[Federal Register Volume 75, Number 124 (Tuesday, June 29, 2010)]
[Rules and Regulations]
[Pages 37526-37592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14717]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Final Rule
Federal Register / Vol. 75 , No. 124 / Tuesday, June 29, 2010 / Rules
and Regulations
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1384]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is amending Regulation Z, which implements the Truth
in Lending Act, and the staff commentary to the regulation in order to
implement provisions of the Credit Card Accountability Responsibility
and Disclosure Act of 2009 that go into effect on August 22, 2010. In
particular, the final rule requires that penalty fees imposed by card
issuers be reasonable and proportional to the violation of the account
terms. The final rule also requires credit card issuers to reevaluate
at least every six months annual percentage rates increased on or after
January 1, 2009. The final rule also requires that notices of rate
increases for credit card accounts disclose the principal reasons for
the increase.
DATES: Effective Date. The rule is effective August 22, 2010.
Mandatory compliance dates. The mandatory compliance date for the
amendments to Sec. Sec. 226.9, 226.52, and 226.59, and the amendments
to Model Forms G-20 and G-22 in Appendix G to Part 226, is August 22,
2010. The amendments to the change-in-terms disclosures in Model Forms
G-18(F) and G-18(G) also have a mandatory compliance date of August 22,
2010. The mandatory compliance date for the amendments to the penalty
fee disclosures in Sec. Sec. 226.5a, 226.6, 226.7, and 226.56, and in
Model Forms G-10(B), G-10(C), G-10(E), G-17(B), G-17(C), G-18(B), G-
18(D), G-18(F), G-18(G), G-21, G-25(A), and G-25(B) in Appendix G to
Part 226, is December 1, 2010.
FOR FURTHER INFORMATION CONTACT: Stephen Shin, Attorney, or Amy
Henderson or Benjamin K. Olson, Senior Attorneys, Division of Consumer
and Community Affairs, Board of Governors of the Federal Reserve
System, at (202) 452-3667 or 452-2412; for users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
The Credit Card Act
This final rule represents the third stage of the Board's
implementation of the Credit Card Accountability Responsibility and
Disclosure Act of 2009 (Credit Card Act), which was signed into law on
May 22, 2009. Public Law 111-24, 123 Stat. 1734 (2009). The Credit Card
Act primarily amends the Truth in Lending Act (TILA) and establishes a
number of new substantive and disclosure requirements to establish fair
and transparent practices pertaining to open-end consumer credit plans.
The requirements of the Credit Card Act that pertain to credit
cards or other open-end credit for which the Board has rulemaking
authority become effective in three stages. First, provisions generally
requiring that consumers receive 45 days' advance notice of interest
rate increases and significant changes in terms (new TILA Section
127(i)) and provisions regarding the amount of time that consumers have
to make payments (revised TILA Section 163) became effective on August
20, 2009 (90 days after enactment of the Credit Card Act). A majority
of the requirements under the Credit Card Act for which the Board has
rulemaking authority, including, among other things, provisions
regarding interest rate increases (revised TILA Section 171), over-the-
limit transactions (new TILA Section 127(k)), and student cards (new
TILA Sections 127(c)(8), 127(p), and 140(f)) became effective on
February 22, 2010 (9 months after enactment). Finally, two provisions
of the Credit Card Act addressing the reasonableness and
proportionality of penalty fees and charges (new TILA Section 149) and
re-evaluation by creditors of rate increases (new TILA Section 148)
become effective on August 22, 2010 (15 months after enactment). The
Credit Card Act also requires the Board to conduct several studies and
to make several reports to Congress, and sets forth differing time
periods in which these studies and reports must be completed.
Implementation of Credit Card Act
The Board has implemented the provisions of the Credit Card Act in
stages, consistent with the statutory timeline established by Congress.
On July 22, 2009, the Board published an interim final rule to
implement the provisions of the Credit Card Act that became effective
on August 20, 2009. See 74 FR 36077 (July 2009 Regulation Z Interim
Final Rule). On February 22, 2010, the Board published a final rule
adopting in final form the requirements of the July 2009 Regulation Z
Interim Final Rule and implementing the provisions of the Credit Card
Act that became effective on February 22, 2010. See 75 FR 7658
(February 2010 Regulation Z Rule).
On March 15, 2010, the Board published a proposed rule in the
Federal Register to implement the provisions of the Credit Card Act
that become effective on August 22, 2010. See 75 FR 12334 (March 2010
Regulation Z Proposal). The comment period on the March 2010 Regulation
Z Proposal closed on April 14, 2010.\1\ In response to the proposal,
the Board received more than 22,000 comments from consumers, consumer
groups, other government agencies, credit card issuers, industry trade
associations, and others. As discussed in more detail elsewhere in this
supplementary information, the Board has considered these comments in
adopting this final rule.
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\1\ The comment period on the Paperwork Reduction Act analysis
set forth in the March 2010 Regulation Z Proposal closed on May 14,
2010.
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II. Summary of Major Revisions
A. Reasonable and Proportional Penalty Fees
Statutory requirements. The Credit Card Act provides that ``[t]he
amount of any penalty fee or charge that a card issuer may impose with
respect to a credit card account under an open end consumer credit plan
in connection with any omission with respect to, or violation of, the
cardholder agreement, including any late payment fee, over-the-limit
fee, or any other penalty fee or charge, shall be reasonable and
proportional to such omission or violation.'' The Credit Card Act
further directs the Board to issue rules that ``establish standards for
assessing whether the amount of any penalty fee or charge * * * is
reasonable and proportional to the omission or violation to which the
fee or charge relates.''
In issuing these rules, the Credit Card Act requires the Board to
consider: (1) The cost incurred by the creditor from an omission or
violation; (2) the deterrence of omissions or violations by the
cardholder; (3) the conduct of the cardholder; and (4) such other
factors as the Board may deem necessary or appropriate. The Credit Card
Act authorizes the Board to establish ``different standards for
different types of fees and charges, as appropriate.'' Finally, the Act
authorizes the Board to ``provide an amount for any penalty fee or
charge * * * that is presumed to be reasonable and proportional to the
omission or violation to which the fee or charge relates.''
Cost incurred as a result of violations. The final rule permits a
credit card issuer to charge a penalty fee for a particular type of
violation (such as a
[[Page 37527]]
late payment) if it has determined that the amount of the fee
represents a reasonable proportion of the costs incurred by the issuer
as a result of that type of violation. Thus, the final rule permits
issuers to use penalty fees to pass on the costs incurred as a result
of violations while ensuring that those costs are spread evenly among
consumers so that no individual consumer bears an unreasonable or
disproportionate share.
The final rule provides guidance regarding the types of costs
incurred by card issuers as a result of violations. For example, with
respect to late payments, the final rule states that the costs incurred
by a card issuer include collection costs, such as the cost of
notifying consumers of delinquencies and resolving those delinquencies
(including the establishment of workout and temporary hardship
arrangements). Notably, the final rule also states that, although
higher rates of loss may be associated with particular violations,
those losses and related costs (such as the cost of holding reserves
against losses) are excluded from the cost analysis. In order to ensure
that penalty fees are based on relatively current cost information, the
final rule requires card issuers to re-evaluate their costs at least
annually.
Deterrence of violations. The Credit Card Act requires the Board to
consider the deterrence of violations by the cardholder. As an
alternative to basing penalty fees on costs, the Board's proposed rule
would have permitted card issuers to base the amount of a penalty fee
on a determination that the amount was reasonably necessary to deter
that a particular type of violation. However, based on the comments and
further analysis, the Board has determined that the proposed approach
would not effectuate the purposes of the Credit Card Act. Instead, as
discussed below, the Board has revised the safe harbors to better deter
violations by generally allowing card issuers to impose higher fees for
repeated violations during a particular period.
Consumer conduct. The Credit Card Act requires the Board to
consider the conduct of the cardholder. The final rule does not require
that each penalty fee be based on an assessment of the individual
consumer conduct associated with the violation. Instead, the final rule
takes consumer conduct into account in three ways. First, as discussed
below, the Board has adopted safe harbors that generally allow card
issuers to impose higher penalty fees when a consumer repeatedly
engages in the same type of conduct during a particular period.
Second, the final rule prohibits issuers from imposing penalty fees
that exceed the dollar amount associated with the violation. For
example, under the final rule, a consumer who exceeds the credit limit
by $5 cannot be charged an over-the-limit fee of more than $5.
Similarly, a consumer who is late making a $20 minimum payment cannot
be charged a late payment fee of more than $20.
Third, the final rule prohibits issuers from imposing multiple
penalty fees based on a single event or transaction. For example, the
final rule prohibits issuers from charging a late payment fee and a
returned payment fee based on a single payment.
Safe harbors. Consistent with the safe harbor authority granted by
the Credit Card Act, the final rule generally permits--as an
alternative to the cost analysis discussed above--issuers to impose a
$25 penalty fee for the first violation and a $35 fee for any
additional violation of the same type during the next six billing
cycles. For example, if a consumer paid late during the January billing
cycle, a $25 late payment fee could be imposed. If one of the next six
payments is late (i.e., the payments due during the February through
July billing cycles), a $35 late payment fee could be imposed. As
discussed in detail below, the Board believes that these amounts are
generally consistent with the statutory factors of cost, deterrence,
and consumer conduct. These amounts will be adjusted annually to the
extent that changes in the Consumer Price Index would result in an
increase or decrease of $1.\2\
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\2\ Notwithstanding these safe harbors, card issuers will be
prohibited from imposing a fee that exceeds the dollar amount
associated with the violation. For example, if a consumer does not
make a $20 minimum payment by the due date, the late payment fee
cannot exceed $20, even though the safe harbors would otherwise
permit imposition of a higher fee.
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Although the safe harbors discussed above apply to charge card
accounts, the final rule provides an additional safe harbor when a
charge card account becomes seriously delinquent.\3\ Specifically, the
final rule provides that, when a charge card issuer has not received
the required payment for two or more consecutive billing cycles, it may
impose a late payment fee that does not exceed 3% of the delinquent
balance.
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\3\ For purposes of Regulation Z, a charge card is a credit card
on an account for which no periodic rate is used to compute a
finance charge. See Sec. 226.2(a)(15)(iii). Charge cards are
typically products where outstanding balances cannot be carried over
from one billing cycle to the next and are payable in full when the
periodic statement is received or at the end of each billing cycle.
See Sec. Sec. 226.5a(b)(7), 226.7(b)(12)(v)(A).
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B. Reevaluation of Rate Increases
Statutory requirements. The Credit Card Act requires card issuers
that increase an annual percentage rate applicable to a credit card
account, based on the credit risk of the consumer, market conditions,
or other factors, to periodically consider changes in such factors and
determine whether to reduce the annual percentage rate. Card issuers
are required to perform this review no less frequently than once every
six months, and must maintain reasonable methodologies for this
evaluation. The Credit Card Act requires card issuers to reduce the
annual percentage rate that was previously increased if a reduction is
``indicated'' by the review. However, the statute expressly provides
that no specific amount of reduction in the rate is required. This
provision is effective August 22, 2010 but requires that creditors
review accounts on which an annual percentage rate has been increased
since January 1, 2009.
General rule. Consistent with the Credit Card Act, the final rule
applies to card issuers that increase an annual percentage rate
applicable to a credit card account, based on the credit risk of the
consumer, market conditions, or other factors. For any rate increase
imposed on or after January 1, 2009, card issuers are required to
review the account no less frequently than once each six months and, if
appropriate based on that review, reduce the annual percentage rate.
The requirement to reevaluate rate increases applies both to increases
in annual percentage rates based on consumer-specific factors, such as
changes in the consumer's creditworthiness, and to increases in annual
percentage rates imposed based on factors that are not specific to the
consumer, such as changes in market conditions or the issuer's cost of
funds. If based on its review a card issuer is required to reduce the
rate applicable to an account, the final rule requires that the rate be
reduced within 45 days after completion of the evaluation.
Factors relevant to reevaluation of rate increases. The final rule
generally permits a card issuer to review either the same factors on
which the rate increase was originally based, or to review the factors
that the card issuer currently considers when determining the annual
percentage rates applicable to similar new credit card accounts. The
Board believes that it is appropriate to permit card issuers to review
the factors they currently consider in advancing credit to new
consumers, because a review of these factors may result in
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existing cardholders receiving the benefit of any reduced rate that
they would receive if applying for a new credit card with the card
issuer.
The final rule contains a special provision for rate increases
imposed between January 1, 2009 and February 21, 2010. For rates
increased during this period, the final rule requires an issuer to
conduct its first two reviews by using the factors that the issuer
currently considers when determining the annual percentage rates
applicable to similar new credit card accounts, unless the rate
increase was based solely upon consumer-specific factors, such as a
decline in the consumer's credit risk or the consumer's delinquency or
default.
Termination of obligation to reevaluate rate increases. The final
rule requires that a card issuer continue to review a consumer's
account each six months unless the rate is reduced to the rate in
effect prior to the increase. Accordingly, in some circumstances, the
final rule requires card issuers to reevaluate rate increases each six
months for an indefinite period. The proposed rule solicited comment on
whether the obligation to review the rate applicable to a consumer's
account should terminate after some specific time period elapses
following the initial increase, as well as on whether there is
significant benefit to consumers from requiring card issuers to
continue reevaluating rate increases even after an extended period of
time.
Based on the comments and further analysis, the Board declines to
adopt a specific time limit on the obligation to reevaluate rate
increases. The Credit Card Act does not expressly create such a time
limit, and it may be beneficial to a consumer to have his or her rate
reevaluated when market conditions change or the consumer's
creditworthiness improves, even if a number of years have elapsed since
the rate increase giving rise to the review requirement.
III. Statutory Authority
General Rulemaking Authority
Section 2 of the Credit Card Act states that the Board ``may issue
such rules and publish such model forms as it considers necessary to
carry out this Act and the amendments made by this Act.'' In addition,
the provisions of the Credit Card Act implemented by this rule direct
the Board to issue implementing regulations. See Credit Card Act
Section 101(c) (new TILA Section 148) and Section 102(b) (new TILA
Section 149). Furthermore, these provisions of the Credit Card Act
amend TILA, which mandates that the Board prescribe regulations to
carry out its purposes and specifically authorizes the Board, among
other things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure rules.
15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end plans.
15 U.S.C. 1663.
For the reasons discussed in this notice, the Board is using its
specific authority under TILA and the Credit Card Act, in concurrence
with other TILA provisions, to effectuate the purposes of TILA, to
prevent the circumvention or evasion of TILA, and to facilitate
compliance with TILA.
Authority To Issue Final Rule With an Effective Date of August 22, 2010
Because the provisions of the Credit Card Act implemented by this
final rule are effective on August 22, 2010,\4\ this final rule is also
effective on August 22, 2010. In order to provide an adequate
transition period, 12 U.S.C. 4802(b)(1) generally requires that new
regulations and amendments take effect no earlier than the first day of
the calendar quarter which begins on or after the date on which the
regulations are published in final form. The date on which the Board's
final rule is published in the Federal Register depends on a number of
variables that are outside the Board's control, including the number
and size of other notices submitted to the Federal Register prior to
the Board's rule.\5\ If this final rule is not published in the Federal
Register on or before July 1, 2010, the effective date for purposes of
12 U.S.C. 4802(b)(1) would be October 1, 2010. However, the Board has
determined that--under those circumstances--the statutory effective
date of August 22, 2010 establishes good cause for making this final
rule effective prior to October 1. See 12 U.S.C. 4802(b)(1)(A)
(providing an exception to the general requirement when ``the agency
determines, for good cause published with the regulation, that the
regulation should become effective before such time''). Furthermore, 12
U.S.C. 4802(b)(1)(C) provides an exception to the general requirement
when ``the regulation is required to take effect on a date other than
the date determined under [12 U.S.C. 4802(b)(1)] pursuant to any other
Act of Congress.''
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\4\ See new TILA Sections 148(d) and 149(b).
\5\ The Board notes that, although the Administrative Procedure
Act (5 U.S.C. 551 et seq.) generally requires that rules be
published not less than 30 days before their effective date, it also
provides an exception when ``otherwise provided by the agency for
good cause found and published with the rule.'' 15 U.S.C. 553(d)(3).
Although the Board is issuing this final rule more than 30 days
before August 22, 2010, it is possible that--for the reasons
discussed above--the rule may not be published in the Federal
Register more than 30 days before that date. Accordingly, to the
extent applicable, the Board finds that good cause exists to publish
the final rule less than 30 days before the effective date.
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Finally, TILA Section 105(d) provides that any regulation of the
Board (or any amendment or interpretation thereof) requiring any
disclosure which differs from the disclosures previously required by
Chapters 1, 4, or 5 of TILA (or by any regulation of the Board
promulgated thereunder) shall have an effective date no earlier than
``that October 1 which follows by at least six months the date of
promulgation.'' However, even assuming that TILA Section 105(d) applies
to this final rule, the Board believes that the specific provisions in
new TILA Sections 148 and 149 governing effective dates override the
general provision in TILA Section 105(d).
IV. Section-by-Section Analysis
Section 226.5a Credit and Charge Card Applications and Solicitations
Section 226.6 Account-Opening Disclosures
Sections 226.5a(a)(2)(iv) and 226.6(b)(1)(i) address the use of
bold text in, respectively, the application and solicitation table and
the account-opening table. Under the February 2010 Regulation Z Rule,
these provisions require that any fee or percentage amounts for late
payment, returned payment, and over-the-limit fees be disclosed in bold
text. However, these provisions also state that bold text shall not be
used for any maximum limits on
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fee amounts unless the fee varies by state.
As discussed in detail below with respect to the amendments to the
model forms in Appendix G-10 and G-17, disclosure of a maximum limit
(or ``up to'' amount) may be necessary to accurately describe penalty
fees that are consistent with the new substantive restrictions in Sec.
226.52(b). While the Board previously restricted the use of bold text
for maximum fee limits in order to focus consumers' attention on the
fee or percentage amounts, the Board believes that--because the maximum
limit may be the only amount disclosed for penalty fees--it is
important to highlight that amount.
Accordingly, the Board is amending Sec. Sec. 226.5a(a)(2)(iv) and
226.6(b)(1)(i) to require the use of bold text when disclosing maximum
limits on fees. For consistency and to facilitate compliance, these
amendments would apply to maximum limits for all fees required to be
disclosed in the Sec. Sec. 226.5a and 226.6 tables (including maximum
limits for cash advance and balance transfer fees). The Board is also
making conforming amendments to comment 5a(a)(2)-5.ii.
