The following article is reprinted from Basis Points® , Vol. 1, Issue 12, Copyright © 2002, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

Do you offer your customers the option to make payments via an expedited payment service, such as FastPay or other electronic check service? Your life may just get simpler if the Federal Reserve Board (Board) adopts just-published proposed revisions to its Official Staff Commentary to Regulation Z.

The Truth in Lending Act (TILA) is implemented by the Board's Regulation Z (12 CFR part 226). The Board has delegated to officials in the Board's Division of Consumer and Community Affairs authority to issue official staff interpretations of Regulation Z. These interpretations are incorporated in the Commentary (12 CFR part 226 (Supp. I)). The Commentary provides guidance to creditors on how to apply the regulation to specific transactions. Creditors who rely on the Commentary in good faith are generally protected from liability under section 130(f) of TILA. The staff updates the Commentary periodically to address significant new questions that arise.

Open End Credit

The proposal addresses how to disclose FastPay fees, and the circumstances under which a creditor can deliver substitute credit cards to a consumer.

FastPay. Credit card and HELOC servicers increasingly have been making expedited payment services available to consumers. The expedited payment service provides consumers an alternative to mailing a payment that might not reach the card issuer by the due date. To avoid being assessed a late payment fee, the consumer often agrees to pay a lesser charge for the expedited payment service. The service is typically an electronic funds transfer or a draft on the customer's checking account. "Expedited" refers to any form of payment or delivery other than the standard mail service generally made available to the creditor's customers.

For some time now, the industry has been arm wrestling with the Board staff over whether these fees are finance charges. Initially, the staff was adamant that such fees are finance charges. "Finance charge" is defined in TILA as any fee "payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." Suppose that you set up an account and tell the consumer that she may pay by check or electronic/ACH payment so long as the payment is made by the due date. However, if she would like, she could call you and you would arrange for an electronic check to be drawn on her account in the amount of the payment due on the account plus a service charge. Is that a TILA "finance charge?"

In the Proposed Commentary, the staff reverses that position and hold that such fees are not finance charges. According to the staff, a fee charged for expediting a consumer's payment is not "incidental to the extension of credit" if this payment method is not established as the regular payment method for the account. Accordingly, the proposal indicates that an expedited payment charge under these circumstances would not be a finance charge. This appears to be the case even if the creditor retains a portion of the fee. However, the fee would be disclosed as an "other charge" under Section 226.6(b). See new proposed comment 6(b)-1.

In addition, the staff has proposed to revise the "change in terms" provisions of the Commentary to allow creditors to change the amount of this fee without having to go through a change in terms under the Regulation. Normally, if a creditor changes a term of an open end account that was a required disclosure under the account opening rules in Section 226.6, a creditor must give the customer written notice of the change and wait at least 15 days after giving notice to make the change. The staff has proposed to waive that requirement for changes in the expedited payment fees. They argue that, in most cases, the creditor discloses the fee to the consumer before completing the expedited payment transaction. The implication is that advance notice would not be of much/any use to the consumer because the consumer already receives adequate notice at the time she decides to use the expedited service. See proposed new comment 9(c)(2)-1.

The staff has left an open question. It is not at all clear that a creditor could change the amount of the fee on a HELOC account. The HELOC rules impose special, some would say draconian, limitations on when a creditor can change the terms of an account. Except in very limited circumstances, a creditor may change the terms of a HELOC account only if the change will "unequivocally benefit the consumer." You might have a hard time arguing that an increase in a fee will unequivocally benefit your customer. Of course, if the facts are that the consumer will definitely incur a late fee if the service is not used, the fee for the service is less than the late fee, and the service will not be available unless the fee is paid, it seems contrary to the purpose and spirit of TILA to deny the consumer the right to incur the increased expedited fee charge rather than pay a larger amount in late fees.

