under the Troubled Asset Relief Program (TARP), including the Term Asset-Backed Securities Loan Facility (TALF), which is a joint program of the Federal Reserve and Treasury. The Emergency Economic Stabilization Act of 2008 (EESA) (Pub. L. No. 110-343), which established the TARP, expressly authorizes the GAO to audit the programs and activities of the Treasury under the TARP for purposes of conducting ongoing oversight of the activities and performance of the TARP. Section 601 of the Helping Families Act clarifies and ensures the GAO's ability to audit the TALF for purposes of assessing the performance of the TARP. Taken together, these provisions provide the GAO with the authority to audit the terms, conditions, and operations of the TALF, including those aspects of the TALF that are administered by the Federal Reserve, as necessary to understand and assess the performance of, and risks to, the TARP.
These provisions augment the GAO's existing audit authority with respect to the Federal Reserve. For example, all of the Federal Reserve's supervisory and regulatory functions are subject to audit by the GAO to the same extent as the supervisory and regulatory functions of the other federal banking agencies.
Temporary Increase in FDIC Borrowing Authority
The Helping Families Act also includes measures designed to preserve confidence in the deposit insurance fund and assist the Federal Deposit Insurance Corporation (FDIC) in recovering any costs of emergency assistance provided to help maintain financial stability during the financial crisis.
Specifically, the Helping Families Act increases, from $30 billion to $100 billion, the amount the FDIC may borrow from the Treasury for deposit insurance purposes. In addition, until December 31, 2010, the Helping Families Act allows the Secretary of the Treasury, after consulting with the President, to allow the FDIC to borrow up to $500 billion from Treasury if the Secretary determines that the increase is necessary after receiving the written recommendations of the Board of Directors of the FDIC and the Board of Governors of the Federal Reserve System (each by a vote of not less than two-thirds of the members of the respective board).
The Helping Families Act also permits the FDIC, with the concurrence of the Secretary of the Treasury, to make special assessments on depository institution holding companies, in addition to insured depository institutions, to recover any losses that the Deposit Insurance Fund may incur as a result of actions taken by the FDIC under the systemic risk exception to the least-cost resolution requirements in the Federal Deposit Insurance Act (12 U.S.C. § 1823(c)(4)(G)). In establishing any such assessment rate, the FDIC must consider the types of entities that benefit from any action taken or assistance provided, economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate and relevant to the action taken or the assistance provided.
Moreover, the Helping Families Act extends, until December 31, 2013, the increase from $100,000 to $250,000 in FDIC deposit insurance coverage for insured depository institutions and National Credit Union Administration (NCUA) share insurance coverage for insured credit unions. This increase in deposit and share insurance initially was enacted as part of the EESA, but only through December 31, 2009.
The HOPE for Homeowners Program
Title II of the Helping Families Act makes several changes to the HOPE for Homeowners Program, a voluntary program designed to allow qualified, at-risk mortgage borrowers to refinance their existing mortgages into new mortgage loans guaranteed by the FHA, subject to certain conditions and restrictions. As originally enacted, the Board of Directors of the program (the "Oversight Board") was provided authority to establish requirements and standards for the program, prescribe regulations, and issue guidance to implement those requirements and standards. The Oversight Board is composed of the Secretary of HUD, the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, and the Chairperson of the Board of Directors of the FDIC, or the respective designee of each. The Helping Families Act transferred all responsibilities of the Oversight Board to the Secretary of HUD and converted the Oversight Board into an advisory body with responsibility for advising the Secretary regarding the program.
The Helping Families Act also gives HUD additional flexibility with respect to the fees assessed for providing government insurance to mortgages refinanced under the program. Specifically, the Act permits HUD to assess an upfront premium of up to 3 percent, and an annual premium of up to 1.5 percent, of the principal balance of the new mortgage, taking into consideration the financial integrity and purpose of the program. Previously, the upfront and annual premiums were fixed at 3 percent and 1.5 percent of the principal balance of the new mortgage, respectively. Additionally, the Helping Families Act allows HUD to make payments to the servicer for loans refinanced under the program, and to originators for new loans made through the program to encourage refinancings for eligible borrowers. HUD is also given greater flexibility in establishing the percentage of any appreciation realized by a borrower on the property refinanced into the program that the borrower must share with HUD. HUD is permitted to share its portion of any appreciation received with either a senior or subordinate mortgage holder whose loans were refinanced pursuant to the program. The Helping Families Act makes several other technical changes to the program to decrease administrative burdens, such as streamlining certifications and allowing conformity with current FHA practices to the extent possible.
1. The "two-cycle" billing method has several permutations. Generally, a card issuer that uses the two-cycle method assesses interest not only on the balance for the current billing cycle but also on balances on days in the preceding billing cycle. The two-cycle method results in greater interest charges for consumers who pay their balance in full one month (and therefore generally qualify for a grace period) but not the next month (and therefore generally lose the grace period). Return to text