Section 226.7 Periodic Statement
Section 226.7(b)(11)(i)(B) currently requires card issuers to
disclose the amount of any late payment fee and any increased rate that
may be imposed on the account as a result of a late payment. If a range
of late payment fees may be assessed, the card issuer may state the
range of fees, or the highest fee and at the issuer's option with the
highest fee an indication that the fee imposed could be lower. Comment
7(b)(11)-4 clarifies that disclosing a late payment fee as ``up to
$29'' complies with this requirement. Model language is provided in
Samples G-18(B), G-18(D), G-18(F), and G-18(G).
As discussed in greater detail below with respect to the amendments
to Appendix G, an ``up to'' disclosure may be necessary to accurately
describe a late payment fee that is consistent with the substantive
restrictions in Sec. 226.52(b). Accordingly, the Board is amending
Sec. 226.7(b)(11)(i)(B) to clarify that, in these circumstances, it is
no longer optional to disclose an indication that the late payment fee
may be lower than the disclosed amount.
However, the Board notes that, consistent with Sec. 226.52(b), a
card issuer could disclose a range of late payment fees in certain
circumstances. As discussed in detail below, Sec. 226.52(b)(2)(i)
prohibits a card issuer from imposing a late payment fee that exceeds
the amount of the delinquent required minimum periodic payment.
However, while credit card minimum payments are generally a percentage
of the outstanding balance (plus, in some cases, accrued interest and
fees), many card issuers include a specific minimum amount in their
minimum payment formulas. For example, a formula might state that the
required minimum periodic payment will be the greater of 2% of the
outstanding balance or $25. In these circumstances, the card issuer
could disclose the late payment fee as a range from $25 to $35, which
is the maximum fee amount under the safe harbors in Sec.
226.52(b)(1)(ii)(A)-(B).
Section 226.9 Subsequent Disclosure Requirements
9(c) Change in Terms
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
9(g) Increases in Rates Due to Delinquency or Default or as a Penalty
Notice of Reasons for Rate Increase
The Credit Card Act added new TILA Section 148, which requires
creditors that increase an annual percentage rate applicable to a
credit card account under an open-end consumer credit plan, based on
factors including the credit risk of the consumer, market conditions,
or other factors, to consider changes in such factors in subsequently
determining whether to reduce the annual percentage rate. New TILA
Section 148 requires creditors to maintain reasonable methodologies for
assessing these factors. The statute also sets forth a timing
requirement for this review. Specifically, creditors are required to
review, no less frequently than once every six months, accounts for
which the annual percentage rate has been increased to assess whether
these factors have changed. New TILA Section 148 is effective August
22, 2010 but requires that creditors review accounts on which the
annual percentage rate has been increased since January 1, 2009.\6\
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\6\ As discussed in the supplementary information to Sec.
226.59, the rule requires that rate increases imposed between
January 1, 2009 and August 21, 2010 first be reviewed prior to
February 22, 2011 (six months after the effective date of new Sec.
226.59).
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New TILA Section 148 requires creditors to reduce the annual
percentage rate that was previously increased if a reduction is
``indicated'' by the review. However, new TILA Section 148(c) expressly
provides that no specific amount of reduction in the rate is required.
The Board is implementing the substantive requirements of new TILA
Section 148 in a new Sec. 226.59, discussed elsewhere in this
supplementary information.
In addition to these substantive requirements, TILA Section 148
also requires creditors to disclose the reasons for an annual
percentage rate increase applicable to a credit card under an open-end
consumer credit plan in the notice required to be provided 45 days in
advance of that increase. The Board is implementing the notice
requirements in Sec. 226.9(c) and (g), which are discussed in this
section. As discussed in the February 2010 Regulation Z Rule, card
issuers are required to provide 45 days' advance notice of rate
increases due to a change in contractual terms pursuant to Sec.
226.9(c)(2) and of rate increases due to delinquency, default, or as a
penalty not due to a change in contractual terms of the consumer's
account pursuant to Sec. 226.9(g). The additional notice requirements
included in new TILA Section 148 are the same regardless of whether the
rate increase is due to a change in contractual terms or the exercise
of a penalty pricing provision already in the contract; therefore for
ease of reference the notice requirements under Sec. 226.9(c)(2) and
(g) are discussed in a single section of this supplementary
information.
Consistent with the approach that the Board has taken in
implementing other provisions of the Credit Card Act that apply to
credit card accounts under an open-end consumer credit plan, the
changes to Sec. 226.9(c)(2) and (g) apply to ``credit card accounts
under an open-end (not home-secured) consumer credit plan'' as defined
in Sec. 226.2(a)(15). Therefore, home-equity lines of credit accessed
by credit cards and overdraft lines of credit accessed by a debit card
are not subject to the new requirements to disclose the reasons for a
rate increase implemented in Sec. 226.9(c)(2) and (g).
Section 226.9(c)(2)(iv) sets forth the content requirements for
significant changes in account terms, including rate increases that are
due to a change in the contractual terms of the consumer's account. In
the March 2010 Regulation Z Proposal, the Board proposed to add a new
Sec. 226.9(c)(2)(iv)(A)(8) to require a card issuer to disclose no
more than four principal reasons for the rate increase for a credit
card account under an open-end (not home-secured) consumer credit plan,
listed in their order of importance, in order to implement the notice
requirements of new TILA Section 148. Proposed comment 9(c)(2)(iv)-11
set forth additional guidance on the disclosure. Specifically, proposed
comment 9(c)(2)(iv)-11 stated that there is no minimum number of
reasons that are required to be disclosed under Sec.
226.9(c)(2)(iv)(A)(8), but that the
[[Page 37530]]
reasons disclosed are required to relate to and accurately describe the
principal factors actually considered by the credit card issuer.
Proposed comment 9(c)(2)(iv)-11 would have permitted a card issuer
to describe the reasons for the increase in general terms, by
disclosing for example that a rate increase is due to ``a decline in
your creditworthiness'' or ``a decline in your credit score,'' if the
rate increase is triggered by a decrease of 100 points in a consumer's
credit score. Similarly, the comment noted that a notice of a rate
increase triggered by a 10% increase in the card issuer's cost of funds
may be disclosed as ``a change in market conditions.'' Finally, the
proposed comment noted that in some circumstances, it may be
appropriate for a card issuer to combine the disclosure of several
reasons in one statement.
Consumer groups and a federal agency urged the Board to require
more specificity in the disclosure of reasons for a rate increase.
These commenters indicated that more specificity would assist consumers
in determining whether they could take action to improve the rates
applicable to their credit card accounts. Several of these commenters
stated that the Board should require the same level of specificity as
is required in adverse action notices under the Equal Credit
Opportunity Act, as implemented in Regulation B, and the Fair Credit
Reporting Act (FCRA). 15 U.S.C. 1691 et seq., 12 CFR part 202, and 15
U.S.C. 1681 et seq. In addition, one city consumer protection agency
urged the Board to require more detailed information if the rate
increase results from a decline in the consumer's credit score. In this
case, the commenter stated that the Board should require issuers to
disclose the consumer's current credit score as well as the previous
score on record with the issuer.
Industry commenters generally supported the Board's approach.
Several commenters noted, however, that there would be significant
burden associated with updating their systems in order to provide the
disclosure of reasons for the increase and questioned whether the
disclosure was necessary. Two credit union commenters asked the Board
not to limit the disclosure to four reasons, while one other industry
commenter stated that limiting the number of reasons in this manner was
appropriate and should be retained.
The Board is adopting new Sec. 226.9(c)(2)(iv)(A)(8) and new
comment 9(c)(2)(iv)-11 generally as proposed. The Board continues to
believe that this approach strikes the appropriate balance between
providing consumers with useful information regarding the reasons for a
rate increase while limiting ``information overload'' and unnecessary
burden. Under the final rule, a consumer will be informed whether the
rate increase is due to changes in his or her creditworthiness or
behavior on the account, which the consumer may be able to take actions
to mitigate, or whether the increase is due to more general factors
such as changes in market conditions. The Board believes that consumers
may find more detailed information confusing, and that, accordingly,
the benefit to consumers of more detailed information would not
outweigh the operational burden associated with providing such
additional information.
The Board acknowledges that there may be a distinction between rate
increases based on changes in a consumer's creditworthiness and
portfolio-wide rate increases based on broader factors such as market
conditions or the issuer's cost of funds. For individual rate
increases, a consumer may be better able to take action to mitigate the
change than for market-based rate increases. The Board has amended
comment 9(c)(2)(iv)-11, as adopted, to clarify that the notice must
specifically disclose any violation of the terms of the account on
which the rate is being increased, such as a late payment or a returned
payment, if such violation of the account terms is one of the four
principal reasons for the rate increase. Accordingly, the notice
required by Sec. 226.9(c)(2)(iv)(A)(8) will inform consumers of any
specific on-account behavior in which they have engaged that gave rise
to the rate increase. The notice required by Sec.
226.9(c)(2)(iv)(A)(8) will also inform consumers if the rate increase
resulted from a decline in their creditworthiness.
The Board notes that, in many cases, consumers also will receive
other notices under federal law that are more specifically intended to
educate consumers about the relationship between their consumer reports
and the terms of credit they receive. In particular, the Federal Trade
Commission and Board's rules implementing section 615(h) of the FCRA
require issuers to provide a risk-based pricing notice if a consumer's
annual percentage rate on purchases is increased based in whole or in
part on information in a consumer report. See 15 U.S.C. 1681m, 12 CFR
part 222, and 16 CFR part 640. The risk-based pricing notice must
inform the consumer that the rate is being increased based on
information in a consumer report. In addition, a consumer who receives
a risk-based pricing notice is entitled to obtain a free consumer
report in order to check for errors. Accordingly, the Board believes
that a more specific disclosure under Sec. 226.9(c)(2) is unnecessary.
As discussed above, proposed comment 9(c)(2)(iv)-11 set forth
several examples of how the reasons for a rate increase must be
disclosed. The examples described a rate increase triggered by a
decrease of 100 points in a consumer's credit score and a rate increase
triggered by a 10% increase in an issuer's cost of funds. Two credit
union commenters urged the Board to clarify that the examples in
proposed comment 9(c)(2)(iv)-11 were not intended as guidance on
acceptable reasons for rate increases. The Board notes that Sec.
226.9(c)(2)(iv)(A)(8) and the associated commentary do not set forth,
and are not intended to impose, any substantive limitations on when a
rate increase may occur. The examples included in comment 9(c)(2)(iv)-
11 are included for illustrative purposes only and are being adopted as
proposed.
The Board proposed to add a new Sec. 226.9(g)(3)(i)(A)(6), which
mirrored proposed Sec. 226.9(c)(2)(iv)(A)(8), for rate increases due
to delinquency, default, or as a penalty not due to a change in
contractual terms of the consumer's account. Proposed Sec.
226.9(g)(3)(i)(A)(6) required a card issuer to disclose no more than
four reasons for the rate increase, listed in their order of
importance, for a credit card account under an open-end (not home-
secured) consumer credit plan. Proposed comment 9(g)-7 cross-referenced
comment 9(c)(2)(iv)-11 for guidance on disclosure of the reasons for a
rate increase. For the reasons discussed above, Sec.
226.9(g)(3)(i)(A)(6) and comment 9(g)-7 are adopted as proposed.
The Board also proposed to amend Samples G-18(F), G-18(G), G-20,
and G-22 to incorporate examples of disclosures of the reasons for a
rate increase as required by Sec. 226.9(c)(2)(iv)(A)(8) and
(g)(3)(i)(A)(6). One issuer commented in support of the proposed
amendments to these model forms, which are adopted as proposed. In
addition, the Board has made one technical change to comment
9(c)(2)(iv)-8, for consistency with changes to Sample G-21 that are
discussed elsewhere in this Federal Register notice.
Finally, the Board is amending Sec. 226.9(c)(2)(iv)(C) and
(g)(3)(i)(B) for clarity and to eliminate redundancy with new Sec.
226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6). As adopted in the February
2010 Regulation Z Rule, Sec. 226.9(c)(2)(iv)(C) and (g)(3)(i)(B)
[[Page 37531]]
required a creditor to include a statement of the reasons for the rate
increase in any notice disclosing a rate increase based on a
delinquency of more than 60 days. New Sec. 226.9(c)(2)(iv)(A)(8) and
(g)(3)(i)(A)(6) require all Sec. 226.9(c) and (g) notices disclosing
rate increases applicable to credit card accounts under an open-end
(not home-secured) consumer credit plan to state the principal reasons
for rate increases. Accordingly, the requirement to state the reasons
for rate increases under Sec. 226.9(c)(2)(iv)(C) and (g)(3)(i)(B) has
been deleted as unnecessary, because such notice is now required under
Sec. 226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6).
Other Amendments to Sec. 226.9(c)(2)
For the reasons discussed in the supplementary information to Sec.
226.52(b), the Board is amending Sec. 226.9(c)(2)(iv)(B) to clarify
that the right to reject does not apply to an increase in a fee as a
result of a reevaluation of a determination made under Sec.
226.52(b)(1)(i) or an adjustment to the safe harbors in Sec.
226.52(b)(1)(ii) to reflect changes in the Consumer Price Index.
For the reasons discussed in the supplementary information to Sec.
226.59(f), the Board also is adopting a new comment 9(c)(2)(v)-12 that
clarifies the relationship between Sec. 226.9(c)(2)(v)(B) and Sec.
226.59 in the circumstances where a rate is increased due to loss of a
temporary rate but is subsequently decreased pursuant to the review
required by Sec. 226.59.
Section 226.52 Limitations on Fees
52(b) Limitations on Penalty Fees
Most credit card issuers will assess a penalty fee if a consumer
engages in activity that violates the terms of the cardholder agreement
or other requirements imposed by the issuer with respect to the
account. For example, most agreements provide that a fee will be
assessed if the required minimum periodic payment is not received on or
before the payment due date or if a payment is returned for
insufficient funds or for other reasons. Similarly, some agreements
provide that a fee will be assessed if amounts are charged to the
account that exceed the account's credit limit.\7\ These fees have
increased significantly over the past fifteen years. A 2006 report by
the Government Accountability Office (GAO) found that late payment and
over-the-limit fees increased from an average of approximately $13 in
1995 to an average of approximately $30 in 2005.\8\ The GAO also found
that, over the same period, the percentage of issuer revenue derived
from penalty fees increased to approximately 10%.\9\
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\7\ The Board notes that some card issuers have recently
announced that they will cease imposing fees for exceeding the
credit limit. In addition, Sec. 226.56 prohibits card issuers from
imposing such fees unless the consumer has consented to the issuer's
payment of transactions that exceed the credit limit.
\8\ U.S. Government Accountability Office, Credit Cards:
Increased Complexity in Rates and Fees Heightens Need for More
Effective Disclosures to Consumers (Sept. 2006) (GAO Credit Card
Report) at 5, 18-22, 33, 72 (available at http://www.gao.gov/new.items/d06929.pdf).
\9\ See GAO Credit Card Report at 72-73.
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According to data obtained by the Board from Mintel Comperemedia,
the average late payment fee has increased to approximately $38 as of
March 2010, while the average over-the-limit fee has increased to
approximately $36.\10\ In addition, a July 2009 review of credit card
application disclosures by the Pew Charitable Trusts found that the
median late payment and over-the-limit fees charged by the twelve
largest bank card issuers were $39.\11\
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\10\ The Mintel data, which is derived from a representative
sample of credit card solicitations, indicates that the average late
payment fee was approximately $37 in January 2007 and increased to
approximately $38 by March 2010. During the same period, the average
over-the-limit fee increased from approximately $35 to approximately
$36. In addition, the average returned payment fee during this
period increased from approximately $30 to approximately $37.
\11\ See The Pew Charitable Trusts, Still Waiting: ``Unfair or
Deceptive'' Credit Card Practices Continue as Americans Wait for New
Reforms to Take Effect (Oct. 2009) (Pew Credit Card Report) at 3,
12-13, 31-33 (available at http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Credit_Cards/Pew_Credit_Cards_Oct09_Final.pdf). As noted in the Pew Credit Card Report, the largest bank
card issuers generally tier late payment fees based on the account
balance (with a median fee of $39 applying when the account balance
is $250 or more). Similarly, some bank card issuers tier over-the-
limit fees (with the median fee of $39 applying when the account
balance is $1,000 or more). In both cases, the balance necessary to
trigger the highest penalty fee is significantly less than the
average outstanding balance on active credit card accounts. See id.
at 12-13, 31.
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However, it appears that smaller credit card issuers generally
charge significantly lower late payment and over-the-limit fees. For
example, the Board understands that some community bank issuers charge
late payment and over-the-limit fees that average between $17 and $25.
In addition, the Board understands that many credit unions charge late
payment and over-the-limit fees of $20 on average.\12\ Similarly, the
Pew Credit Card Report found that the median late payment and over-the-
limit fees charged by the twelve largest credit union card issuers were
$20.\13\
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\12\ Data submitted during the comment period by a trade
association representing federal and state credit unions supported
the Board's understanding with respect to credit union penalty fees.
\13\ See Pew Credit Card Report at 3, 31-33.
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The Credit Card Act creates a new TILA Section 149. Section 149(a)
provides that ``[t]he amount of any penalty fee or charge that a card
issuer may impose with respect to a credit card account under an open
end consumer credit plan in connection with any omission with respect
to, or violation of, the cardholder agreement, including any late
payment fee, over-the-limit fee, or any other penalty fee or charge,
shall be reasonable and proportional to such omission or violation.''
Section 149(b) further provides that the Board, in consultation with
the other federal banking agencies\14\ and the National Credit Union
Administration (NCUA), shall issue rules that ``establish standards for
assessing whether the amount of any penalty fee or charge * * * is
reasonable and proportional to the omission or violation to which the
fee or charge relates.''
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\14\ The Office of the Comptroller of the Currency (OCC), the
Federal Deposit Insurance Corporation (FDIC), and the Office of
Thrift Supervision (OTS).
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In issuing these rules, new TILA Section 149(c) requires the Board
to consider: (1) The cost incurred by the creditor from such omission
or violation; (2) the deterrence of such omission or violation by the
cardholder; (3) the conduct of the cardholder; and (4) such other
factors as the Board may deem necessary or appropriate. Section 149(d)
authorizes the Board to establish ``different standards for different
types of fees and charges, as appropriate.'' Finally, Section 149(e)
authorizes the Board--in consultation with the other federal banking
agencies and the NCUA--to ``provide an amount for any penalty fee or
charge * * * that is presumed to be reasonable and proportional to the
omission or violation to which the fee or charge relates.''
