On March 18, 2011, the Federal Reserve Board of Governors issued a Supplementary Information and Final Regulation and Commentary (“Supplementary Information”) which, among other things, clarified the definition of credit card. The following Client Alert focuses on how the new Supplementary Information impacts debit and prepaid cards that access a separate line of credit.

Since publication of the February 2010 and June 2010 Final Rules, the Board has become aware that clarification is needed to resolve confusion regarding how institutions must comply with particular aspects of those rules. In order to provide guidance and facilitate compliance with the final rules, the Board published proposed amendments to portions of the regulation and the accompanying staff commentary on November 2, 2010. See 75 FR 67458 (November 2010 Proposed Rule).

With respect to prepaid cards, the Supplementary Information discusses what happens when a customer opens a line of credit in connection with a prepaid card account.  Depending on how the line of credit works, the prepaid card or prepaid card account number, or both, may be deemed a “credit card” under Reg Z. If the prepaid card or its account number is a credit card, then all Reg Z requirements applicable to a “credit card account under an open-end (not home-secured) plan” would apply.

  • First Approach: If the customer can use the prepaid card or its account number to access the line of credit to pay for goods and services, then the prepaid card or account number, as applicable, will be deemed a credit card under Reg Z. This means that all Reg Z requirements applicable to credit cards (not home-secured) would apply. For example, the issuer of the prepaid card would be required to provide full Reg Z disclosures (including the Annual Percentage Rate) for the credit transactions, and payments for loans could not be debited without first billing the cardholder at least 21 days in advance of the payment due date or any grace period.
  • Second Approach: If the customer can use the prepaid account number simply to cause a transfer from the line of credit to load the prepaid card account, then that transaction does NOT convert the prepaid card or account number into a credit card. This means that you must still provide full disclosures of all terms and comply with other applicable state or federal laws, but the prepaid card or its account number is not subject to the full panoply of Reg Z’s credit card rules.

Important: If a card issuer wishes to use the Second Approach to avoid characterization of a prepaid card as a credit card under Reg Z, it would be important NOT to combine the transfer of funds and any subsequent payment for a purchase into a “seamless” transaction. If, for example, a cardholder wishes to move $72.50 to her prepaid card account in order pay for an online-purchase, the card issuer should require the transaction to be made in two separate steps: first, the transfer of funds from the line of credit; second, the purchase. Even better would be to have the initial transfer of funds from the line of credit to the prepaid card to be in a standard, flat amount (in our example, perhaps $100), so that the two transactions (the transfer from the line of credit, and the purchase transaction) would be in different amounts as well.

For your convenience, we have copied below the key provisions of the Federal Reserve Board’s Supplementary Information. If you have any questions, do not hesitate to contact us.

Judith Rinearson
Judith.rinearson@bryancave.com
(212) 541-1135

John ReVeal
(202) 508-6395
John.reveal@bryancave.com

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Supplementary Information and Final Regulation and Commentary:  Relevant Portions
NOTE:  Italics are added.  In the Final Rule and Regulation, bracketed language is the existing regulation that was not changed by this amendment.

In the February 2010 Final Rule, the Board retained the pre-existing definition of “credit card” as any card, plate, or other single credit device that may be used from time to time to obtain credit. See § 226.2(a)(15)(i). However, the Board also added a new, somewhat narrower definition in order to implement the provisions of the Credit Card Act that apply to “credit card account[s] under an open end consumer credit plan.” Specifically, in a new § 226.2(a)(15)(ii), the Board defined “credit card account under an open-end (not home-secured) consumer credit plan” to mean any open-end credit account accessed by a credit card except: (1) a home-equity plan subject to the requirements of § 226.5b that is accessed by a credit card; or (2) an overdraft line of credit that is accessed by a debit card. This term is generally used in the provisions of Regulation Z that implement the Credit Card Act.

The Board’s February 2010 Final Rule declined requests from industry commenters to exempt all lines of credit accessed solely by an account number from the definition in § 226.2(a)(15)(ii), noting Congress’ apparent intent that the Credit Card Act apply broadly to all products that meet the definition of “credit card.” See 75 FR 7664-7665. However, the Board understands that this determination has caused uncertainty about whether all credit products accessed by an account number are subject to TILA’s credit card provisions.

In particular, some institutions offer general purpose open-end lines of credit that are linked to a checking or other asset account with the same institution. The consumer can use the line’s account number to request an extension of credit, which is then deposited into the asset account. The Board understands that there has been some confusion as to whether, in these circumstances, the account number is a “credit card” for purposes of § 226.2(a)(15)(i) and therefore a “credit card account under an open-end (not home-secured) consumer credit plan” for purposes of § 226.2(a)(15)(ii). Because most if not all credit accounts can be accessed in some fashion by an account number, the Board does not believe that Congress generally intended to treat account numbers that access a credit account as credit cards for purposes of TILA. However, the Board is concerned that, when an account number can be used to access an open-end line of credit to purchase goods or services, it would be inconsistent with the purposes of the Credit Card Act to exempt the line of credit from the protections provided for credit card accounts. For example, creditors may offer open-end credit accounts designed for online purchases that function like a traditional credit card account but can only be accessed using an account number. In these circumstances, the Board believes that TILA’s credit card protections should apply.

