Bankruptcy Act Spells Out Consumer Protections

The new law is more consumer-friendly than critics claim.

PRESIDENT Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law April 20, 2005, and it generally becomes effective Oct. 17, 2005.

Critics condemn the law for favoring special interest groups and containing no consumer protections. Other critics claim the law tilts the playing field in favor of credit card companies and against ordinary workers. But these statements aren't entirely correct. The law actually adds new consumer protections, many of which will be found in the Truth in Lending (TIL) Act and Regulation Z.

The bankruptcy law amends TIL to provide:

* Enhanced disclosures for openend credit plans, explaining the payoff effect of making only minimum monthly payments on an account. This includes a referral to a toll-free number for pay-off information.

* Enhanced disclosures for credit secured by a dwelling. These include a new warning in initial disclosures, applications, and ads for high loanto-value mortgages stating that interest may not be tax deductible on the portion of the loan exceeding the property's fair market value.

* Changes for disclosures related to "introductory rates," solicitations, and promotional materials to more prominently disclose the introductory rate, its expiration date, and subsequent rates.

* A requirement that Internet-based credit card solicitations disclose the items currently appearing in the "Schumer box," including introductory rate information.

* A requirement that the periodic statement prominently and conspicuously disclose the late fee and the payment due date, or the earliest date on which a late fee is charged if that date differs from the due date.

* A statement that creditors are prohibited from terminating a credit card account before the expiration date solely because the account hasn't incurred finance charges. Creditors still may terminate accounts that have had no activity for three or more consecutive months.

One of the most significant new consumer protections is minimum payment disclosures. Open-end credit plans, including credit card accounts credit unions offer, will require a "minimum payment warning" revealing how long it will take to repay a balance if the member makes only minimum payments each month. The language will vary depending on whether the required minimum payment is less than or greater than 4% of the balance.

This warning must appear on the front of the periodic statement and must include a toll-free phone number the member may call to receive an estimate of how long it will take to repay the balance making only minimum payments. If the credit union maintains a toll-free number to provide the actual number of months it will take to repay the balance, only a shortened warning without an example is required on the periodic statement.

State-chartered credit unions whose compliance with Reg Z is enforced by the Federal Trade Commission (FTC) will be required to provide a similar minimum payment warning with a payment example. However, members will be directed to call a toll-free phone number the FTC maintains for an estimate of how long it will take to repay the balance making only minimum payments.

For 24 months, credit unions with less than $250 million in assets may provide a toll-free phone number the Federal Reserve Board or another third party maintains.

TIL's minimum payment disclosures will become effective 18 months after the bankruptcy law's enactment (October 2006) or 12 months after the Fed's publication of final regulations, whichever is later. The other changes to Reg Z will take effect 12 months after the bankruptcy law's enactment or 12 months after the Fed's publication of final regulations, whichever is later.

You'll see the Fed's proposed and final regulations and detailed information from the Credit Union National Association prior to the effective dates.

MICHAEL MCLAIN is assistant general counsel for the Credit Union National Association. Contact him at 608-231-4185 or at [email protected].

Copyright Credit Union National Association, Inc. Jul 2005
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