As discussed below, the Board is implementing new TILA Section 149
in Sec. 226.52(b). In developing Sec. 226.52(b), the Board consulted
with the other federal banking agencies and the NCUA.
Reasonable and Proportional Standard and Consideration of Statutory
Factors
As noted above, the Board is responsible for establishing standards
for assessing whether a credit card penalty fee is reasonable and
proportional to the violation for which it is imposed. New TILA Section
149 does not define ``reasonable and proportional,'' nor is the Board
aware of any generally accepted definition for those terms when used in
conjunction
[[Page 37532]]
with one another. As a separate legal term, ``reasonable'' has been
defined as ``fair, proper, or moderate.'' \15\ Congress often uses a
reasonableness standard to provide agencies or courts with broad
discretion in implementing or interpreting a statutory requirement.\16\
The term ``proportional'' is seldom used by Congress and does not have
a generally-accepted legal definition. However, it is commonly defined
as meaning ``corresponding in size, degree, or intensity'' or as
``having the same or a constant ratio.'' \17\ Thus, it appears that
Congress intended the words ``reasonable and proportional'' in new TILA
Section 149(a) to require that there be a reasonable and generally
consistent relationship between the dollar amounts of credit card
penalty fees and the violations for which those fees are imposed, while
providing the Board with substantial discretion in implementing that
requirement.
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\15\ E.g., Black's Law Dictionary at 1272 (7th ed. 1999); see
also id. (``It is extremely difficult to state what lawyers mean
when they speak of `reasonableness.' '' (quoting John Salmond,
Jurisprudence 183 n.(u) (Glanville L. Williams ed., 10th ed. 1947)).
\16\ See, e.g., 42 U.S.C. 12112(b)(5) (defining the term
``discriminate'' to include ``not making reasonable accommodations
to the known physical or mental limitations of an otherwise
qualified individual with a disability who is an applicant or
employee''); 28 U.S.C. 2412(b) (``Unless expressly prohibited by
statute, a court may award reasonable fees and expenses of attorneys
* * * to the prevailing party in any civil action brought by or
against the United States or any agency.''); 43 U.S.C. 1734(a)
(``Notwithstanding any other provision of law, the Secretary may
establish reasonable filing and service fees and reasonable charges,
and commissions with respect to applications and other documents
relating to the public lands and may change and abolish such fees,
charges, and commissions.'').
\17\ E.g., Merriam-Webster's Collegiate Dictionary at 936 (10th
ed. 1995).
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However, in Section 149(c), Congress also set forth certain factors
that the Board is required to consider when establishing standards for
determining whether penalty fees are reasonable and proportional.
Although Section 149(c) only requires consideration of these factors,
the Board believes that they are indicative of Congressional intent
with respect to the implementation of Section 149(a) and therefore
provide useful measures for determining whether penalty fees are
``reasonable and proportional.'' Accordingly, when implementing the
reasonable and proportional requirement, the Board has been guided by
these factors.\18\
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\18\ Several commenters asserted that Section 149 requires the
Board to base the standards for penalty fees on one or more of the
factors listed in Section 149(c). In particular, several industry
commenters argued that proposed Sec. 226.52(b)(1) was inconsistent
with Section 149 insofar as it required issuers to choose between
basing penalty fees on costs or deterrence, noting that Section
149(c) uses the conjunctive ``and'' rather than the disjunctive
``or'' when listing the factors. Such arguments misread Section
149(c), which--as noted above--only requires the Board to consider
the listed factors. Thus, while these factors provide valuable
guidance, the Board does not believe that Congress intended to limit
the Board's discretion in the manner suggested by these commenters.
Furthermore, as discussed below, there are circumstances where--in
the Board's view--the statutory factors point to conflicting
results, leaving it to the Board to resolve those conflicts.
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In addition, pursuant to its authority under Section 149(c)(4) to
consider ``such other factors as the Board may deem necessary or
appropriate,'' the Board has considered the need for general
regulations that can be consistently applied by card issuers and
enforced by the federal banking agencies, the NCUA, and the Federal
Trade Commission. The Board has also considered the need for
regulations that result in fees that can be effectively disclosed to
consumers in solicitations, account-opening disclosures, and elsewhere.
Finally, the Board has considered other relevant factors, as discussed
below.
Section 226.52(b) reflects the Board's careful consideration of the
statutory factors. However, when those factors were in conflict, the
Board found it necessary to give more weight to a particular factor or
factors. For example, as discussed below with respect to Sec.
226.52(b)(2)(i), the Board has determined that--if a fee based on the
card issuer's costs would be disproportionate to the consumer conduct
that caused the violation--it is consistent with the intent of Section
149 to give greater weight to the consumer conduct factor. The Board
has made these determinations pursuant to the authority granted by new
TILA Section 149 and existing TILA Section 105(a).
Cost Incurred as a Result of Violations
New TILA Section 149(c)(1) requires the Board to consider the costs
incurred by the creditor from the violation. The Board believes that,
for purposes of new TILA Section 149(a), the dollar amount of a penalty
fee is generally reasonable and proportional to a violation if it
represents a reasonable proportion of the total costs incurred by the
issuer as a result of all violations of the same type. Accordingly, the
Board has adopted this standard in Sec. 226.52(b)(1)(i). This
application of Section 149 appears to be consistent with Congress'
intent insofar as it permits card issuers to use penalty fees to pass
on the costs incurred as a result of violations, while also ensuring
that those costs are spread evenly among consumers and that no
individual consumer bears an unreasonable or disproportionate
share.\19\ As discussed below, the Board has also adopted safe harbor
amounts in Sec. 226.52(b)(1)(ii) that the Board believes will be
generally sufficient to cover issuers' costs.
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\19\ One commenter argued that the Board's ``reasonable
proportion'' standard does not satisfy the requirement in Section
149(a) that penalty fees be ``reasonable and proportional.''
(Emphasis added.) Specifically, the commenter argued that, while a
fee that represents a reasonable proportion of an issuer's costs
might be proportional, it was not necessarily reasonable. The Board
disagrees. By listing costs incurred from a violation as one of the
factors in Section 149(c), Congress indicated that a penalty fee
based on such costs will generally be reasonable for purposes of
Section 149(a). Furthermore, the limitations in Sec. 226.52(b)(2)
impose additional reasonableness requirements on penalty fees that
are based on costs.
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The Board notes that Sec. 226.52(b)(1)(i) does not require that a
penalty fee be reasonable and proportional to the costs incurred as a
result of a specific violation on a specific account. Such a
requirement would force card issuers to wait until after a violation
has been resolved to determine the associated costs. In addition to
being inefficient and overly burdensome for card issuers, this type of
requirement would be difficult for regulators to enforce and would
result in fees that could not be disclosed to consumers in advance. The
Board does not believe that Congress intended this result. Instead, as
discussed in greater detail below, Sec. 226.52(b)(1)(i) requires card
issuers to determine that their penalty fees represent a reasonable
proportion of the total costs incurred by the issuer as a result of the
type of violation (for example, late payments).
Deterrence of Violations
New TILA Section 149(c)(2) requires the Board to consider the
deterrence of violations by the cardholder. Under proposed Sec.
226.52(b)(1)(ii), a penalty fee would have been deemed reasonable and
proportional to a violation if the card issuer had determined that the
dollar amount of the fee was reasonably necessary to deter that type of
violation using an empirically derived, demonstrably and statistically
sound model that reasonably estimated the effect of the amount of the
fee on the frequency of violations. This proposed standard was intended
to encourage issuers to develop an empirical basis for the relationship
between penalty fee amounts and deterrence and to prevent consumers
from being charged fees that unreasonably exceeded--or were out of
proportion to--their deterrent effect.\20\
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\20\ Like Sec. 226.52(b)(1)(i), proposed Sec. 226.52(b)(1)(ii)
would not have required that penalty fees be calibrated to deter
individual consumers from engaging in specific violations. The Board
noted that this type of requirement would be unworkable because the
amount necessary to deter a particular consumer from, for example,
paying late may depend on the individual characteristics of that
consumer (such as the consumer's disposable income or other
obligations) and other highly specific factors. Imposing such a
requirement would create compliance, enforcement, and disclosure
difficulties similar to those discussed above with respect to costs.
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[[Page 37533]]
However, commenters generally expressed strong reservations
regarding the deterrence standard in proposed Sec. 226.52(b)(1)(ii).
Some industry commenters argued that, in order to develop the data
necessary to comply with the proposed standard, the Board would have to
permit card issuers to test--after the statutory effective date of
August 22, 2010--the deterrent effect of fee amounts that would
otherwise be inconsistent with Sec. 226.52(b).\21\ Other industry
commenters urged the Board to adopt a less stringent standard, stating
that it would be impossible for card issuers--particularly smaller
institutions with limited resources--to develop the data and models
necessary to satisfy proposed Sec. 226.52(b)(1)(i). In contrast,
consumer groups and a municipal consumer protection agency expressed
concern that the proposed standard was not sufficiently stringent and
would allow card issuers to use marginal changes in the frequency of
violations to justify unreasonably high fee amounts.\22\
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\21\ Notably, some of these commenters stated that, even if such
testing were permitted, they would not test high fee amounts on
their consumers because of the risks involved. One industry
commenter submitted the results of models based on issuer data
estimating the deterrent effect of different penalty fee amounts.
However, because the Board does not have access to the data and
assumptions used to produce these results, the Board is unable to
determine whether these models satisfy the proposed standard.
\22\ Some consumer groups argued that deterrence was not an
appropriate consideration because, for example, a penalty fee is
unlikely to have a deterrent effect in circumstances where consumers
cannot avoid the violation of the account terms. The Board
acknowledged this possibility in the proposal. However, the Board
also noted that deterrence is a required factor for the Board to
consider under new TILA Section 149(c) and that there is evidence
indicating that, as a general matter, penalty fees may deter future
violations of the account terms. See Agarwal et al., Learning in the
Credit Card Market (Feb. 8, 2008) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1091623&download=yes).
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Based on its review of the comments and its own reevaluation of the
proposed deterrence standard, the Board has determined that the
standard in proposed Sec. 226.52(b)(1)(ii) would not provide card
issuers with a meaningful ability to base penalty fees on deterrence.
Furthermore, the Board is concerned that adopting a less stringent
standard could lead to penalty fees that are substantially higher than
current levels, which would undermine the purpose of new TILA Section
149. Accordingly, the Board has not adopted proposed Sec.
226.52(b)(1)(ii).
Instead, the Board has revised the safe harbors in proposed Sec.
226.52(b)(3) to better address concerns regarding deterrence and
adopted those safe harbors in Sec. 226.52(b)(1)(ii). Specifically,
Sec. 226.52(b)(1)(ii) would permit card issuers to impose a $25 fee
for the first violation of a particular type and a $35 fee for each
additional violation of the same type during the next six billing
cycles. For example, if a consumer pays late for the first time in
January, Sec. 226.52(b)(1)(ii) would limit the late payment fee to
$25. If the consumer pays late again during February, March, April,
May, June, or July, the card issuer would be permitted to impose a $35
late payment fee. However, if after paying late in January the consumer
makes the next six payments on time, the fee for the next late payment
would be limited to $25. The Board believes that Sec. 226.52(b)(1)(ii)
is consistent with new TILA 149(c)(2) insofar as--after a violation has
occurred--the amount of the fee increases to deter additional
violations of the same type during the next six billing cycles.
Although the application and solicitation disclosures in Sec.
226.5a and the account opening disclosures in Sec. 226.6 provide
consumers with advance notice of the amount of credit card penalty
fees,\23\ the Board is concerned that some consumers may discount these
disclosures because they overestimate their ability to avoid paying
late and engaging in other conduct that violates the terms or other
requirements of the account. However, as noted in the proposal, there
is some evidence that the experience of incurring a late payment fee
makes consumers less likely to pay late for a period of time.\24\
Accordingly, although upfront disclosure of a penalty fee may be
sufficient to deter some consumers from engaging in certain conduct,
other consumers may be deterred by the imposition of the fee itself.
For these consumers, the Board believes that imposition of a higher fee
when multiple violations occur will have a significant deterrent effect
on future violations. In addition, as discussed below, the Board
believes that multiple violations during a relatively short period can
be associated with increased costs and credit risk and reflect a more
serious form of consumer conduct than a single violation.
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\23\ In addition, Sec. 226.7(b)(11) requires card issuers to
disclose on each periodic statement the amount of the late payment
fee that will be imposed if payment is not received by the due date.
\24\ For example, one study of four million credit card
statements found that a consumer who incurs a late payment fee is
40% less likely to incur a late payment fee during the next month,
although this effect depreciates approximately 10% each month. See
Agarwal, Learning in the Credit Card Market. Although this study
indicates that the imposition of a penalty fee may cease to have a
deterrent effect on future violations after four months, the Board
has concluded--as discussed in greater detail below--that imposing
an increased fee for additional violations of the same type during
the next six billing cycles is consistent with the intent of the
Credit Card Act.
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In the proposal, the Board solicited comment on this tiered
approach to the safe harbor, which was supported by some industry
commenters as being consistent with the statutory factors of cost,
deterrence, and consumer conduct. However, consumer groups and some
industry commenters opposed a tiered safe harbor on the grounds that it
would be overly complex. Although the Board agrees that, for these
reasons, it would not be appropriate to establish numerous fee amounts,
it does not appear that the two-tiered safe harbor in Sec.
226.52(b)(1)(ii) is overly complex.\25\
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\25\ The Board also solicited comment on whether penalty fees
should be imposed in increments based on the consumer's conduct. For
example, the Board suggested that card issuers could be permitted to
impose a late payment fee of $5 each day after the payment due date
until the required payment is received. However, the Board has not
adopted this cumulative approach in the final rule because of
concerns about complexity and the need to establish an upper limit
for the total fee.
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Consumer Conduct
New TILA Section 149(c)(3) requires the Board to consider the
conduct of the cardholder. As discussed above, the Board does not
believe that Congress intended to require that each penalty fee be
based on an assessment of the individual characteristics of the
violation. Thus, Sec. 226.52(b) does not require card issuers to
examine the conduct of the individual consumer before imposing a
penalty fee.\26\ Instead, Sec. 226.52(b) ensures that penalty fees
will reflect consumer conduct in a number of ways.
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\26\ Although some industry commenters argued that consumer
conduct should serve as an independent basis for penalty fees, none
suggested a specific method of basing the dollar amount of a penalty
fee on consumer conduct.
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As an initial matter, to the extent certain consumer conduct that
violates the terms or other requirements of an account has the effect
of increasing the costs incurred by the card issuer, fees imposed
pursuant to Sec. 226.52(b)(1)(i) will reflect that conduct because the
issuer is permitted to recover those costs. Furthermore, as discussed
above, the safe harbors in Sec. 226.52(b)(1)(ii) address consumer
conduct by allowing issuers to impose higher penalty fees on consumers
who violate the terms or other requirements of an account
[[Page 37534]]
multiple times, while limiting the amount of the penalty fee for a
consumer who engages in a single violation and does not repeat that
conduct for the next six billing cycles.
The Board notes that, based on data submitted by a large credit
card issuer, consumers who pay late multiple times over a six-month
period generally present a significantly greater credit risk than
consumers who pay late a single time. Although this data also indicates
that consumers who pay late two or more times over longer periods (such
as twelve or twenty-four months) are significantly more risky than
consumers who pay late a single time, the Board believes that, when
evaluating the conduct of consumers who have violated the terms or
other requirements of an account, it is consistent with other
provisions of the Credit Card Act to distinguish between those who
repeat that conduct during the next six billing cycles and those who do
not. Specifically, new TILA Section 171(b)(4) provides that, if the
annual percentage rate that applies to a consumer's existing balance is
increased because the account is more than 60 days delinquent, the
increase must be terminated if the consumer makes the next six payments
on time. See Sec. 226.55(b)(4). Furthermore, as discussed below with
respect to Sec. 226.59, new TILA Section 148 provides that, when an
annual percentage rate is increased based on the credit risk of the
consumer or other factors, the card issuer must review the account at
least once every six months to assess whether those factors have
changed (including whether the consumer's credit risk has declined).
In addition, Sec. 226.52(b)(2)(i) takes consumer conduct into
account by prohibiting issuers from imposing penalty fees that exceed
the dollar amount associated with the violation. The Board believes
that, in enacting new TILA Section 149, Congress intended the amount of
a penalty fee to bear a reasonable relationship to the magnitude of the
violation. For example, a consumer who exceeds the credit limit by $5
should not be penalized to the same degree as a consumer who exceeds
the limit by $500. Accordingly, under Sec. 226.52(b)(2)(i), a consumer
who exceeds the credit limit by $5 could not be charged an over-the-
limit fee of more than $5.
Finally, Sec. 226.52(b)(2)(ii) prohibits issuers from imposing
multiple penalty fees based on a single event or transaction. The Board
believes that imposing multiple fees in these circumstances would be
unreasonable and disproportionate to the conduct of the consumer
because the same conduct may result in a single or multiple violations,
depending on circumstances that may not be in the control of the
consumer. For example, Sec. 226.52(b)(2)(ii) would prohibit issuers
from charging a late payment fee and a returned payment fee based on a
single payment.
52(b)(1) General Rule
Section 226.52(b) provides that a card issuer must not impose a fee
for violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan unless the
dollar amount of the fee is consistent with Sec. 226.52(b)(1) and
(b)(2). Section 226.52(b)(1) states that, subject to the limitations in
Sec. 226.52(b)(2), a card issuer may impose a fee for violating the
terms or other requirements of an account if the dollar amount of the
fee is consistent with either the cost analysis in Sec.
226.52(b)(1)(i) or the safe harbors in Sec. 226.52(b)(1)(ii). These
alternatives are discussed in detail below.
Proposed comment 52(b)-1 clarified that, for purposes of Sec.
