Open End Credit Fee Income

Truth in Lending Errors
Open end credit - programs such as credit cards and lines of credit - may not have been given as much compliance attention as closed end credit - for example, adjustable rate mortgages - but there is the same opportunity for problems as closed end credit.

The findings of violations in open end credit plans is increasing dramatically. The increase is the result of several factors. First, the number of banks that offer credit card programs is increasing. Second, co-branded or affinity cards with differences in program features are proliferating. Finally, examiners are looking more closely at open end credit and finding problems that can be costly and embarrassing to creditors. The most common problems result from changes to the plan after program disclosures are given.

Processing Fees
Many institutions are looking for fee income to increase profitability. A bank looking for fee income may decide to add a processing fee or transaction fee to open-end credit plans. For example, many banks now impose a processing fee for cash advances at an ATM. Some banks impose a transaction fee for checks drawing on home equity lines of credit.

There are two potential problems with this practice. First, the bank must disclose the fact that it will impose a fee before any fees are imposed.

Second, - and here's where it hits in the pocket - the fee is a finance charge and must be included in the APR calculations. If left out, the bank owes the fee to the customer.

Program Disclosures
The pre-application disclosures that are given to the customer disclose the program. When you change the program, you should consider two things. First, review the contract to make sure that the change is consistent with the contract. Second, a program change requires program disclosures. You have to tell the customer about the changes.

When program elements have not been properly disclosed, the consequences can be serious. The resulting problems are automatically a pattern and practice violation with high stakes. When a $2.00 fee is charged for advances at an ATM, the bank will not only owe its customers restitution for finance charges that the bank failed to disclose, the bank may also face civil money penalties for a pattern and practice violation.

Calculations
Fee income must be included in the APR. This means that the APR may vary depending on whether the customer used the account in a way to trigger the fee, such as taking a cash advance at an ATM. The fee should also be taken into account in calculating the balance on which interest is charged. If the fee is added to the balance before calculating the interest for the period, the effect is to impose a finance charge on a finance charge.

Sticking to the contract
A common violation that examiners find is early credit card disclosures that do not match the contract. This can result from a variety of all too common practices: changing the program but not updating the disclosures, preparing disclosure by looking at Regulation Z and talking with program administrators but not reading the contract, or copying documents from another creditor. (What makes you think they got it right?)

Examination procedures
Examiners do more than review your periodic statements and run a few numbers. They are now comparing disclosures, contracts, fee practices, and periodic statements. This expanded procedure is revealing a disturbing number of violations and errors in programs.

What causes errors
These problems are the result of program and product responsibilities existing in departments of the bank that function separately from each other. For example, product development usually works with marketing, but does not usually work with the operations department that manages the periodic statements.

Your compliance success depends on preventing these failures to communicate. Identify the independent components - your banking departments - which are involved in an open-end credit product. Your compliance procedures, including training, monitoring, and auditing, should take the involvement of each department into account.

For example, disclosures must be based on the product actually being marketed. Therefore, anyone developing a credit card product making changes to an existing program should notify the unit responsible for developing accurate disclosures. This contact should be a required step in product development.

Similarly, operations must support the product by generating statements with accurate calculations and disclosures. There must be communications between the product and the operations managers whenever changes are being considered.

Finally, the compliance monitoring and audit should look for any cracks in the system (See Action Steps for suggestions.)

ACTION STEPS

Check your early disclosures for completeness and accuracy under Regulation Z. Then compare the terms that are disclosed to the terms provided for in the contract. Make sure they match.
Make a list of all the fees that your bank charges credit card customers. Identify those that are finance charges and should be reflected in the APR. Check the monthly balance calculations. Then check some APRs.
If your bank offers more than one credit card program, such as co-branded programs, check the contractual provisions of each program and then check disclosures and periodic statements to test whether they accurately disclose the contract provisions.