Expedited delivery fee. The staff has also proposed that a fee imposed to expedite delivery of a replacement credit card not be disclosed as a finance charge or an "other charge." According to the staff, an expedited delivery fee is not "incidental to the extension of credit" where the card is also available to consumers by standard mail service without paying the fee. As a result, it is not a finance charge. In addition, the charge is not an "other charge" under Regulation Z for two reasons. First, it is not a significant part of the credit plan so long as the card is also available without paying the fee. Second, consumers don't incur the fee very often. Consumers request the expedited delivery service only occasionally, such as when a consumer seeks to replace a lost or stolen credit card and requests expedited mailing. See proposed new comment 6(b)-2.

Special rules on delivering credit cards. As a general rule, Section 226.12 of Regulation Z prohibits you from delivering a credit card to a consumer unless the consumer has asked for the card. This restriction was one of the most important of the "credit card rules" when those rules were added to TILA back in the pre-historic times of the early 1970s.

There was a time, if you can imagine it, when cash was king in middle class America. And, when cash was inadequate, you opened a store account (essentially, a revolving retail installment sales account) with each individual merchant where you shopped. At the end of each month, you received separate bills from JC Penney's, Sears, Texaco, and maybe even the local butcher. In many instances, people would walk or drive down to the merchant's billing office to make the monthly payment, often in cash. The merchant maintained paper ledgers where they recorded the amount of each new purchase and payment. They figured payment amounts from accounting tables or, if really fancy, a slide rule. Some merchants handed out membership or ID cards that you would use to identify your account when you made a purchase. If you were rich and you traveled a lot, you might have a Diners Club card in your wallet. But that was really a charge card, payable in full at the end of each month. And it was only accepted by a few upscale merchants in the travel and entertainment business.

Then Bank of America had a thought. What if we collect all of the merchants in Central California and convince them to accept a universal card that can be used anywhere? We could convince the merchants that they could sell more products if customers were not limited to cash on hand. And the merchants could close out the billing departments that tried to keep pace with in-house credit plan billings and collections. Merchants would only buy into the plan if they could expect a high volume of customers to own and use the new BankAmericard. So, BankAmerica carpet-bombed Central California residents with mailings that included actual credit cards.

Consumers reacted as you might expect. Chaos ensued. Many threw the cards in the garbage. Of those who kept the cards and used them, a significant number maxed out on the credit line and then could not make the payments. Some claimed they did not even realize that the money had to be repaid. The US Mail being what it was, many cards were lost or not delivered. Many of these fell into the hands of people who used them to buy things knowing that someone else was going to get the bill. Bank of America tried to collect from some of these customers even where the charges were fraudulent.

Out of this whirlwind were born two institutions that remain with us to this day. One is the VISA system. (Citicorp matched the process on the East Coast and gave birth to MasterCard). The other is the cardholder protections under the Truth in Lending Act. And, because of that chaotic consumer response to unsolicited cards in the initial BankAmericard trials, one of the cornerstone rules in the new credit card rules prohibited issuers from delivering cards to consumers unless the consumer asked for the card.

Every rule must have an exception. And this rule is no exception. A creditor can deliver new cards to existing cardholders without a specific request from the cardholder. Among other things, this exception has enabled issuers to make frequent changes to that familiar piece of plastic to keep pace with technological advances and to make cards ever easier to use and ever more secure against fraudulent transactions. Today, that familiar piece of plastic is itself undergoing change. Some cards can now be read by flashing them at a reader, rather than swiping them through a machine that reads the old fashioned magnetic stripe on the back of the card. With this new technology (you see it at some gas pumps these days) the "card" can be as small as an inch or two long and hang off your key chain.

Issuers who want to expand the market for this new technology were stymied by the traditional rule against delivering unsolicited cards. They want the ability to deliver the new-fangled card that will be accessible at only a few merchants who have bought in to the leading edge technology, and a traditional card that can be used at all the usual locations. In response, the staff has proposed to amend the Commentary to allow an issuer to deliver multiple replacement cards so long as they all relate to the same account, are subject to the same account terms, and do not increase the consumer's liability for unauthorized use.