226.52(b), a fee is any charge imposed by a card issuer based on an act
or omission that violates the terms of the account or any other
requirements imposed by the card issuer with respect to the account,
other than charges attributable to periodic interest rates. This
comment provided the following examples of fees that are subject to the
limitations in--or prohibited by--Sec. 226.52(b): (1) Late payment
fees and any other fees imposed by a card issuer if an account becomes
delinquent or if a payment is not received by a particular date; (2)
returned payment fees and any other fees imposed by a card issuer if a
payment received via check, automated clearing house, or other payment
method is returned; (3) any fee or charge for an over-the-limit
transaction as defined in Sec. 226.56(a), to the extent the imposition
of such a fee or charge is permitted by Sec. 226.56; \27\ (4) any fee
or charge for a transaction that the card issuer declines to authorize;
and (5) any fee imposed by a card issuer based on account inactivity
(including the consumer's failure to use the account for a particular
number or amount of transactions or a particular type of transaction)
or the closure or termination of an account.\28\
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\27\ Some industry commenters argued that over-the-limit fees
should be exempt from Sec. 226.52(b) because, once a consumer has
consented to the payment of transactions that exceed the credit
limit consistent with new TILA Section 127(k) and Sec. 226.56, the
fee for exceeding the limit is a fee for a service affirmatively
requested by the consumer rather than a fee for violating the terms
or other requirements of the account. On the other hand, a municipal
consumer protection agency requested that the Board ban over-the-
limit fees in all circumstances, arguing that such fees are never
reasonable because the issuer controls whether to allow the account
to exceed the credit limit. As noted in the proposal, it appears
that Congress intended new TILA Section 149 to apply to over-the-
limit fees. See new TILA Sec. 149(a) (listing over-the-limit fees
as an example of a penalty fee or charge). Furthermore, the Board
has previously determined that the Credit Card Act's restrictions on
fees for over-the-limit transactions apply regardless of whether the
card issuer characterizes the fee as a fee for a service or a fee
for a violation of the account terms. See comment 56(j)-1. Thus, the
Board believes it would be inconsistent with Congress' intent to
exempt over-the-limit fees from the application of Section 149.
Similarly, because Section 127(k) specifically addresses the
circumstances in which an over-the-limit fee may be charged, the
Board believes that it would be inconsistent with Congress' intent
to ban such fees entirely.
\28\ As discussed below, Sec. 226.52(b)(2)(i)(B) would prohibit
the imposition of fees for declined transactions, fees based on
account inactivity, and fees based on the closure or termination of
an account. Several industry commenters objected to the treatment of
inactivity and account closure fees as penalty fees for purposes of
Section 149, arguing that a consumer who does not use an account for
transactions or who closes an account generally has not violated an
express term of the cardholder agreement. However, the Board
believes that it would be inconsistent with the purpose of Section
149 to permit card issuers to exempt a fee from Sec. 226.52(b) by
placing the requirement on which that fee is based outside the
account agreement. For example, if a card issuer charges a fee when
a consumer fails to use an account for transactions, the card issuer
is requiring consumers to use the account for transactions, even if
that requirement does not appear in the cardholder agreement.
Accordingly, Sec. 226.52(b) applies to fees imposed for violating
the terms or other requirements of a credit card account.
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Proposed comment 52(b)-1 also provided the following examples of
fees to which Sec. 226.52(b) does not apply: (1) Balance transfer
fees; (2) cash advance fees; (3) foreign transaction fees; (4) annual
fees and other fees for the issuance or availability of credit
described in Sec. 226.5a(b)(2), except to the extent that such fees
are based on account inactivity; (4) fees for insurance described in
Sec. 226.4(b)(7) or debt cancellation or debt suspension coverage
described in Sec. 226.4(b)(10) written in connection with a credit
transaction, provided that such fees are not imposed as a result of a
violation of the terms or other requirements of an account; (5) fees
for making an expedited payment (to the extent permitted by Sec.
226.10(e)); (6) fees for optional services (such as travel insurance);
and (7) fees for reissuing a lost or stolen card.
The examples in comment 52(b)-1 are adopted as proposed, although
the Board has made non-substantive revisions and added fees imposed for
[[Page 37535]]
declined access checks as an additional example of a fee subject to
Sec. 226.52(b). Consumer group commenters noted that many card issuers
cancel redeemable rewards points or similar benefits if a consumer pays
late or otherwise violates the account terms and that, in those
circumstances, some issuers require consumers to pay a fee to reinstate
those rewards or benefits. These commenters requested that the Board
treat both the cancellation and the reinstatement fee as penalty fees
subject to new TILA Section 149. In contrast, one industry commenter
requested that the Board clarify that any loss of a benefit as a result
of a violation is not a fee for purposes of Section 149.
As discussed above, new TILA Section 149 applies to ``any penalty
fee or charge'' imposed in connection with a violation. As a general
matter, the Board believes that the loss of rewards points or other
benefits as a result of a violation is not a ``fee or charge'' and
therefore is not subject to Section 149. Furthermore, because a
consumer can choose not to pay the reinstatement fee if the consumer
decides that the rewards or benefits are not sufficiently valuable, the
Board does not believe it would be appropriate to treat that fee as a
penalty fee. However, as discussed in detail below with respect to
inactivity fees, there are circumstances in which the loss of a benefit
as a result of a violation cannot be meaningfully distinguished from
the imposition of a penalty fee. See comment 52(b)(2)(i)-5.
Accordingly, although losses of rewards points or other benefits are
generally not subject to Sec. 226.52(b), the Board does not believe
that such losses can be categorically excluded. Instead, whether the
loss of a benefit as a result of a violation of the terms or other
requirements is subject to Sec. 226.52(b) depends on the relevant
facts and circumstances.
Proposed comment 52(b)-1 also clarified that Sec. 226.52(b) does
not apply to charges attributable to an increase in an annual
percentage rate based on an act or omission that violates the terms or
other requirements of an account. Currently, many credit card issuers
apply an increased annual percentage rate (or penalty rate) based on
certain violations of the account terms. Application of this increased
rate can result in increased interest charges. However, the Board does
not believe that Congress intended the words ``any penalty fee or
charge'' in new TILA Section 149(a) to apply to penalty rate increases.
In the proposal, the Board noted that, elsewhere in the Credit Card
Act, Congress expressly referred to increases in annual percentage
rates when it intended to address them.\29\ In fact, the Credit Card
Act contains several provisions that specifically limit the ability of
card issuers to apply penalty rates. Revised TILA Section 171 prohibits
application of penalty rates to existing credit card balances unless
the account is more than 60 days delinquent. See revised TILA Section
171(b)(4); see also Sec. 226.55(b)(4). Furthermore, if an account
becomes more than 60 days delinquent and a penalty rate is applied to
an existing balance, the card issuer must terminate the penalty rate if
it receives the required minimum payments on time for the next six
months. See revised TILA Section 171(b)(4)(B); Sec. 226.55(b)(4)(ii).
With respect to new transactions, new TILA Section 172(a) generally
prohibits card issuers from applying penalty rates during the first
year after account opening. See also Sec. 226.55(b)(3)(iii).
Subsequently, the card issuer must provide 45 days advance notice
before applying a penalty rate to new transactions. See new TILA
Section 127(i); Sec. 226.9(g). Finally, beginning on August 22, 2010,
once a penalty rate is in effect, the card issuer generally must review
the account at least once every six months thereafter and reduce the
rate if appropriate. See new TILA Section 148; Sec. 226.59. These
protections--in combination with the lack of any express reference to
penalty rate increases in new TILA Section 149--indicate that Congress
did not intend to apply the ``reasonable and proportional'' standard to
increases in annual percentage rates.\30\
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\29\ For example, revised TILA Section 171(a) and (b) and new
TILA Section 172 explicitly distinguish between annual percentage
rates, fees, and finance charges.
\30\ The Board also noted that prior versions of the Credit Card
Act contained language that would have limited the amount of penalty
rate increases, but that language was removed prior to enactment.
See S. 414 Sec. 103 (introduced Feb. 11, 2009) (proposing to create
a new TILA Section 127(o) requiring that ``[t]he amount of any fee
or charge that a card issuer may impose in connection with any
omission with respect to, or violation of, the cardholder agreement,
including any late payment fee, over the limit fee, increase in the
applicable annual percentage rate, or any similar fee or charge,
shall be reasonably related to the cost to the card issuer of such
omission or violation'') (emphasis added) (available at http://thomas.loc.gov).
---------------------------------------------------------------------------
Comments from individual consumers, consumer groups, state
attorneys general, and state and municipal consumer protection agencies
disagreed with the Board's interpretation. Some of these commenters
argued that the Board was not giving effect to the reference in Section
149 to a penalty ``charge'' (as opposed to a penalty ``fee''). However,
as discussed above, the Board has expressly stated in comment 52(b)-1
that Sec. 226.52(b) applies to ``any charge imposed by a card issuer
based on an act or omission that violates the terms of the account or
any other requirements imposed by the card issuer with respect to the
account, other than charges attributable to periodic interest rates.''
Comment 52(b)-1 (emphasis added). Thus, the Board has given effect to
the words ``any penalty fee or charge'' in Section 149.
These commenters further argued that, even if new TILA Section 149
does not expressly apply to penalty rate increases, the Board should
use its authority under TILA Section 105(a) to apply Sec. 226.52(b) to
such rate increases because doing so would effectuate the purposes of
the Credit Card Act. However, the Board does not believe that this
would be an appropriate use of its authority because, for the reasons
discussed above, Congress has provided other protections that
specifically apply to penalty rate increases.\31\
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\31\ One commenter argued that the Board should apply Section
149 to prohibit the assessment of deferred interest when a consumer
pays late during a deferred interest period. For the reasons
discussed above with respect to the assessment of additional
interest charges as a result of a penalty rate increase, the Board
believes that it would not be appropriate to apply Section 149 to
the assessment of deferred interest. However, the Board notes that,
effective February 22, 2010, card issuers were generally prohibited
from assessing deferred interest as a result of a late payment. See
comment 55(b)(1)-3.
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Proposed comment 52(b)-2 clarified that a card issuer may round any
fee that complies with Sec. 226.52(b) to the nearest whole dollar. For
example, if Sec. 226.52(b) permits a card issuer to impose a late
payment fee of $21.50, the card issuer may round that amount up to the
nearest whole dollar and impose a late payment fee of $22. However, if
the permissible late payment fee were $21.49, the card issuer is not
permitted to round that amount up to $22, although the card issuer
could round that amount down and impose a late payment fee of $21. The
Board did not receive any significant comment on this aspect of the
proposal, which is adopted as proposed.
Finally, a state and a municipal consumer protection agency
expressed concern that providing card issuers with the flexibility to
choose between different methods for calculating penalty fees would
lead issuers to switch back and forth between methods in order to
charge the highest possible fee in all circumstances. As a general
matter, the Board believes that card issuers should be permitted to
choose
[[Page 37536]]
between basing the amount of a penalty fee on a cost analysis that is
consistent with Sec. 226.52(b)(1)(i) or on the safe harbors in Sec.
226.52(b)(1)(ii) because both methods result in fees that are
consistent with new TILA Section 149. Accordingly, the Board has
adopted comment 52(b)(1)-1, which clarifies that a card issuer may
impose a fee for one type of violation pursuant to Sec.
226.52(b)(1)(i) and may impose a fee for a different type of violation
pursuant to Sec. 226.52(b)(1)(ii). For example, a card issuer may
impose a late payment fee of $30 based on a cost determination pursuant
to Sec. 226.52(b)(1)(i) but impose returned payment and over-the-limit
fees of $25 or $35 pursuant to the safe harbors in Sec.
226.52(b)(1)(ii).
In addition, the Board believes that card issuers should be
permitted to shift from charging fees based on a cost analysis
consistent with Sec. 226.52(b)(1)(i) to charging fees that are
consistent with the safe harbors in Sec. 226.52(b)(1)(ii) (and vice
versa). However, because the applicability of the safe harbors in Sec.
226.52(b)(1)(ii)(A) and (B) depends on whether the consumer has engaged
in multiple violations of the same type during the specified period, it
would be inconsistent with the intent of Sec. 226.52(b)(1)(ii) to
permit a card issuer to charge the higher safe harbor amount in Sec.
226.52(b)(1)(ii)(B) without having previously charged the lower amount
in Sec. 226.52(b)(1)(ii)(A). Accordingly, comment 52(b)(1)-1 clarifies
that this practice is inconsistent with Sec. 226.52(b)(1) and provides
an illustrative example.
Finally, the Board has incorporated into this comment the guidance
proposed in comment 52(b)(3)-1, which clarified that a card issuer that
complies with the safe harbors is not required to determine that its
fees represent a reasonable proportion of the total costs incurred by
the card issuer as a result of a type of violation under Sec.
226.52(b)(1)(i). However, this guidance also clarifies that Sec.
226.52(b)(1) does not permit a card issuer to impose a fee that is
inconsistent with the prohibitions in Sec. 226.52(b)(2). For example,
if Sec. 226.52(b)(2)(i) prohibits the card issuer from imposing a late
payment fee that exceeds $15, the safe harbors in Sec.
226.52(b)(1)(ii) do not permit the card issuer to impose a higher late
payment fee.
52(b)(1)(i) Fees Based on Costs
Section 226.52(b)(1)(i) permits a card issuer to impose a fee for
violating the terms or other requirements of an account if the card
issuer has determined that the dollar amount of the fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation. As discussed above, Sec.
226.52(b)(1)(i) does not require card issuers to make individualized
determinations with respect to the costs incurred as a result of each
violation. Instead, card issuers would be required to make these
determinations with respect to the type of violation (for example, late
payments), rather than a specific violation or an individual consumer.
Because a card issuer is in the best position to determine the
costs it incurs as a result of violations, the Board believes that, as
a general matter, it is appropriate to make card issuers responsible
for determining that their fees comply with Sec. 226.52(b)(1)(i). As
discussed below, to reduce the burden of making these determinations,
Sec. 226.52(b)(1)(ii) contains safe harbors that are intended to
generally reflect issuers' costs. However, a card issuer that chooses
to base its penalty fees on its own determination (rather than on the
safe harbors) must be able to demonstrate to the regulator responsible
for enforcing compliance with TILA and Regulation Z that its
determination is consistent with Sec. 226.52(b)(1)(i).\32\
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\32\ Consumer groups objected to this approach, arguing that--in
order to prevent manipulation of the cost determinations required by
Sec. 226.52(b)(1)(i)--card issuers should be required to submit all
data supporting those determinations to the Board for publication on
an anonymous basis. The Board believes that such a requirement would
be inefficient and overly burdensome and is not necessary to
effectuate the purpose of Section 149. An issuer's principal
regulator is most familiar with its operations and is in the best
position to evaluate its cost analysis under Sec. 226.52(b)(1)(i).
---------------------------------------------------------------------------
Industry commenters generally supported proposed Sec.
226.52(b)(1)(i), while consumer group commenters expressed a general
concern that--by allowing card issuers with higher costs to collect
higher fees--the proposed rule could have the unintended consequence of
rewarding the issuers that are least efficient in managing their costs.
The Board understands this concern. However, because Regulation Z
requires card issuers to disclose the amounts of their penalty fees in
the application and solicitation table (Sec. 226.5a(b)(9), (10), and
(12)) and in the account-opening table (Sec. 226.6(b)(2)(viii), (ix),
and (xi)) as well as the amount of their late payment fee on each
periodic statement (Sec. 226.7(b)(11)(B)), the Board believes that--
for competitive and other reasons--card issuers will have incentives to
manage their costs efficiently. Accordingly, Sec. 226.52(b)(1)(i) is
adopted as proposed.
A. Reevaluation of Cost Determinations
Proposed Sec. 226.52(b)(1) would have required card issuers that
base their penalty fees on costs to reevaluate their cost determination
at least once every twelve months. If as a result of the reevaluation
the card issuer determined that a lower fee represented a reasonable
proportion of the total costs incurred by the card issuer as a result
of that type of violation, the proposed rule would have required the
card issuer to begin imposing the lower fee within 30 days after
completing the reevaluation. If as a result of the reevaluation the
card issuer determined that a higher fee represented a reasonable
proportion of the total costs incurred by the card issuer as a result
of that type of violation, the proposed rule clarified that the card
issuer cannot begin imposing the higher fee until it has complied with
the notice requirements in Sec. 226.9.
This reevaluation requirement was intended to ensure that card
issuers impose penalty fees based on relatively current cost
information. However, because the Board did not wish to encourage
frequent changes in penalty fees, it solicited comment on whether
twelve months was an appropriate interval for the reevaluation.
Generally, consumer groups supported the proposal while industry
commenters requested less frequent reevaluation, citing the cost of
reviewing their analyses annually and revising disclosures and account
agreements. Based on its review of the comments and further analysis,
the Board believes that an annual reevaluation requirement is
appropriate. Although the Board understands that there will be costs
involved in preparing a Sec. 226.52(b)(1)(i) analysis, an issuer that
determines that those costs outweigh the benefits of utilizing Sec.
226.52(b)(1)(i) can instead comply with the safe harbors in Sec.
226.52(b)(1)(ii).
However, because the Board understands that it may take some card
issuers more than 30 days to implement a fee reduction, the Board has
revised the reevaluation requirement to provide issuers with 45 days to
do so. This period parallels the amount of time issuers are required to
delay imposition of an increased fee under Sec. 226.9. Furthermore,
because it would be inconsistent with the intent of Sec.
226.52(b)(1)(i) to prohibit issuers from increasing a fee to reflect
increased costs, the Board has revised Sec. 226.9(c)(2)(iv)(B) to
provide that the right to reject an increase in a fee does not apply in
these circumstances.
[[Page 37537]]
B. Factors Relevant to Cost Determination
Proposed comment 52(b)(1)(i)-1 would have clarified that a card
issuer is not required to base its fees on the costs incurred as a
result of a specific violation. Instead, for purposes of Sec.
226.52(b)(1)(i), a card issuer must have determined that a fee for
violating the terms or other requirements of an account represents a
reasonable proportion of the costs incurred by the card issuer as a
result of that type of violation. As proposed, the factors relevant to
this determination included: (1) The number of violations of a
particular type experienced by the card issuer during a prior period;
and (2) the costs incurred by the card issuer during that period as a
result of those violations. In addition, a card issuer was permitted,
at its option, to base its fees on a reasonable estimate of changes in
the number of violations of that type and the resulting costs during an
upcoming period. For example, under the proposal, a card issuer could
satisfy Sec. 226.52(b)(1)(i) by determining that its late payment fee
represented a reasonable proportion of the total costs incurred by the
card issuer as a result of late payments based on the number of
delinquencies it experienced in the past twelve months, the costs
incurred as a result of those delinquencies, and a reasonable estimate
about changes in delinquency rates and the costs incurred as a result
of delinquencies during a subsequent period of time (such as the next
twelve months).
The Board has revised several aspects of comment 52(b)(1)(i)-1
based on the comments and further analysis. First, the Board has
clarified that card issuers must evaluate their costs based on a prior
period of reasonable length (such as a period of twelve months). The
Board believes that this clarification is necessary to ensure that any
cost analysis is based on a period that accurately reflects the number
of violations an issuer typically experiences and the costs incurred as
a result of those violations.
One public interest group expressed a general concern that card
issuers could manipulate estimates regarding future changes in the
frequency of violations and the resulting costs. However, because the
burden is on the card issuer to demonstrate that its estimates have a
reasonable basis, the Board believes that any manipulation will be
detected.