Accordingly, the Board proposed to clarify the application of § 226.2(a)(15)(i) and (a)(15)(ii) to account numbers by amending comment 2(a)(15)-2, which provides illustrative examples of credit devices that are and are not credit cards. Specifically, the Board proposed to add an additional example clarifying that an account number that accesses a credit account is not a credit card, unless the account number can access an open-end line of credit to purchase goods or services. The comment would further clarify that, if, for example, a creditor provides a consumer with an open-end line of credit that can be accessed by an account number in order to transfer funds into another account (such as an asset account with the same creditor), the account number is not a credit card for purposes of § 226.2(a)(15)(i). However, if the account number can also access the line of credit in order to purchase goods or services (such as an account number that can be used to purchase goods or services on the Internet), the account number is a credit card for purposes of § 226.2(a)(15)(i). Furthermore, if the line of credit can also be accessed by a card (such as a debit card or prepaid card), then that card is a credit card for purposes of § 226.2(a)(15)(i).

Consistent with this treatment of account numbers, the Board also proposed to amend § 226.2(a)(15)(ii)(B) – which currently excludes overdraft lines of credit accessed by a debit card from the definition of “credit card account under an open-end (not homesecured) consumer credit plan” – to also exclude overdraft lines of credit accessed by an account number (such as when a debit card number or checking account number is used to make an online purchase that overdraws the asset account). In addition, the Board proposed to adopt a new comment 2(a)(15)-4, which clarifies the test used for determining whether an account is a credit card account under an open-end (not homesecured) consumer credit plan for purposes of § 226.2(a)(15)(ii). Finally, for clarity and consistency, the Board proposed additional non-substantive revisions to the exception for home-equity plans in § 226.2(a)(15)(ii)(A).

Except as discussed below, the revisions to § 226.2(a)(15)(ii) and the commentary to § 226.2(a)(15) are adopted as proposed. While industry commenters generally supported or did not oppose this aspect of the proposal, comments from the prepaid card industry strongly objected to the reference to prepaid cards in the proposed example in comment 2(a)(15)-2. As discussed above, the Board’s proposed amendments to comment 2(a)(15)-2 were intended to clarify § 226.2(a)(15)(i)’s definition of “credit card” with respect to account numbers that access lines of credit, not prepaid cards that access lines of credit. Accordingly, the Board has revised the proposed example in comment 2(a)(15)-2 to remove the specific reference to prepaid cards. However, a prepaid card is a credit card for purposes of Regulation Z if it falls within the general definition of “credit card” set forth in § 226.2(a)(15) and the accompanying commentary.

Consumer group commenters objected to the proposed revisions to comment 2(a)(15)-2, which could – in their view – create an incentive for creditors to develop new products designed to circumvent the Credit Card Act. However, the proposed revisions are intended to prevent circumvention by clarifying that an account number that accesses an open-end line of credit to purchase goods or services is generally treated as a credit card for purposes of Regulation Z. To the extent that additional products emerge that raise concerns regarding circumvention, further revisions to Regulation Z may be appropriate. Nevertheless, the Board has revised comment 2(a)(15)-2 to clarify that, when an account number can access an open-end line of credit to purchase goods or services, a creditor cannot evade Regulation Z’s credit card provisions by treating the purchases as cash advances or as some other type of transaction.

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§ 226.2 Definitions and rules of construction.

(a) * * *

(15) [(i) Credit card means any card, plate, or other single credit device that may be used from time to time to obtain credit.]

 

(ii) Credit card account under an open-end (not home-secured) consumer credit plan means any open-end credit account that is accessed by a credit card, except:

(A) A home-equity plan subject to the requirements of § 226.5b that is accessed by a credit card; or

(B) An overdraft line of credit that is accessed by a debit card or an account number.

* * * * *

COMMENTARY:

2(a)(15) Credit card.

* * * * *

2. Examples.
[i. Examples of credit cards include: * * * *

[B. A card that accesses both a credit and an asset account (that is, a debit-credit card).

[C. An identification card that permits the consumer to defer payment on a purchase.

* * * *

[E. A card or device that can be activated upon receipt to access credit, even if the card has a substantive use other than credit, such as a purchase-price discount card. Such a card or device is a credit card notwithstanding the fact that the recipient must first contact the card issuer to access or activate the credit feature.]

ii. In contrast, credit card does not include, for example:

* * * * *

C. An account number that accesses a credit account, unless the account number can access an open-end line of credit to purchase goods or services. For example, if a creditor provides a consumer with an open-end line of credit that can be accessed by an account number in order to transfer funds into another account (such as an asset account with the same creditor), the account number is not a credit card for purposes of § 226.2(a)(15)(i). However, if the account number can also access the line of credit to purchase goods or services (such as an account number that can be used to purchase goods or services on the Internet), the account number is a credit card for purposes of § 226.2(a)(15)(i), regardless of whether the creditor treats such transactions as purchases, cash advances, or some other type of transaction. Furthermore, if the line of credit can also be accessed by a card (such as a debit card), that card is a credit card for purposes of § 226.2(a)(15)(i).