7.1 Credit Cards: Coverage, Disclosures and Ability to Pay

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1. Regulatory Framework & Open-End Credit Definitions

Under 12 CFR §1026.2(a)(20), open-end credit is defined as consumer credit extended by a creditor under a plan in which:

1. The creditor reasonably contemplates repeated transactions;
2. The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
3. The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid (replenishing line of credit).

If any of these three elements is missing, the credit product cannot be treated as open-end credit and must comply with the closed-end credit provisions of Regulation Z Subpart C.

Open-End Credit Classifications

• Credit Card Accounts Under an Open-End (Not Home-Secured) Consumer Credit Plan (§1026.2(a)(15)): Any open-end credit account accessed by a credit card, excluding home-equity lines of credit (HELOCs) or lines secured by real property.
• Home Equity Lines of Credit (HELOCs, §1026.40): Open-end credit plans secured by the consumer's dwelling, subject to specialized disclosure and substantive rules under Subpart B.
• General Open-End Unsecured Lines of Credit: Overdraft lines of credit, personal revolving credit lines, and cash advance lines accessed via checks or automated clearinghouse (ACH).

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2. CARD Act Requirements & Account Management Rules

Enacted in 2009, the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) amended TILA to curb predatory practices, unannounced rate hikes, and hidden penalty fee traps. These provisions are integrated into Regulation Z Subpart B.

A. 45-Day Advance Notice of Significant Changes in Terms (§1026.9(c), (g))

A card issuer must provide a written notice at least 45 calendar days prior to the effective date of:

• A significant change in account terms, including increases in the annual percentage rate (APR), increases in minimum periodic payment amounts, changes in transaction fees, or the addition of new penalty fees.
• An increase in the APR due to consumer default, delinquency, or penalty triggers (§1026.9(g)).

Consumer Opt-Out & Payoff Rights (§1026.9(h))

When a creditor provides a 45-day notice of a significant change or rate increase, the consumer generally has the right to reject (opt out of) the change prior to the effective date. If the consumer rejects the change:

• The card issuer may terminate credit availability and close the account to new transactions.
• The creditor cannot demand immediate payment of the entire balance.
• The creditor must allow the consumer to repay the existing balance under one of the statutory payoff methods:
  1. Amortization over a period of not less than 5 years; or
  2. A required minimum periodic payment that includes a percentage of the balance that is equal to not more than twice the percentage required prior to the effective date of the change.

Statutory Exceptions to the 45-Day Notice Requirement

Notice is not required 45 days in advance under four specific regulatory scenarios:

1. Variable Rate Index Adjustments: The rate increase occurs due to the operation of an interest rate index that is publicly available and outside the creditor's control (e.g., the Wall Street Journal Prime Rate).
2. Expiration of Upfront Promotional Rates: The increase results from the expiration of a promotional/introductory rate, provided the creditor disclosed in writing upfront the duration of the promotional period and the specific post-promotional APR that would apply.
3. Completion of or Failure to Comply with a Temporary Workout/Hardship Plan: The rate increase occurs upon completion of, or default under, a temporary workout arrangement, provided the terms (and the restored rate) were disclosed in writing prior to commencement and the restored rate does not exceed the pre-workout rate.
4. Servicemembers Civil Relief Act (SCRA) Expiration: A rate increase resulting from the expiration of the SCRA 6% interest rate cap, returning the rate to the pre-service contract rate.

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B. Ability to Pay Underwriting Standards (§1026.51)

Card issuers are prohibited from opening a credit card account or increasing an existing credit line without conducting an independent, reasonable assessment of the consumer's ability to make the required payments.

1. General Ability to Pay Rule (§1026.51(a))

• Creditors must establish written policies and procedures to evaluate the consumer's current or reasonably expected income or assets, and current debt obligations.
• Household Income Restriction: Creditors cannot consider aggregate "household income" unless the creditor has a reasonable basis to conclude that the applicant has a reasonable expectation of access to that income (e.g., shared deposit accounts, regular transfers, or joint tax filings).
• Minimum payment calculation: The ability to pay must be evaluated assuming the consumer utilizes the full credit line and makes the minimum periodic payment under the card agreement.

2. Strict Protections for Consumers Under Age 21 (§1026.51(b))

For any applicant who has not attained the age of 21 prior to account opening, the creditor must satisfy one of two rigorous standards:

• Independent Ability to Pay: The applicant must submit financial information demonstrating an independent ability to make the required minimum periodic payments based on their own personal income or assets (wages, salary, bonuses, independent investments). Income merely available to the household is insufficient. Funds regularly deposited into an account on which the young applicant is an account holder may be that applicant’s income under the commentary.
• Qualified Adult Cosigner: The applicant must submit a joint application with an adult cosigner, guarantor, or joint holder who is at least 21 years of age and who possesses the independent financial ability to pay the debt.
• Cosigner Consent for Line Increases: If an account was opened with an adult cosigner, the creditor cannot increase the credit line before the cardholder turns 21 without the cosigner's written agreement assuming joint liability for the increase.

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