Industry commenters requested that the cost analysis reflect the
fact that not all violations result in the collection of a penalty fee.
These commenters noted that a penalty fee might not be collected
because, for example, the account has charged off or because the card
issuer has waived the fee as a courtesy to the consumer or as part of a
workout or temporary hardship arrangement. The Board agrees that--to
the extent a card issuer is unable to collect a penalty fee (for
example, because the account has been charged off or discharged in
bankruptcy)--that fee should not be considered when determining the
amount needed to cover an issuer's costs.\33\ However, the Board draws
a distinction between fees the card issuer is unable to collect and
those the card issuer chooses not to collect (such as fees the card
issuer waives). Although the waiver of penalty fees is beneficial to
consumers whose fees are waived, those waivers should not result in
higher fees for other consumers. Several industry commenters warned
that card issuers may be less willing to offer workout or temporary
hardship arrangements if the cost analysis cannot be adjusted to
reflect fees waived pursuant to such arrangements; however, the Board
believes the effect on workout and temporary hardship arrangements is
unlikely to be substantial because those arrangements are generally
used by card issuers to prevent the entire account balance from
becoming a loss.\34\
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\33\ The Board notes that this treatment is not inconsistent
with its determination that--as discussed below--losses are not
costs for purposes of the cost analysis, which is discussed below.
Card issuers are not permitted to include losses in the costs
incurred as a result of violations. However, when dividing those
costs among the violations, the Board believes that card issuers
should be permitted to exclude violations that resulted in fees the
card issuer cannot collect. For example, assume that a card issuer
experiences 5 million late payments and $100 million in costs as a
result of those late payments (not including losses). Dividing the
$100 million in costs by the 5 million late payments results in a
$20 late payment fee. However, if the card issuer cannot collect 25%
of the late payment fees it imposes, the card issuer will be unable
to recover 25% of the costs incurred as a result of late payments.
Accordingly, the $100 million in costs should be divided by the 3.75
million delinquencies for which the card issuer could have collected
a fee, which results in a late payment fee of approximately $27.
\34\ The Board notes that this approach is consistent with the
conclusions reached by the United Kingdom's Office of Fair Trading
in its statement of the principles that credit card issuers must
follow in setting default charges. See Office of Fair Trading
(United Kingdom), Calculating Fair Default Charges in Credit Card
Contracts: A Statement of the OFT's Position (April 2006) (OFT
Credit Card Statement) at 25-26 (available at http://www.oft.gov.uk/shared_oft/reports/financial_products/oft842.pdf). The Board is
aware that a recent opinion by the Supreme Court of the United
Kingdom has called into question aspects of the OFT's legal
authority to regulate prices paid by consumers for banking services.
See Office of Fair Trading v. Abbey Nat'l Plc and Others (Nov. 25,
2009) (available at http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2009_0070_Judgment.pdf). However, this opinion does not
appear to affect the OFT's authority to regulate default charges,
which was the basis for the Credit Card Statement. See OFT Credit
Card Statement at 10-17. And regardless, this question does not
affect the Board's legal authority (and mandate) to regulate credit
card penalty fees under new TILA Section 149. As discussed in
greater detail below, the Board also believes that--notwithstanding
important distinctions between the laws of the United States and the
United Kingdom--the OFT's findings warrant consideration along with
other relevant information. However, the Board does not find the
OFT's analysis to be dispositive on any particular point.
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Accordingly, the Board has revised comment 52(b)(1)(i)-1 to clarify
that, when determining the appropriate fee amount under Sec.
226.52(b)(1)(i), a card issuer may, at its option, consider the number
of fees imposed during the relevant period that it reasonably estimates
it will be unable to collect. In addition, the Board has adopted a new
comment 52(b)(1)(i)-5, which clarifies that, for purposes of Sec.
226.52(b)(1)(i), a card issuer may consider fees that it is unable to
collect when determining the appropriate fee amount. Fees that the card
issuer is unable to collect include fees imposed on accounts that have
been charged off or discharged in bankruptcy and fees that the card
issuer is required to waive in order to comply with a legal
requirement--such as the Servicemembers Civil Relief Act (SCRA), 50
U.S.C. app. 501 et seq., which limits the charges a card issuer may
impose on an account while the accountholder is in active military
service. See 50 U.S.C. app. 527. However, the comment also clarifies
that fees that the card issuer chooses not to impose or chooses not to
collect (such as fees that the card issuer chooses to waive) are not
relevant for purposes of this determination.
Finally, in response to industry comments, the Board has revised
comment 52(b)(1)(i)-1 to clarify that a card issuer may make a single
cost determination pursuant to Sec. 226.52(b)(1)(i) for all of its
credit card portfolios or may make separate determinations for each
portfolio. The Board believes that it is appropriate to provide this
flexibility because violations may be more or less frequent and may
result in greater or lesser costs depending on the composition of the
portfolio. For example, a card issuer with a retail credit card
portfolio and a general purpose credit card portfolio might experience
more frequent violations or greater costs on one portfolio than on the
other. Although the Board does not believe it is necessary to
specifically define the term ``credit card portfolio,'' the Board notes
that, for purposes of Sec. 226.52(b)(1)(i), this term is generally
intended to
[[Page 37538]]
encompass a broader range of credit card accounts than the term ``type
of credit card plan,'' which is used in the commentary to Sec.
226.59(d). The Board understands that, for example, a general purpose
credit card portfolio may contain several different types of credit
card plans (such as plans that provide rewards and plans that do not).
However, the Board acknowledges that there may be circumstances in
which a credit card portfolio contains only one type of credit card
plan (such as certain retail credit card portfolios).
C. Exclusion of Losses From Cost Analysis
Proposed comment 52(b)(1)(i)-2 clarified that, although higher
rates of loss may be associated with particular violations of the terms
or other requirements of an account, those losses and associated costs
(such as the cost of holding reserves against losses) are excluded from
the Sec. 226.52(b)(1)(i) cost analysis. In the proposal, the Board
observed that, although an account generally cannot become a loss
without first becoming delinquent, delinquencies and associated losses
may be caused by a variety of factors (such unemployment, illness, and
divorce). The Board also stated that, based on available data, it
appeared that most violations did not actually result in losses.\35\
Finally, the Board expressed concern that--if card issuers were
permitted to begin recovering losses and associated costs through
penalty fees rather than upfront rates--transparency in credit card
pricing would be reduced because, as discussed above, some consumers
overestimate their ability to avoid violations and therefore may
discount upfront penalty fee disclosures.
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\35\ Specifically, data submitted to the Board during the
comment period for the January 2009 FTC Act Rule indicated that more
than 93% of accounts that were over the credit limit or delinquent
twice in a twelve month period did not charge off during the
subsequent twelve months. See Federal Reserve Board Docket No. R-
1314: Exhibit 5, Table 1a to Comment from Oliver I. Ireland,
Morrison Foerster LLP (Aug 7, 2008) (Argus Analysis) (presenting
results of analysis by Argus Information & Advisory Services, LLC of
historical data for consumer credit card accounts believed to
represent approximately 70% of all outstanding consumer credit card
balances). Furthermore, because collections generally continue after
the account has been charged off, an account that has been charged
off is not necessarily a total loss (although the Board understands
that recoveries after an account has been charged off are generally
a small fraction of the account balance). The January 2009 FTC Act
Rule was issued jointly with the OTS and NCUA under the Federal
Trade Commission Act to protect consumers from unfair acts or
practices with respect to consumer credit card accounts. See 74 FR
5498 (Jan. 29, 2009).
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A Federal agency, a municipal consumer protection agency, and
consumer groups supported the proposed exclusion of losses and
associated costs from the cost analysis. However, industry commenters
challenged several aspects of the Board's rationale.
First, while industry commenters generally conceded that most
violations do not result in losses, they argued that the cost
associated with those that do is extremely high. They further argued
that, if card issuers are not permitted to recover losses through
penalty fees, those losses will cause issuers to reduce credit
availability or will be reflected in the upfront annual percentage
rates and annual fees charged to consumers who do not pay late. The
Board does not dispute that losses impose substantial costs on card
issuers. However, the Board understands that, historically, most card
issuers have not priced for the risk of loss through penalty fees;
instead, issuers have generally priced for risk through upfront annual
percentage rates and penalty rate increases.\36\ Although the Credit
Card Act has restricted card issuers' ability to impose penalty rate
increases on existing balances, the Board believes that these
restrictions were based, in part, on an understanding that pricing for
risk using upfront rates rather than penalty rate increases will
promote transparency and protect consumers from unanticipated increases
in the cost of credit.\37\ Thus, the Board believes that it would be
inconsistent with the purpose of the Credit Card Act to permit card
issuers to begin recovering losses and associated costs through penalty
fees rather than through upfront rates.\38\ Furthermore, issuers
generally acknowledged that--if losses were included in the cost
analysis--Sec. 226.52(b)(1)(i) would permit the imposition of penalty
fees that are dramatically higher than those imposed today, a result
which appears directly contrary to the intent of Section 149.\39\
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\36\ The Board notes that industry commenters generally agreed
with or did not dispute the Board's understanding. However, some
industry commenters suggested that some issuers may currently use
penalty fees to recover losses. Also, the Board recognizes that
charge card accounts generally impose an annual fee but not interest
charges because the balance must be paid in full each billing cycle.
As discussed below, the Board had adopted a safe harbor in Sec.
226.52(b)(1)(ii)(C) that specifically addresses charge cards.
\37\ The relevant provisions of the Credit Card Act (which are
codified in TILA Sec. Sec. 171 and 172) appear to be based on
similar limitations imposed by the Board in the January 2009 FTC Act
Rule. In that final rule, the Board reasoned that pricing for risk
using upfront rates rather than penalty rate increases would promote
transparency and protect consumers from unanticipated increases in
the cost of credit. See 74 FR 5521-5528.
\38\ The Board notes that the OFT reached a similar conclusion
with respect to losses. See OFT Credit Card Statement at 1, 19-22,
25. The Board reiterates that it does not find the OFT's analysis to
be dispositive. However, notwithstanding the important distinctions
between the laws of the United States and the United Kingdom, the
Board believes this analysis warrants consideration.
\39\ Although some industry commenters suggested that only a
portion of losses be included in the cost analysis, they did not
provide any meaningful way to distinguish between types of losses
(nor is the Board aware of any).
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Finally, some industry commenters argued that Congress intended to
include losses in the cost analysis. One commenter noted that the
reference in new TILA Section 149(c)(1) to ``costs incurred by the
creditor from [an] omission or violation'' does not expressly exclude
losses and that definitions of ``cost'' typically include ``loss.''
\40\ However, as discussed above, the factors in Section 149(c) are
considerations to be taken into account by the Board when establishing
standards, not the standards themselves. Furthermore, the Board notes
that Section 149(c)(1) refers to ``costs incurred by the creditor from
[an] omission or violation,'' which could be construed to mean that it
is appropriate to exclude losses where--as here--card issuers do not
incur losses as a result of the overwhelming majority of
violations.\41\
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\40\ See e.g., Merriam-Webster's Collegiate Dictionary at 262
(10th ed. 1995) (defining cost as, among other things, ``loss or
penalty incurred esp. in gaining something'').
\41\ Another commenter referred to language in a report issued
by the Senate Committee on Banking, Housing, and Urban Affairs
stating the Committee's understanding that ``the Federal Reserve
Board, in determining reasonable relation to cost, will take into
account a number of factors, including * * * credit risk associated
with both portfolio and the individual. * * * '' See S. Rep. No.
111-16, at 7 (2009). However, this report refers to a prior version
of the Credit Card Act, which would have required that fees be based
solely on costs. See id. at 10 (``This section requires that penalty
fees assessed to cardholders be reasonably related to the cost
incurred by the card issuer.'') In contrast, under the final version
of the legislation, costs are one of the several considerations. See
new TILA Section 149(c). Nevertheless, the Board notes that it has
taken credit risk into consideration when implementing Section 149.
Specifically, the Board believes that the safe harbors in Sec.
226.52(b)(1)(ii) address concerns that accounts that experience
multiple violations over a particular period pose a greater credit
risk than accounts that experience a single violation over the same
period.
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For the reasons discussed above, comment 52(b)(1)(i)-2 is adopted
as proposed, with two revisions. First, several industry commenters
suggested that, even if losses were generally excluded from the cost
analysis, card issuers should be permitted to include the cost of
funding delinquent balances before the account becomes a loss. However,
as a general matter, the Board does not believe that such costs can be
meaningfully distinguished from losses. Accordingly, comment
52(b)(1)(i)-2 has
[[Page 37539]]
been revised to clarify that the cost of funding delinquent accounts is
considered a loss and is therefore excluded from the cost analysis.
Second, several industry commenters suggested that all risk
management costs should be included in the cost analysis, including the
cost of underwriting new accounts in order to determine the likelihood
that credit extended to an applicant will result in a loss. However,
while the Board agrees that, for example, costs associated with
managing risk on delinquent accounts should be included in the cost
analysis, the Board also believes that upfront underwriting costs
cannot be categorized as costs incurred by the card issuer from or as a
result of violations. Accordingly, the Board has revised comment
52(b)(1)(i)-2 to clarify that a card issuer may not include in the cost
analysis costs associated with evaluating whether consumers who have
not violated the terms or other requirements of an account are likely
to do so in the future (such as the costs associated with underwriting
new accounts). However, the comment also clarifies that, once a
violation of the account terms or other requirements has occurred, the
costs associated with preventing additional violations for a reasonable
period of time may be included in the cost analysis.
D. Additional Guidance and Examples
Proposed comment 52(b)(1)(i)-3 clarified that, as a general matter,
amounts charged to the card issuer by a third party as a result of a
violation of the terms or other requirements of an account are costs
incurred by the card issuer for purposes of Sec. 226.52(b)(1)(i). For
example, if a card issuer is charged a specific amount by a third party
for each returned payment, that amount is a cost incurred by the card
issuer as a result of returned payments. However, if the amount is
charged to the card issuer by an affiliate or subsidiary of the card
issuer, the card issuer must have determined for purposes of Sec.
226.52(b)(1)(i) that the amount represents a reasonable proportion of
the costs incurred by the affiliate or subsidiary as a result of the
type of violation. For example, if an affiliate of a card issuer
provides collection services to the card issuer for delinquent
accounts, the card issuer must determine that the amount charged to the
card issuer by the affiliate for such services represents a reasonable
proportion of the costs incurred by the affiliate as a result of late
payments. The Board did not receive significant comment on this aspect
of the proposal, which is adopted as proposed (with non-substantive
clarifications).
Proposed comment 52(b)(1)-1 clarified that the fact that a card
issuer's penalty fees are comparable to fees assessed by other card
issuers is not sufficient to satisfy the requirements of Sec.
226.52(b)(1)(i). Instead, a card issuer must make its own
determinations whether the amounts of its fees represent a reasonable
proportion of the total costs incurred by the issuer. Consumer groups
generally supported this clarification. Some industry commenters argued
that card issuers should be permitted to rely on general industry cost
data or any other reliable information for purposes of Sec.
226.52(b)(1)(i). However, the Board believes that this would be
inconsistent with new TILA Section 149(c)(1), which refers to the
``costs incurred by the creditor from [an] omission or violation.''
Accordingly, this comment has been revised for clarity and redesignated
as comment 52(b)(1)(i)-4 for organizational reasons but otherwise
adopted as proposed.
Proposed comment 52(b)(1)(i)-4 clarified the application of Sec.
226.52(b)(1)(i) to late payment fees. In addition to providing
illustrative examples, the comment stated that, for purposes of Sec.
226.52(b)(1)(i), the costs incurred by a card issuer as a result of
late payments include the costs associated with the collection of late
payments, such as the costs associated with notifying consumers of
delinquencies and resolving delinquencies (including the establishment
of workout and temporary hardship arrangements). Although industry
commenters requested that the Board specify that a variety of costs are
costs incurred as a result of late payments, those costs generally
appear to be addressed by the commentary discussed above.
Consumer group commenters requested that the Board exclude from the
cost analysis any collection costs unless the issuer has actually begun
collection activity. However, this approach would require examining
individual violations, which--for the reasons discussed above--the
Board generally does not believe to be warranted.
Consumer group commenters also requested that the Board exclude
from the cost analysis time spent by a customer service representative
speaking with a consumer who has been charged a fee. However, the Board
believes that this is a cost incurred by the card issuer as a result of
a violation. Accordingly, this comment has been redesignated as comment
52(b)(1)(i)-6 for organizational purposes and adopted as proposed,
except for the provision of an additional illustrative example.
Proposed comment 52(b)(1)(i)-5 clarified the application of Sec.
226.52(b)(1)(i) to returned payment fees. The comment stated that, for
purposes of Sec. 226.52(b)(1)(i), the costs incurred by a card issuer
as a result of returned payments include the costs associated with
processing returned payments and reconciling the card issuer's systems
and accounts to reflect returned payments as well as the costs
associated with notifying the consumer of the returned payment and
arranging for a new payment. The comment also provided illustrative
examples. An industry commenter noted that, in some cases, payments are
intentionally made with checks written on accounts with insufficient
funds in order to fraudulently increase the available credit or to
fraudulently create a credit balance that will be refunded to the
accountholder. Accordingly, the Board has revised this comment to
clarify that the costs associated with investigating potential fraud
with respect to returned payments are costs incurred by the issuer as a
result of returned payments. The Board did not receive any other
significant comment on this aspect of the proposal. Accordingly, this
comment has been redesignated as comment 52(b)(1)(i)-7 for
organizational purposes and adopted as proposed, except for the
provision of an additional illustrative example.
Proposed comment 52(b)(1)(i)-6 clarified the application of Sec.
226.52(b)(1)(i) to over-the-limit fees. In addition to providing
illustrative examples, the comment stated that, for purposes of Sec.
226.52(b)(1)(i), the costs incurred by a card issuer as a result of
over-the-limit transactions include the costs associated with
determining whether to authorize over-the-limit transactions and the
costs associated with notifying the consumer that the credit limit has
been exceeded and arranging for payments to reduce the balance below
the credit limit. Consumer group commenters argued that any costs
associated with the card issuer's authorization system should be
excluded from the cost analysis because card issuers need this system
for their general business operations. However, the Board does not
believe it is possible to meaningfully distinguish between the cost of
authorizing and declining transactions.
Consumer groups also argued that any costs incurred by the card
issuer obtaining the affirmative consent of consumers to the payment of
over-the-limit transactions consistent with
[[Page 37540]]
Sec. 226.56 are not costs incurred by a card issuer as a result of
over-the-limit transactions. The Board agrees and has revised the
proposed comment accordingly. The Board has also added an additional
illustrative example. Otherwise, this comment has been redesignated as
comment 52(b)(1)(i)-8 for organizational purposes and adopted as
proposed.
