Legislative Update

July – September 2009

Federal Regulation

Board of Governors of the Federal Reserve

Proposed Changes in Disclosure Requirements for Mortgages and HELOCs

On July 23, the Board of Governors of the Federal Reserve announced proposed changes to Regulation Z that would affect disclosure requirements for mortgages (74, Federal Register, pp. 43232-425) and home equity lines of credit (HELOCs) (74, Federal Register, pp. 43428-613). Under the rule for closed-end mortgages, lenders would need to show how the consumer's interest rates compare with national averages and how an adjustable rate could affect payments, as well as highlight risky features such as negative amortization and improve other disclosures. To prevent mortgage brokers or loan officers from steering consumers into more expensive loans, payments to brokers by originators that are based on the loan's interest rates would be prohibited. Under the rule for HELOCs, consumers would receive a one-page summary of basic information and risks associated with a HELOC and lenders would be prohibited from terminating a HELOC for late payment until the consumer was at least 30 days past due. Comments on the proposed rules are due by December 24, 2009.

Proposed Consumer Credit Card Protections

On September 29, the Board of Governors of the Federal Reserve proposed an amendment to Regulation Z that would implement new rules on credit card disclosures, interest rates, and other consumer credit protection (74, Federal Register, pp. 54124-332). These rules were mandated by the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009, which was signed into law on May 22, 2009. On September 24, Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.) introduced a bill (H.R. 3639) to move up the effective date for the provisions of the Credit CARD Act to December 1, 2009, from their original effective dates in February and August 2010. For more information on the Credit CARD Act, see Banking Legislation and Policy, Volume 28, Number 2.

Federal Trade Commission

Proposed Rule to Amend Telemarketing Sales Rule to Address Debt Relief Services

On July 30, the Federal Trade Commission issued a proposed rule that would protect consumers from misleading or fraudulent debt relief services that are sold through telemarketing (74, Federal Register, pp. 41988-42024). The rule would amend the Telemarketing Sales Rule to expand the definition of "debt relief service," require new disclosures and prohibit misrepresentations about rates of success, and prohibit debt relief services from requesting or receiving payment until the services have been performed and documented to the consumer. Comments on the proposed rule were due on October 9, 2009.

Judicial Rulings

Tax Court Rulings

Credit Card Interchange Fees Ruled to Be a Form of Interest for Tax Purposes

On September 21, the United States Tax Court ruled that the interchange fees that credit card issuers charge merchants for each purchase made by a cardholder should be considered a form of interest for tax purposes (Capital One Financial Corp. v. Commissioner of Internal Revenue, T.C., No. 19519-05, 133 T.C. No. 8, 9/21/09). The Internal Revenue Service had argued that the interchange fee was payment by merchants for a service, but the court ruled that the fee was more economically equivalent to interest because it is income that compensates the issuers for the cost of lending money to the cardholders.