Closed End Credit

Payment Schedule Disclosure. The closed-end credit rules require you to describe the number, amounts and timing of scheduled payments. Private mortgage insurance premiums must be part of these calculations if they are part of the monthly payment. Under the Homeowners Protection Act of 1998, you are required to terminate PMI under certain conditions. Apparently, some creditors asked for help determining when the last payment with PMI as a portion happens when you have a portion of the PMI in an escrow account. So, the staff has proposed to revise paragraph 18(g)-5 of the Commentary to add an example. Suppose the PMI must terminate after the 120th scheduled monthly payment and you have collected two months worth of the PMI premiums in the escrow account as a hedge against missed payments. If the legal obligation requires the lender to apply the escrowed payments as the final premium payments, then the payment schedule disclosure would include PMI premiums for only 118 months. On the other hand, if the legal obligation permits the lender to refund the excess amount held in escrow to the borrower, then you would show the borrower making 120 monthly PMI payments in the payments schedule.

HOEPA: How to Select a Treasury Yield. The HOEPA or high cost loan test for mortgage loans requires you to compare the APR on the loan to the yield on Treasury securities with a comparable yield. Currently, the law permits you to use the actual results of Treasury auctions or the Board's "Selected Interest Rates" (statistical release H-15), which is published daily and lists the yield on actively traded issues adjusted to constant maturities. The H-15 is posted on the Board's Internet Web site at: www.federalreserve.gov/releases/h15/update.

The H-15 lists yields for various instruments. Creditors that rely on the H-15 have asked for additional guidance on the appropriate instrument to use when the loan maturity is comparable with more than one instrument. For example, the H-15 lists yields for Treasury bills as well as for actively traded Treasury securities adjusted to constant maturities of 6 months. The proposed comment clarifies that you are supposed to compare to the yield on the Treasury security adjusted to a constant maturity.

In addition, the staff offers an explanation of what to do when the Treasury plays "hide the security." The Department of the Treasury recently ceased auctioning 30-year securities. So, if you have a loan with a 30-year term, what do you use as a comparable Treasury yield? The H-15 currently lists a long-term average of the yields for Treasury securities with terms to maturity of 25 years and over, and refers to Treasury's formula for estimating a 30-year yield. The proposed comment would clarify that you should compare the APR on 30-year loans (and other loans longer than 20 years) with the yield for a 20-year constant maturity, and not with the average long-term yield for maturities over 25 years or an estimate for a 30-year yield.

The proposal eliminates the option to use yields of actual auction results. The staff identified two reasons. First, the longest maturity for auctioned Treasury securities is 10 years, while home-secured loans commonly have terms of 15 years or more. As a result, the maturities don't match up very well. Second, and probably more important, Treasury auctions are held infrequently. The H-15 is updated daily, which affords a more precise determination of the yield for Treasury securities as of the fifteenth day of the month preceding the application, the date mandated by HOEPA. Requiring all creditors to use the H-15 would ensure uniform application of HOEPA by eliminating the possibility that some creditors could use yields from auctions held several months before the loan application, which might differ significantly from the yields updated daily on the H-15. Many creditors already rely on the H-15 rather than actual auction results, and the revision is not expected to significantly affect creditor practices.

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Basis Points® is a concise, easy-to-read, monthly legal update for the mortgage lending industry. Basis Points® addresses complex legal issues from an industry perspective and keeps you informed on new legal developments affecting your business. Written in plain English, Basis Points® provides familiar factual scenarios, identifies the legal issues involved, presents real court resolutions and suggests how you might avoid similar legal pitfalls. Topics featured in Basis Points® include: Predatory Lending; Yield-Spread Premiums; RESPA - Fee Splitting and Up charges; Privacy; RESPA - Joint Venture; Bankruptcy; Fair Lending and Discrimination; and Truth in Lending/ Regulation Z. Basis Points® is published by CounselorLibrary.com, LLC, an affiliate of the Hudson Cook, LLP law firm. The CounselorLibrary.com, LLC is also the publisher of CARLAW®, HouseLaw®, Spot Delivery®, and the Counselor Library Series. For more information, please visit: www.counselorlibrary.com.