The Board has adopted a new comment 52(b)(1)(i)-9 clarifying the
application of Sec. 226.52(b)(1)(i) to fees charged when the card
issuer declines payment on checks that access a credit card account. In
addition to providing an illustrative example, the comment clarifies
that the costs incurred by a card issuer as a result of a declined
access check include costs associated with determining whether to
decline access checks, costs associated with processing declined access
checks and reconciling the card issuer's systems and accounts to
reflect declined access checks, costs associated with investigating
potential fraud with respect to declined access checks, and costs
associated with notifying the consumer and the merchant that accepted
the access check that the check has been declined.
Finally, the Board notes that consumer group commenters requested
that all overhead costs be excluded from the cost analysis. Although
the Board agrees that not all overhead costs are costs incurred as a
result of a violation, it would not be feasible to develop a meaningful
definition of ``overhead'' for purposes of this regulation. Instead,
the Board believes that the determination of whether certain costs are
incurred as a result of violations of the account terms or other
requirements should be made based on all the relevant facts and
circumstances.
52(b)(1)(ii) Safe Harbors
As discussed above, new TILA Section 149(e) authorizes the Board to
provide amounts for penalty fees that are presumed to be reasonable and
proportional to the violation. The Board acknowledges that specific
safe harbor amounts cannot perfectly reflect the factors listed in new
TILA Section 149(c) insofar as the costs incurred as a result of
violations, the amount necessary to deter violations, and the consumer
conduct associated with violations will vary depending on the issuer,
the consumer, the type of violation, and other circumstances. However,
as discussed above, it would not be feasible to implement new TILA
Section 149 based on individualized determinations. Instead, the Board
believes that establishing generally applicable safe harbors will
facilitate compliance by issuers and increase consistency and
predictability for consumers.
Commenters generally supported the adoption of safe harbors. Some
industry commenters noted that safe harbors were necessary for smaller
institutions that may lack the resources to perform the cost analysis
required by Sec. 226.52(b)(1)(i). However, comments from credit
unions, small banks, a state consumer protection agency, and a
municipal consumer protection agency expressed concern that, while
larger issuers with the resources to conduct a cost analysis would be
able to choose between relying on that analysis or on the safe harbors,
smaller issuers would be forced to use the safe harbors, which would
create inconsistency and bifurcate the market. However, some risk of
inconsistency is inevitable because new TILA 149 does not authorize the
Board to establish a single fee amount that must be used by all
issuers. Furthermore, as discussed below, the Board does not believe
that smaller issuers will be significantly disadvantaged by the safe
harbor amounts in Sec. 226.52(b)(1)(ii) because those amounts are
generally consistent with the fees currently charged by smaller
issuers.
Some industry commenters argued that, in order to promote
consistency and reduce compliance burden, the Board should apply the
safe harbors to all of the requirements in Sec. 226.52(b).
Specifically, these commenters argued that an issuer that complies with
the safe harbors should not be required to comply with the limitations
in Sec. 226.52(b)(2) on fees that exceed the dollar amount associated
with the violation and on the imposition of multiple fees based on a
single event or occurrence. However, as discussed below, the Board
believes that the limitations in Sec. 226.52(b)(2) provide important
protections for consumers and will not be overly burdensome for card
issuers.
Accordingly, for the reasons discussed below, Sec.
226.52(b)(1)(ii) states that, except as provided in Sec. 226.52(b)(2),
a card issuer may impose a fee for violating the terms or other
requirements of an account if the dollar amount of the fee generally
does not exceed one of two amounts. For the first violation of a
particular type, the card issuer may impose a fee of $25. For a
subsequent violation of the same type during the next six billing
cycles (for example, a second late payment), the card issuer may impose
a fee of $35. Both amounts may be adjusted annually by the Board to
reflect changes in the Consumer Price Index. Finally, for the reasons
discussed below, when a charge card issuer has not received the
required payment for two or more consecutive billing cycles, the issuer
may impose a fee that does not exceed 3% of the delinquent balance.
52(b)(1)(ii)(A)-(B) First and Subsequent Violations
The Board believes that, as a general matter, the safe harbor
amounts in Sec. 226.52(b)(1)(ii)(A) and (B) are reasonable and
proportional to violations of the terms and other requirements of an
account. As discussed below, these amounts are based on the statutory
factors listed in new TILA Section 149(c) and on the Board's analysis
of the data and other information discussed in the proposal and
submitted by commenters. Specifically, the safe harbor amount in Sec.
226.52(b)(1)(ii)(A) is generally intended to represent a reasonable
proportion of the costs incurred by most card issuers as a result of a
single violation of the terms or other requirements of an account. In
contrast, the higher safe harbor amount in Sec. 226.52(b)(1)(ii)(B) is
intended to represent the increased costs incurred as a result of
additional violations of the same type during the next six billing
cycles as well as to address the consumer conduct that leads to such
violations and to deter subsequent violations.
A. Safe Harbor Amounts
1. Penalty Fees for Credit Card Accounts
As an initial matter, the Board considered the dollar amounts of
penalty fees currently charged by credit card issuers. Although credit
card penalty fees appear to be approximately $36 to $38 on average,
many smaller card issuers (such as credit unions and community banks)
charge penalty fees of $20 to $25. As discussed above, the Board
understands that--rather than basing penalty fees solely on costs and
deterrence--most card issuers currently consider a number of additional
factors, including the need to maintain or increase overall revenue.
Nevertheless, the Board noted in the proposal that the discrepancy
between the fees charged by large and small issuers suggested that--
although violations of the terms or other requirements of an account
likely impact different types of card issuers to different degrees--
fees that are substantially lower than the current average may be
sufficient to cover the costs incurred as a result of those violations
and to deter such violations.
The Board requested that commenters submit relevant information
that would
[[Page 37541]]
assist the Board in establishing a safe harbor amount or amounts for
credit card penalty fees. In particular, the Board asked commenters to
provide, for each type of violation of the terms or other requirements
of a credit card account, data regarding the costs incurred as a result
of that type of violation (itemized by the type of cost). In addition,
commenters were asked to provide, if known, the dollar amounts
reasonably necessary to deter violations and the methods used to
determine those amounts.
In response, commenters suggested a wide variety of safe harbor
amounts but relatively few provided any data supporting those
suggestions. Consumer groups, a state consumer protection agency, and a
municipal consumer protection agency suggested amounts ranging from $10
to $20 based on state laws (which are discussed in detail below) and
the fees charged by credit unions and community banks. Credit unions,
community banks, and a state attorney general suggested fees of $20 to
$25. However, large issuers argued that comparisons with the fees
charged by credit unions and community banks were not valid because
smaller institutions have a less risky customer base and therefore
incur fewer costs as a result of violations. Most large issuers
declined to suggest a specific safe harbor amount, but those that did
generally suggested amounts between $29 and $34 (although two large
issuers suggested fees as high as $40 or $50).
The Board did not receive any data regarding the costs incurred as
a result of--or the amounts necessary to deter--returned payments,
over-the-limit transactions, or declined access checks. However, the
Board did receive a comment providing the results of a study of the
costs associated with late payments on credit card accounts issued by
ten of the largest credit card issuers. According to the comment,
issuers participating in the study were asked to identify operating
expenses associated with handling late payments and delinquent accounts
and with recovering those costs via late fee assessments. The comment
stated that, based on this information, a late payment costs the
participating issuers $28.40 on average.\42\ The comment also provided
a second figure of $32.45, which was represented as an adjusted cost
estimate based on the number of assessed fees that are not recovered by
the issuer.
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\42\ The comment emphasized that--because $28.40 is the average
cost--a safe harbor based on that amount would force many issuers to
perform their own cost analysis under Sec. 226.52(b)(1)(i) or incur
losses. One large issuer commented that smaller institutions would
have higher costs as a result of violations because they lack
economies of scale. However, comments from small institutions stated
that their current fees of $20 to $25 were sufficient to cover their
costs.
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Although these figures are generally useful in understanding the
costs incurred by large issuers as a result of violations, the Board
has significant concerns about aspects of this study. As an initial
matter, the Board is unable to determine whether the cost information
collected from the participants was accurate or consistent from issuer
to issuer. Although the comment states that the cost methodologies used
by the participants were reasonable, the participants presumably do not
track their costs in a uniform fashion. Furthermore, it appears that
some of the costs included in the study are not--in the view of the
Board--costs incurred as a result of violations for purposes of Sec.
226.52(b)(1)(i). In particular, although the comment states that losses
were excluded from the study, it also states that the cost of funding
balances that were eventually charged off was included. The Board
believes that most or all of these funding costs should be categorized
as losses for purposes of Sec. 226.52(b)(1)(i). Finally, although it
is not clear precisely how the study determined the amount of assessed
fees that were not recovered for purposes of the $32.45 figure, it does
appear that this amount included fees that the participating issuers
chose to waive, which--as discussed above--the Board has excluded from
the cost analysis. For all of these reasons, the Board believes that
this study significantly overstates the fee amounts necessary to cover
the costs incurred by large issuers as a result of violations, although
the exact extent of the overstatement is unclear.
The same commenter also submitted the results of applying two
deterrence modeling methods to data gathered from all leading credit
card issuers in the United States. According to the commenter, these
models estimated that fees of $28 or less have relatively little
deterrent effect on late payments but that higher fees are a
statistically significant contributor to sustaining lower levels of
delinquent behavior. Although the Board does not have access to the
data underlying these results, the significance of the $28 figure
appears to be questionable based on the information provided. In
addition, the Board is concerned that the results submitted by this
commenter could--if accepted at face value--be used to justify late
payment fees in excess of $100, which would be contrary to the intent
of new TILA Section 149. While the Board questions the assumptions used
to arrive at these results, they give additional support to some of the
concerns that--as discussed above--prompted the Board to remove
deterrence as an independent basis for setting penalty fee amounts.
Nevertheless, the Board does accept that--as generally illustrated by
these models--increases in the amount of penalty fees can affect the
frequency of violations.\43\
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\43\ This commenter also submitted the results of an online
survey of consumers who were asked what fee amounts would or would
not deter them from paying late. According to the commenter, the
survey indicated that a fee of $30 to $34 was necessary to deter the
majority of participants and that a fee of $50 to $54 was necessary
to deter 80% of participants. Although surveys of this type are
sometimes used to gauge the prices consumers may be willing to pay
for retail products, the Board understands that their accuracy is
limited even in that context. Furthermore, the Board is not aware of
this type of survey being used to measure the deterrent effect of
fees. Accordingly, the Board does not believe that it would be
appropriate to give significant weight to the results of this
survey.
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2. Penalty Fees for Other Types of Accounts
The Board has also considered the dollar amounts of penalty fees
charged with respect to deposit accounts and consumer credit accounts
other than credit cards. As a general matter, these fees appear to be
significantly lower than average credit card penalty fees, which
further supports the conclusion that lower credit card penalty fees may
adequately reflect the cost of violations and deter future violations.
For example, according to a January 2008 report by the GAO, the average
overdraft and insufficient funds fee charged by depository institutions
was just over $26 per item in 2007.\44\ Notably, the GAO also reported
that large institutions on average charged between $4 and $5 more for
overdraft and insufficient funds fees compared to smaller
institutions.\45\ Similarly, the Board understands that, for many home-
equity lines of credit, the late payment fee, returned payment fee, and
over-the-limit fee is $25 (although in some cases those fees may be set
by state law).
[[Page 37542]]
However, for most closed-end mortgage loans and some home-equity lines
of credit and automobile installment loans, the late payment fee is 5%
of the overdue payment. This information was discussed in the proposal
but was not the subject of significant comment.
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\44\ See Bank Fees: Federal Banking Regulators Could Better
Ensure That Consumers Have Required Disclosure Documents Prior to
Opening Checking or Savings Accounts, GAO Report 08-281, at 14
(January 2008) (GAO Bank Fees Report); see also ``Consumer Overdraft
Fees Increase During Recession: First-Time Phenomenon,'' Press
release, Moebs $ervices (July 15, 2009) (Moebs 2009 Pricing Survey
Press Release) (available at: http://www.moebs.com/AboutUs/Pressreleases/tabid/58/ctl/Details/mid/380/ItemID/65/Default.aspx)
(reporting an average overdraft fee of $26).
\45\ See GAO Bank Fees Report at 16. Another recent survey
suggests that the cost difference in overdraft fees between small
and large institutions may be larger than reported by the GAO. See
Moebs 2009 Pricing Survey Press Release (reporting that banks with
more than $50 billion in assets charged on average $35 per overdrawn
check compared to $26 for all institutions).
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3. State and Local Laws Regulating Penalty Fees
The Board has also considered state and local laws regulating
penalty fees. As above, except in the case of late payment fees that
are a percentage of the overdue amount, it appears that state and local
laws that specifically address penalty fees generally limit those fees
to amounts that are significantly lower than the current average for
credit card penalty fees. For example, California law does not permit
credit and charge card late payment fees unless the account is at least
five days' past due and then limits the fee to an amount between $7 and
$15, depending on the number of days the account is past due and
whether the account was previously past due.\46\ In addition,
California law does not permit over-the-limit fees unless the credit
limit is exceeded by the lesser of $500 or 20% of the limit and then
restricts the fee to $10.\47\ Massachusetts law limits delinquency
charges for all open-end credit plans to the lesser of $10 or 10% of
the outstanding balance and permits such fees only when the account is
more than 15 days past due.\48\ Maine law generally limits delinquency
charges for consumer credit transactions and open-end credit plans to
the lesser of $10 or 5% of the unpaid amount.\49\ Finally, the Board
understands some state and local laws governing late payment fees for
utilities permit only fixed fee amounts (ranging between $5 and $25),
while others limit the fee to a percentage of the amount past due
(ranging from 1% to 10%) or some combination of the two (for example,
the greater of $20 or 5% of the amount past due).
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\46\ See Cal. Fin. Code Sec. 4001(a)(1)-(2).
\47\ See id. Sec. 4001(a)(3).
\48\ See Mass. Ann. Laws ch. 140 Sec. 114B.
\49\ See Me. Rev. Stat. Ann. tit. 9-A, Sec. 2-502(1); see also
Minn. Stat. Sec. Sec. 48.185(d), 53C.08(1)(c), and 604.113(2)(a)
(generally limiting late payment fees on open-end credit plans to
the greater of $5 or 5% of the amount past due if the account is
more than 10 days past due and limiting returned-payment and over-
the-limit fees to $30).
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Consumer groups and a municipal consumer protection agency urged
the Board to consider these types of statutes when setting safe harbor
amounts. Industry commenters generally did not address these
provisions. However, industry commenters did note that the Internal
Revenue Service imposes penalty fees that are a percentage of the
amount owed by the taxpayer. Industry commenters also noted that some
state and local governments impose substantial penalty fees for
speeding and other traffic infractions.
4. Safe Harbor Established by the United Kingdom
The Board has also considered the safe harbor threshold for credit
card default charges established by the United Kingdom's Office of Fair
Trading (OFT) in 2006. As a general matter, the OFT concluded that--
under the laws and regulations of the United Kingdom--provisions in
credit card agreements authorizing default charges ``are open to
challenge on grounds of unfairness if they have the object of raising
more in revenue than is reasonably expected to be necessary to recover
certain limited administrative costs incurred by the credit card
issuer.'' \50\ In order to ``help encourage a swift change in market
practice,'' the OFT stated that it would regard charges set below a
monetary threshold of [pound]12 as ``either not unfair, or
insufficiently detrimental to the economic interests of consumers in
all the circumstances to warrant regulatory intervention at this
time.'' \51\ The OFT explained that, in establishing its threshold, it
took into account ``information * * * on the banks' recoverable costs
includ[ing] not only direct costs but also indirect costs that have to
be allocated on the basis of judgment.'' \52\ The OFT did not, however,
disclose this cost information, nor does it appear that the OFT
considered the need to deter violations of the account terms or the
relationship between the amount of the fee and the conduct of the
cardholder (which the Board is required to do). Based on average annual
exchange rates, [pound]12 has been equivalent to approximately $18 to
$24 (based on annual averages) since the OFT announced its monetary
threshold in April 2006.
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\50\ OFT Credit Card Statement at 1.
\51\ OFT Credit Card Statement at 27-28.
\52\ OFT Credit Card Statement at 29.
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The Board is aware that--as noted by many industry commenters--a
different regulator in the United Kingdom announced in March 2010 that
it would not impose restrictions on rate increases similar to those in
the Credit Card Act.\53\ These commenters also noted numerous other
differences between the laws of the United Kingdom and those of the
United States. The Board recognizes these distinctions and does not
find the OFT Credit Card Statement to be dispositive on any particular
point. Indeed, the safe harbors established by the Board are
substantially different than the safe harbor established by the OFT.
Nevertheless, the Board believes that the OFT's findings with respect
to credit card penalty fees warrant consideration, along with other
factors.
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\53\ See Dep't for Business Innovation & Skills, A Better Deal
for Consumers: Review of the Regulation of Credit and Store Cards:
Gov't Response to Consultation (Mar. 2010) 33-35 (available at
http://www.bis.gov.uk/assets/biscore/corporate/docs/c/10-768-consumer-credit-card-consultation-response.pdf).
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5. Conclusion
Although it is not possible based on the available information to
set safe harbor amounts that precisely reflect the costs incurred by a
widely diverse group of card issuers and that deter the optimal number
of consumers from future violations, the Board believes that, for the
reasons discussed above, the safe harbor amounts in Sec.
226.52(b)(1)(ii)(A) and (B) are generally sufficient to cover issuers'
costs and to deter future violations. Based on the comments, the $25
safe harbor in Sec. 226.52(b)(1)(ii)(A) for the first violation is
sufficient to cover the costs incurred by most small issuers as a
result of violations. Furthermore, the Board did not receive any
information indicating that this amount would not be sufficient to
cover the costs incurred by large issuers as a result of returned
payments, transactions that exceed the credit limit, and declined
access checks. With respect to late payments, the Board believes that
large issuers generally incur fewer collection and other costs on
accounts that experience a single late payment and then pay on time for
the next six billing cycles than on accounts that experience multiple
late payments during that period. Even if $25 is not sufficient to
offset all of the costs incurred by some large issuers as a result of a
single late payment, those issuers will be able to recoup any
unrecovered costs through upfront annual percentage rates and other
pricing strategies.
When an account experiences additional violations during the six
billing cycles following the initial violation, the Board believes that
the $35 safe harbor in Sec. 226.52(b)(1)(ii)(B) will generally be
sufficient to cover any increase in the costs incurred by the card
issuer and will have a reasonable deterrent effect on additional
violations. Furthermore, the Board believes that allowing the
imposition of an increased fee in these circumstances appropriately
distinguishes between consumers who engage in conduct that results in a
single violation during a period and consumers who repeatedly engage in
such conduct during the same period.
[[Page 37543]]
Indeed, data submitted on behalf of a large credit card issuer
indicates that consumers who pay late multiple times over six months
generally are significantly more likely to charge off than consumers
who only pay late once during the same period.
Comment 52(b)(1)(ii)-1 provides guidance regarding the application
of the safe harbors in Sec. 226.52(b)(1)(ii)(A) and (B). In addition
to providing several illustrative examples, the comment clarifies that,
for purposes of Sec. 226.52(b)(1)(ii), a $35 fee may be imposed
pursuant to Sec. 226.52(b)(1)(ii)(B) if, during the six billing cycles
following the billing cycle in which a violation occurred, another
violation of the same type occurs. The comment further clarifies the
billing cycle in which various types of violations occur for purposes
of Sec. 226.52(b)(1)(ii). For late payments, the violation occurs
during the billing cycle in which the payment may first be treated as
late consistent with the requirements of 12 CFR part 226 and the terms
or other requirements of the account. For returned payments, the
violation occurs during the billing cycle in which the payment is
returned to the card issuer. For transactions that exceed the credit
limit, the violation occurs during the billing cycle in which the
transaction occurs or is authorized by the card issuer. Finally, a
check that accesses a credit card account is declined during the
billing cycle in the card issuer declines payment on the check.
This comment also clarifies the relationship between the safe
harbors in Sec. 226.52(b)(1)(ii)(A) and (B) and the substantive
limitations in Sec. Sec. 226.52(b)(2)(ii) and 226.56(j)(1)(i).
Specifically, it clarifies that, if multiple violations are based on
the same event or transaction such that Sec. 226.52(b)(2)(ii)
prohibits the card issuer from imposing more than one fee, the event or
transaction constitutes a single violation for purposes of Sec.
226.52(b)(1)(ii). Furthermore, the comment clarifies that, consistent
with the limitations in Sec. 226.56(j)(1)(i) on imposing more than one
over-the-limit fee during a billing cycle, no more than one violation
for exceeding an account's credit limit can occur during a single
billing cycle for purposes of Sec. 226.52(b)(1)(ii).
B. Consumer Price Index Adjustments
Section 226.52(b)(1)(i) provides for annual adjustments to the safe
harbor amounts in Sec. 226.52(b)(1)(ii)(A) and (B) to reflect changes
in the Consumer Price Index. Comment 52(b)(1)(ii)-2 states that the
Board will calculate each year a price level adjusted safe harbor fee
using the Consumer Price Index in effect on June 1 of that year. When
the cumulative change in the adjusted minimum value derived from
applying the annual Consumer Price level to the current safe harbor fee
amount has risen by a whole dollar, the safe harbor fee amount will be
increased by $1.00. Similarly, when the cumulative change in the
adjusted minimum value derived from applying the annual Consumer Price
level to the current safe harbor fee amount has decreased by a whole
dollar, the safe harbor fee amount will be decreased by $1.00. The
comment also states that the Board will publish adjustments to the safe
harbor fee.\54\
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\54\ The approach set forth in this comment is similar to Sec.
226.5a(b)(3), which sets a $1.00 threshold for disclosure of the
minimum interest charge but provides that the threshold will be
adjusted periodically to reflect changes in the Consumer Price
Index.
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The proposed rule provided for annual adjustments based on the
Consumer Price Index in Sec. 226.52(b)(3) and comment 53(b)(3)-2.
Consumer group commenters generally opposed such adjustments, arguing
that changes in the Consumer Price Index will not necessarily
correspond with changes in the costs incurred by issuers as a result of
violations or the amount necessary to deter violations. These
commenters argued that the Board should instead adjust the safe harbor
amounts as appropriate through rulemaking. The Board believes that this
approach would be inefficient. While the Consumer Price Index is not a
perfect substitute, the Board believes that changes in the Consumer
Price Index will be sufficiently similar to changes in issuers' costs
and the deterrent effect of the safe harbor amounts that additional
rulemaking generally will not be necessary.
Industry commenters did not object to adjustments based on the
Consumer Price Index but requested that such adjustments be exempted
from the right to reject in Sec. 226.9(h). The Board agrees that, to
the extent that a change in the amount of a penalty fee results from a
change in the Consumer Price Index, the right to reject should not
apply. The Board has revised Sec. 226.9(c)(2)(iv)(B) accordingly.
C. Proposed Safe Harbor of 5% of Dollar Amount Associated With
Violation
As an alternative to the proposed safe harbor amount, proposed
Sec. 226.52(b)(3) would have permitted card issuers to impose a
penalty fee that did not exceed 5% of the dollar amount associated with
the violation (up to a specific dollar amount). This approach was based
on certain state laws that--as discussed above--permit penalty fees to
be the greater of a dollar amount or a percentage of the amount past
due. The Board intended that the specific safe harbor amount would be
imposed for most violations but that card issuers could use the 5% safe
harbor to impose a higher fee when the dollar amount associated with
the violation was large, although that fee could not exceed a specified
upper limit.\55\
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\55\ For example, if the specific safe harbor amount were $25,
the safe harbor would not have permitted a card issuer to impose a
fee that exceeded $25 unless the dollar amount associated with the
violation was more than $500. In addition, if the upper limit were
$40, a card issuer could not have imposed a fee that exceeded $40
under the proposed safe harbor even if the dollar amount associated
with the violation was more than $800.
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However, industry commenters opposed the 5% safe harbor on the
grounds that it made fee amounts difficult to predict and disclose,
which would be confusing for consumers. These commenters also argued
that this safe harbor was not useful because the dollar amount
associated with a violation would have to be extremely high for 5% of
that amount to exceed a reasonable safe harbor amount. Based on these
comments and the revisions to the safe harbor discussed above, the
Board agrees that the 5% safe harbor would not be sufficiently useful
to justify the added complexity of including it in the final rule.
52(b)(1)(ii)(C) Charge Cards
For purposes of Regulation Z, a charge card is a credit card on an
account for which no periodic rate is used to compute a finance charge.
See Sec. 226.2(a)(15)(iii). Charge cards are typically products where
outstanding balances cannot be carried over from one billing cycle to
the next and are payable in full when the periodic statement is
received or at the end of each billing cycle. See Sec. Sec.
226.5a(b)(7), 226.7(b)(12)(v)(A). In the proposal, the Board
acknowledged that--in contrast to conventional credit card accounts--
issuers do not use annual percentage rates to manage the risk of loss
on charge card accounts. For that reason, the Board solicited comment
on whether any adjustments to proposed Sec. 226.52(b) were necessary
with respect to charge card accounts.
In response, one industry commenter stated that, for charge card
accounts, late payment fees play an important role in deterring further
delinquency by encouraging consumers to pay delinquent balances.
Because charge card issuers cannot use rate increases for this purpose,
this commenter urged the Board to exempt charge cards from Sec.
226.52(b) entirely.
[[Page 37544]]
The Board does not believe that it would be consistent with the
purpose of new TILA Section 149 to exempt charge cards entirely.
However, the Board does believe that additional flexibility is
appropriate to permit charge card issuers to deter consumers that
become seriously delinquent from remaining delinquent. While the Credit
Card Act generally prohibits the application of increased rates to
existing credit card balances, it provides an exception when an account
becomes more than 60 days delinquent. See TILA Section 171(b)(4); Sec.
226.55(b)(4). This exception appears to recognize that it is
appropriate to provide card issuers with more flexibility when an
account becomes seriously delinquent. Because charge card issuers do
not apply an annual percentage rate to the account balance and
therefore cannot respond to serious delinquencies by increasing that
rate, the Board believes that it is appropriate to provide additional
flexibility for charge cards with respect to late payment fees. The
Board is concerned that, without such flexibility, charge card issuers
may not be able to effectively manage risk, which could affect the cost
and availability of charge card accounts.
Accordingly, Sec. 226.52(b)(1)(ii)(C) provides that, when a card
issuer has not received the required payment for two or more
consecutive billing cycles for a charge card account that requires
payment of outstanding balances in full at the end of each billing
cycle, the card issuer may impose a late payment fee that does not
exceed three percent of the delinquent balance. Like Sec.
226.55(b)(4), Sec. 226.52(b)(1)(ii)(C) measures delinquency from the
date on which the required payment is due. However, because charge card
payments are generally due upon receipt of the periodic statement but
no later than the end of the billing cycle during which the statement
is received, Sec. 226.52(b)(1)(ii)(C) applies when the required
payment has not been received for two or more consecutive billing
cycles (rather than 60 days from the payment due date). In these
circumstances, the delinquency is unlikely to be inadvertent because
the consumer will have received multiple periodic statements disclosing
the amount due. The Board believes that Sec. 226.52(b)(1)(ii)(C)
generally provides charge card issuers with flexibility in managing
seriously delinquent accounts that is similar to that provided in new
TILA Section 171(b)(4) and Sec. 226.55(b)(4) for traditional credit
card accounts.
However, the Board believes that, even in these circumstances, it
is necessary to place limits on the late payment fee in order to ensure
that the amount of the fee is reasonable and proportional to the
violation. As discussed above, the Board has not adopted the proposed
safe harbor that would have permitted all card issuers to impose
penalty fees that did not exceed 5% of the dollar amount associated
with the violation. However, the Board believes that a similar approach
is appropriate with respect to charge cards that are seriously
delinquent. Although a late payment fee equal to 5% of the delinquent
amount generally would not have been meaningful for conventional credit
cards because the required payments for such accounts are typically a
small percentage of the account balance, charge cards typically require
payment of the full balance each billing cycle. Thus, for charge card
accounts, a fee that equals a percentage of the delinquent amount would
be meaningful. However, the Board is concerned that a late payment fee
that equals 5% of the delinquent balance would exceed the amount
necessary for charge card issuers to effectively manage accounts that
becomes seriously delinquent. Accordingly, because the Board
understands that a late payment fee of 3% of the delinquent amount is
currently sufficient for this purpose, the Board has adopted that
standard in Sec. 226.52(b)(1)(ii)(C).
Comment 52(b)(1)(ii)-3 clarifies that, for purposes of Sec.
226.52(b)(1)(ii)(C), the delinquent balance is any previously billed
amount that remains unpaid at the time the late payment fee is imposed
pursuant to Sec. 226.52(b)(1)(ii)(C). For example, assume that a
charge card issuer requires payment of outstanding balances in full at
the end of each billing cycle and that the billing cycles for the
account begin on the first day of the month and end on the last day of
the month. At the end of the June billing cycle, the account has a
balance of $1,000. On July 5, the card issuer provides a periodic
statement disclosing the $1,000 balance consistent with Sec. 226.7.
During the July billing cycle, the account is used for $300 in
transactions, increasing the balance to $1,300. At the end of the July
billing cycle, no payment has been received and the card issuer imposes
a $25 late payment fee consistent with Sec. 226.52(b)(1)(ii)(A). On
August 5, the card issuer provides a periodic statement disclosing the
$1,325 balance consistent with Sec. 226.7. During the August billing
cycle, the account is used for $200 in transactions, increasing the
balance to $1,525. At the end of the August billing cycle, no payment
has been received. Consistent with Sec. 226.52(b)(1)(ii)(C), the card
issuer may impose a late payment fee of $40, which is 3% of the $1,325
balance that was due at the end of the August billing cycle. However,
Sec. 226.52(b)(1)(ii)(C) does not permit the card issuer to include
the $200 in transactions that occurred during the August billing cycle.
Comment 52(b)(1)(ii)-3 also clarifies that, consistent with Sec.
226.52(b)(2)(ii), a charge card issuer that imposes a fee pursuant to
Sec. 226.52(b)(1)(ii)(C) with respect to a late payment may not impose
a fee pursuant to Sec. 226.52(b)(1)(ii)(B) with respect to the same
late payment. Thus, in the example discussed above, the charge card
issuer would be prohibited from imposing the $40 fee pursuant to Sec.
226.52(b)(1)(ii)(C) and a $35 fee pursuant to Sec. 226.52(b)(1)(ii)(B)
based on the consumer's failure to pay the $1,325 balance by the end of
the August billing cycle.
52(b)(2) Prohibited Fees
Section 226.52(b)(2) prohibits credit card penalty fees that the
Board believes to be inconsistent with new TILA Section 149. In
particular, these prohibitions are intended to ensure that--consistent
with new TILA Section 149(c)(3)--penalty fees are generally reasonable
and proportional to the conduct of the cardholder.
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
Section 226.52(b)(2)(i)(A) prohibits fees based on violations of
the terms or other requirements of an account that exceed the dollar
amount associated with the violation. In the proposal, the Board stated
that this prohibition would be consistent with Congress' intent to
prohibit penalty fees that are not reasonable and proportional to the
violation. Specifically, the Board observed that penalty fees that
exceed the dollar amount associated with the violation do not appear to
be proportional to the consumer conduct that resulted in the violation.
For example, the Board stated its belief that Congress did not intend
to permit issuers to impose a $35 over-the-limit fee when a consumer
has exceeded the credit limit by $5.
Comments from individual consumers, consumer groups, and a state
attorney general supported the proposed limitation, although some
consumer groups suggested that a more stringent limitation--such as 50%
of the dollar amount associated with the violation--was warranted for
violations involving substantial dollar amounts.
[[Page 37545]]
These commenters noted that, if the dollar amount associated with a
violation was $100, Sec. 226.52(b)(2)(i)(A) would permit a card issuer
to impose a penalty fee of $100. However, the proposed limitation was
intended to address fees imposed for violations involving relatively
small dollar amounts. To the extent that a violation involves a dollar
amount that exceeds the applicable safe harbor in Sec.
226.52(b)(1)(ii), Sec. 226.52(b)(1) would prevent card issuers from
imposing unreasonable and disproportionate fees by requiring that a fee
that exceeds the applicable safe harbor represent a reasonable
proportion of the issuer's costs.
Industry commenters opposed this aspect of the proposed rule on the
grounds that, when the dollar amount associated with a violation is
small, it could limit the penalty fee to an amount that is neither
sufficient to cover the issuer's costs nor to deter future violations.
The Board acknowledges that a card issuer could incur costs as a result
of a violation that exceed the dollar amount associated with that
violation. However, as noted in the proposal, the Board does not
believe this will be the case for most violations. Furthermore, to the
extent card issuers cannot recover all of their costs when a violation
involves a small dollar amount, this limitation will encourage them
either to undertake efforts to reduce the costs incurred as a result of
violations that involve small dollar amounts or to build those costs
into upfront rates, which will result in greater transparency for
consumers regarding the cost of using their credit card accounts.
Furthermore, the Board believes that violations involving small
dollar amounts are more likely to be inadvertent and therefore the need
for deterrence is less pronounced. In addition, the Board believes that
consumers are unlikely to change their behavior in reliance on this
limitation. Penalty fees will still have a deterrent effect when
violations involve small dollar amounts because a card issuer will be
permitted to impose a fee that equals the dollar amount associated with
the violation (so long as that fee is otherwise consistent with Sec.
226.52(b)). See examples in comment 52(b)(2)(i)-1 through -3.
Industry commenters also argued that the proposed rule would
require card issuers to charge individualized penalty fees because the
amount of the fee is tied to the dollar amount associated with the
particular violation. However, unlike individualized consideration of
cost, deterrence, or consumer conduct, Sec. 226.52(b)(2)(i)(A)
requires a mathematical determination that issuers should generally be
able to program their systems to perform automatically. Thus, although
Sec. 226.52(b)(2)(i)(A) may require card issuers to incur substantial
programming costs at the outset, the Board does not believe that--once
this programming is complete--compliance with Sec. 226.52(b)(2)(i)(A)
will be overly burdensome. For these reasons, the Board has adopted
Sec. 226.52(b)(2)(i)(A) as proposed.
As discussed below, Sec. 226.52(b)(2)(i)(B) and the commentary to
Sec. 226.52(b)(2)(i) provide guidance regarding the dollar amounts
associated with specific violations. Consistent with the intent of
Sec. 226.52(b)(2)(i), the Board generally defines the dollar amount
associated with a violation in terms of the consumer conduct that
resulted in the violation, rather than the cost to the issuer or the
need for deterrence.
A. Dollar Amount Associated With Late Payments
As proposed, comment 52(b)(2)(i)-1 clarified that that the dollar
amount associated with a late payment is the amount of the required
minimum periodic payment that was not received on or before the payment
due date. Thus, for example, a card issuer would be prohibited from
charging a late payment fee of $39 based on a consumer's failure to
make a $15 required minimum periodic payment by the payment due date.
Instead, the maximum late payment fee permitted under Sec.
226.52(b)(2)(i)(A) would be $15.
Consumer group commenters supported the proposed comment. In
contrast, industry commenters argued that the dollar amount associated
with a late payment is the outstanding balance on the account because
that is the amount the issuer stands to lose if the delinquency
continues and the account eventually becomes a loss. However, as
discussed above, relatively few delinquencies result in losses.
Furthermore, the violation giving rise to a late payment fee is the
consumer's failure to make the required minimum periodic payment by the
applicable payment due date. Accordingly, the Board continues to
believe that, for purposes of Sec. 226.52(b)(2)(i), the dollar amount
associated with a late payment is the amount of the required minimum
periodic payment on which the late payment fee is based.
Industry commenters also requested clarification regarding the
application of proposed comment 52(b)(2)(i)-1 in circumstances where a
payment that is less than the required minimum periodic payment is
received on or prior to the payment due date. The Board has revised the
proposed comment in order to clarify that, in these circumstances, the
dollar amount associated with the late payment is the full amount of
the required minimum periodic payment, rather than the unpaid portion.
An illustrative example is provided in comment 52(b)(2)(i)-1.ii.
One industry commenter requested that issuers be provided with
flexibility to base the late payment fee on either the required minimum
payment for the billing cycle in which the late payment fee is imposed
or the required minimum periodic payment for the prior cycle. The Board
is concerned that this approach could enable issuers to maximize the
amount of the late payment fee by delaying imposition of the fee until
a new billing cycle has begun and a larger minimum payment is due.\56\
The Board does not believe this outcome would be consistent with the
purpose of new TILA Section 149 and Sec. 226.52(b)(2)(i). However, the
Board understands that, because of the requirement in Sec.
226.5(b)(2)(ii)(A) that credit card periodic statements be mailed or
delivered at least 21 days prior to the payment due date, issuers must
set payment due dates near the end of the billing cycle. As a result,
there may circumstances where a late payment fee is not imposed until
after a new billing cycle has begun. Accordingly, the Board has revised
comment 52(b)(2)(i)-1 to clarify that, in such cases, the card issuer
must base the late payment fee on the required minimum periodic payment
due immediately prior to assessment of the late payment fee. An
illustrative example is provided in comment 52(b)(2)(i)-1.iii.
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\56\ For example, assume that the billing cycles for an account
begin on the first day of the month and end on the last day of the
month and that the required minimum periodic payment is due on the
twenty-eighth day of each month. A $15 minimum payment is due on
September 28. If, on September 29, no payment has been received, the
card issuer could have an incentive to wait until the October
billing cycle has begun and the minimum payment for the October
cycle has been calculated. Because--under the minimum payment
formulas used by some issuers--the minimum payment for the October
cycle would include the $15 payment for the September cycle as well
as the amount due for October, a late payment fee based on the
October minimum payment would be higher than a fee based on the
September payment.
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B. Dollar Amount Associated With Returned Payments
Proposed comment 52(b)(2)(i)-2 clarified that, for purposes of
Sec. 226.52(b)(2)(i)(A), the dollar amount associated with a returned
payment is the amount of the required minimum periodic payment due
during the billing
[[Page 37546]]
cycle in which the payment is returned to the card issuer. Consumer
group commenters supported the proposed comment. In contrast, industry
commenters stated that the dollar amount associated with a returned
payment should be the amount of the returned payment. The Board
considered this approach in the proposed rule. However, the Board was
concerned that some returned payments may substantially exceed the
amount of the required minimum periodic payment, which would result in
Sec. 226.52(b)(2)(i)(A) permitting a returned payment fee that
substantially exceeds the late payment fee. For example, if the
required minimum periodic payment is $20 and the consumer makes a $100
payment that is returned, this application of Sec. 226.52(b)(2)(i)(A)
would have limited the late payment fee to $20 but permitted a $100
returned payment fee. In addition to being anomalous, this result would
be inconsistent with the intent of new TILA Section 149. Accordingly,
the Board continues to believe that the better approach is to define
the dollar amount associated with a returned payment as the required
minimum periodic payment due when the payment is returned.
In the proposal, the Board recognized that there may be
circumstances in which a payment that is received shortly after a
payment due date is not returned until the following billing cycle. In
those circumstances, proposed comment 52(b)(2)(i)-2 clarified that the
issuer was permitted to base the returned payment fee on the minimum
payment due during the billing cycle in which the fee was imposed. For
example, assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $20 is due on March 25. The card issuer receives a check for
$100 on March 31, which is returned to the card issuer for insufficient
funds on April 2. The minimum payment due on April 25 is $30. Proposed
comment 226.52(b)(2)(i)-2 clarified that, for purposes of Sec.
226.52(b)(2)(i), the dollar amount associated with the returned payment
was the minimum payment for the April billing cycle ($30), rather than
the minimum payment for the March cycle ($20).
However, one industry commenter noted that the Board's proposed
approach could result in consumer confusion because--as illustrated in
the prior example--consumers could receive significantly different
returned payment fees depending on whether the payment was returned on
the last day of a billing cycle or on the first day of the next billing
cycle. Furthermore, the Board's proposed guidance regarding the dollar
amount associated with returned payment fees is inconsistent with the
final guidance in comment 226.52(b)(2)(i)-1, which ties the amount of
the late payment fee to the required minimum payment due immediately
prior to assessment of the fee. Accordingly, consistent with comment
226.52(b)(2)(i)-1, the Board has revised comment 226.52(b)(2)(i)-2 to
clarify that, for purposes of Sec. 226.52(b)(2)(i), the dollar amount
associated with a returned payment is the amount of the required
minimum periodic payment due immediately prior to the date on which the
payment is returned to the card issuer.
Proposed comment 52(b)(2)(i)-2 also clarified that, if a payment
has been returned and is submitted again for payment by the card
issuer, there is no separate or additional dollar amount associated
with a subsequent return of that payment. Thus, Sec.
226.52(b)(2)(i)(B) would prohibit a card issuer from imposing an
additional returned payment fee in these circumstances. The Board
stated that it would be inconsistent with the consumer conduct factor
in new TILA Section 149(c)(3) to permit a card issuer to generate
additional returned payment fees by resubmitting a returned payment
because resubmission does not involve any additional conduct by the
consumer.\57\ Commenters generally supported this aspect of the
proposal, which is adopted as proposed.
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\57\ Although this concern could also be addressed under the
prohibition on multiple fees based on a single event or transaction
in Sec. 226.52(b)(2)(ii), that provision permits issuers to comply
by imposing no more than one penalty fee per billing cycle. Thus, if
imposition of an additional returned payment fee were not prohibited
under Sec. 226.52(b)(2)(i), the card issuer could impose that fee
by resubmitting a payment that is returned late in a billing cycle
immediately after the start of the next cycle.
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Industry commenters requested guidance regarding a variety of other
circumstances involving returned payments. Accordingly, the Board has
revised comment 52(b)(2)(i)-2 to provide additional examples
illustrating the application of Sec. 226.52(b)(2)(i).
C. Dollar Amount Associated With Extensions of Credit in Excess of
Credit Limit
Proposed comment 52(b)(2)(i)-3 clarified that the dollar amount
associated with extensions of credit in excess of the credit limit is
the total amount of credit extended by the card issuer in excess of
that limit as of the date on which the over-the-limit fee is imposed.
The comment further clarified that, although Sec. 226.56(j)(1)(i)
prohibits a card issuer from imposing more than one over-the-limit fee
per billing cycle, the card issuer may choose the date during the
billing cycle on which to impose an over-the-limit fee.\58\
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\58\ The Board considered whether the dollar amount associated
with extensions of credit in excess of the credit limit should be
the total amount of credit extended by the card issuer in excess of
that limit as of the last day of the billing cycle. However, in the
February 2010 Regulation Z Rule, the Board determined with respect
to Sec. 226.56(j)(1) that this approach could delay the generation
and mailing of the periodic statement, thereby impeding issuers'
ability to comply with the 21-day requirement for mailing statements
in advance of the payment due date.
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A consumer group commenter expressed concern that permitting
issuers to choose the date on which an over-the-limit fee is imposed
would lead to manipulation. In contrast, an industry commenter
requested that card issuers be provided with the flexibility to impose
an over-the-limit fee at the end of a billing cycle based on the amount
the account was over the credit limit on any day during that cycle. The
Board understands that, for operational reasons, some issuers may
prefer to wait until the end of the billing cycle to impose an over-
the-limit fee. Furthermore, the Board believes that, in these
circumstances, it is consistent with the intent of Sec.
226.52(b)(2)(i) to permit the card issuer to base the amount of the
over-the-limit fee on the total amount by which the account balance
exceed the credit limit during the billing cycle (subject to the
limitations in Sec. 226.52(b)(1)). The Board has revised comment
52(b)(2)(i)-3 accordingly.
D. Dollar Amounts Associated With Other Types of Violations
Section 226.52(b)(2)(i)(B) prohibits the imposition of penalty fees
in circumstances where there is no dollar amount associated with the
violation. As discussed below, proposed Sec. 226.52(b)(2)(i)(B) listed
specific circumstances in which a fee would be prohibited because there
was no dollar amount associated with the violation.
1. Declined Transaction Fees
Proposed Sec. 226.52(b)(2)(i)(B)(1) specifically prohibited a card
issuer from imposing a fee based on a transaction that the issuer
declined to authorize. Although the imposition of fees based on
declined transactions does not appear to be widespread at present, the
Board believes that--given the restrictions on the imposition of over-
the-limit fees in Sec. Sec. 226.52(b) and
[[Page 37547]]
226.56--it is important to address this issue in this rulemaking. A
card issuer may decline to authorize a transaction because, for
example, the transaction would have exceeded the credit limit for the
account. Unlike over-the-limit transactions, however, declined
transactions do not result in an extension of credit. Thus, there does
not appear to be any dollar amount associated with a declined
transaction.
In addition, it does not appear that the imposition of a fee for a
declined transaction can be justified based on the costs incurred by
the card issuer. Unlike returned payments, it is not necessary for a
card issuer to incur costs reconciling its systems or arranging for a
new payment when a transaction is declined. Furthermore, the Board
understands that card issuers generally use a single automated system
for determining whether transactions should be authorized or declined.
Thus, to the extent that card issuers incur costs designing and
administering such systems, they are permitted to recover those costs
through over-the-limit fees.
Comments from a federal agency, individual consumers, consumer
groups, and a municipal consumer protection agency supported the
proposed prohibition on declined transaction fees. As one commenter
noted, permitting a card issuer to impose a declined transaction fee
would undermine the limitations in new TILA Section 127(k) and Sec.
226.56 by allowing a card issuer to charge a consumer who has declined
to authorize the payment of transactions that exceed the credit limit a
fee when such transactions are declined.
Some industry commenters opposed Sec. 226.52(b)(2)(i)(B)(1),
arguing that card issuers incur some costs every time a credit card
purchase is submitted for authorization. However, as discussed above,
these costs are not unique to declined transactions. Furthermore, one
industry commenter conceded that these costs were minimal. Accordingly,
Sec. 226.52(b)(2)(i)(B)(1) is adopted as proposed.
Several industry commenters requested clarification regarding the
dollar amount associated with returning or declining payment of a check
that accesses a credit card account because, for example, the
transaction would have exceeded the account's credit limit, the account
had charged off, or another valid reason.\59\ Although the imposition
of a fee for a declined access check is similar in some respects to the
imposition of a fee for a transaction that the issuer declines to
authorize, the Board understands that, unlike other declined
transactions, card issuers incur significant costs as a direct result
of declining payment on an access check, including the cost of
communicating with the merchant or other party that received the check
from the consumer. Accordingly, comment 52(b)(2)(i)-4 clarifies that,
for purposes of Sec. 226.52(b)(2)(i), the dollar amount associated
with a declined access check is the amount of the check. Thus, Sec.
226.52(b)(2)(i)(A) prohibits a card issuer from imposing a fee for a
declined access check that exceeds the amount of that check. For
example, assume that an access check is used as payment for a $50
transaction, but payment on the check is declined by the card issuer
because the transaction would have exceeded the credit limit for the
account. For purposes of Sec. 226.52(b)(2)(i), the dollar amount
associated with the declined access check is the amount of the check
($50). Thus, Sec. 226.52(b)(2)(i)(A) prohibits the card issuer from
imposing a fee that exceeds $50. However, the amount of this fee must
also comply with the cost standard in Sec. 226.52(b)(1)(i) or the safe
harbors in Sec. 226.52(b)(1)(ii).
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\59\ The Board understands that, in these circumstances, an
access check may described as ``returned'' or ``declined.'' For
clarity and consistency, the Board has used the term ``declined
access check.'' However, no substantive distinction is intended.
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2. Inactivity and Closed Account Fees
Proposed Sec. 226.52(b)(2)(i)(B)(2) and (3) specifically
prohibited card issuers from imposing a penalty fee based on,
respectively, account inactivity and the closure or termination of an
account. The Board believes that these prohibitions are warranted
because there does not appear to be any dollar amount associated with
this consumer conduct.
As with the prohibition on declined transaction fees, proposed
Sec. 226.52(b)(2)(i)(B)(2) and (3) were supported by a federal agency,
individual consumers, consumer groups, and a municipal consumer
protection agency but opposed by industry commenters. Industry
commenters argued that card issuers receive less revenue from accounts
that are not used for a significant number of transactions or are
inactive or closed and that these fees cover the cost of administering
such accounts (such as providing periodic statements and other required
disclosures). However, because card issuers incur these costs with
respect to all accounts, the Board does not believe that they
constitute a dollar amount associated with a violation. Furthermore, to
the extent that an inactive or closed account has a balance, these
costs may be recovered through application of an annual percentage
rate.\60\ Accordingly, Sec. 226.52(b)(2)(i)(B)(2) and (3) are adopted
as proposed.
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\60\ Industry commenters also argued that inactivity and closed
account fees should not be treated as penalty fees because the
consumer has not violated the terms of the cardholder agreement by
failing to use the account for a certain amount of transactions or
by closing the account. However, as discussed above with respect to
comment 52(b)-1, the Board believes that these fees are properly
subject to Sec. 226.52(b) because they are fees imposed for
violating other requirements of the account.
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In response to requests from commenters, the Board has adopted
comments 52(b)(2)(i)-5 and -6, which clarify the application of Sec.
226.52(b)(2)(i)(B)(2) and (3). Comment 52(b)(2)(i)-5 clarifies that
Sec. 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a fee
based on account inactivity (including the consumer's failure to use
the account for a particular number or dollar amount of transactions or
a particular type of transaction). For example, Sec.
226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 fee
when a consumer fails to use the account for $2,000 in purchases over
the course of a year.
Consumer groups and individual consumers requested that the Board
clarify that a card issuer cannot circumvent this prohibition by, for
example, imposing a $50 annual fee on all accounts but waiving the fee
if the consumer uses the account for $2,000 in purchases over the
course of a year. In contrast, industry commenters argued that such
arrangements should be permitted because they are no different than
``cash back'' rewards and other incentives provided to encourage
consumers to use their accounts. Unlike other types of incentives,
however, this arrangement is inconsistent with the intent of Sec.
226.52(b)(2)(i)(B)(2) because only consumers who do not engage in the
requisite level of account activity are ultimately responsible for the
fee. Thus, in these circumstances, there is no meaningful distinction
between the annual fee and an inactivity fee. Accordingly, comment
52(b)(2)(i)-5 clarifies that this type of arrangement is prohibited.
The Board notes that this guidance should not be construed as
prohibiting ``cash back'' rewards or similar incentives commonly
offered by card issuers to encourage account usage.
The Board has also adopted comment 52(b)(2)(i)-6, which clarifies
the application of Sec. 226.52(b)(2)(i)(B)(3). Specifically, this
comment clarifies that Sec. 226.52(b)(2)(i)(B)(3) prohibits card
issuers from imposing a one-time fee on a consumer who closes his or
her
[[Page 37548]]
account or from imposing a periodic fee--such as an annual fee, a
monthly maintenance fee, or a closed account fee--after an account is
closed if that fee was not imposed prior to the closure or termination
(even if the fee was disclosed prior to closure or termination). The
comment further clarifies that card issuers are prohibited from
increasing a periodic fee after an account is closed or terminated but
may continue to impose a periodic fee that was imposed before closure
or termination.
52(b)(2)(ii) Multiple Fees Based On a Single Event or Transaction
As proposed, Sec. 226.52(b)(2)(ii) prohibited card issuers from
imposing more than one penalty fee based on a single event or
transaction, although issuers were permitted to comply with this
requirement by imposing no more than one penalty fee during a billing
cycle. The Board believes that imposing multiple fees based on a single
event or transaction is unreasonable and disproportionate to the
conduct of the consumer because the same conduct may result in a single
violation or multiple violations, depending on how the card issuer
categorizes the conduct or on circumstances that may not be in the
control of the consumer. For example, if a consumer submits a payment
that is returned for insufficient funds or for other reasons, the
consumer should not be charged both a returned payment fee and a late
payment fee. Similarly, in these circumstances, it does not appear that
multiple fees are reasonably necessary to deter the single event or
transaction.
Individual consumers, consumer groups, and a state attorney general
supported this aspect of the proposal, as did one credit union.
However, industry commenters generally opposed this limitation, arguing
that it would prevent full recovery of costs, undermine deterrence, and
create operational difficulties. As discussed in the proposal, the
Board understands that a card issuer may incur greater costs as a
result of an event or transaction that causes multiple violations than
an event or transaction that causes a single violation. Using the
example above, assume that the card issuer incurs costs as a result of
the late payment and costs as a result of the returned payment. If the
card issuer imposes a late payment fee, Sec. 226.52(b)(2)(ii)
prohibits the issuer from recovering the costs incurred as a result of
the returned payment by also charging a returned payment fee. However,
the Board believes that Sec. 226.52(b)(2)(ii) will only apply in a
relatively limited number of circumstances. Furthermore, as discussed
above with respect to Sec. 226.52(b)(2)(i), any costs that are not
recovered as a result of the application of Sec. 226.52(b)(2)(ii) can
instead be recovered through upfront rates or other pricing strategies.
Furthermore, because Sec. 226.52(b)(2)(ii) generally addresses
circumstances in which a single act or omission by a consumer results
in multiple violations, the Board believes that imposition of a single
fee will generally be sufficient to deter such consumer conduct in the
future. Finally, in order to reduce the operational burden on card
issuers of determining whether multiple violations are caused by a
single event or transaction, Sec. 226.52(b)(2)(ii) permits a card
issuer to comply by charging no more than one penalty fee per billing
cycle. The Board believes that this approach generally provides at
least the same degree of protection for consumers as prohibiting
multiple fees based on a single event or transaction because fees
imposed in different billing cycles will generally be caused by
different events or transactions. Accordingly, Sec. 226.52(b)(2)(ii)
is adopted as proposed.
Comment 52(b)(2)(ii)-1 provides additional examples of
circumstances where multiple penalty fees would be prohibited, as well
as examples of circumstances where multiple fees would be permitted.
For example, assume that the required minimum periodic payment due on
March 25 is $20. On March 25, the card issuer receives a check for $50,
but the check is returned for insufficient funds on March 27. The
comment clarifies that, consistent with Sec. Sec. 226.52(b)(1)(ii)(A)
and (b)(2)(i)(A), the card issuer may impose a late payment fee of $25
or a returned payment fee of $25. However, the comment also clarifies
that Sec. 226.52(b)(2)(ii) prohibits the card issuer from imposing
both fees because those fees would be based on a single event or
transaction.
The comment provides another example based on the same facts,
except that the card issuer receives the $50 check on March 27 and the
check is returned for insufficient funds on March 29. The comment
clarifies that, as above, Sec. 226.52(b)(2)(ii) prohibits the card
issuer from imposing both fees because those fees would be based on a
single event or transaction. Industry commenters objected to this
example, arguing that--because the payment was late before it was
returned--the violations were not based on the same event or
transaction. However, as discussed above, Sec. 226.52(b)(2)(ii) is
intended to prevent the imposition of multiple fees based on a single
act or omission by a consumer. In light of this purpose, the Board
believes it would be anomalous for a consumer whose payment is received
on the payment due date and then returned to be charged a single fee,
while a consumer whose payment is received the following day and then
returned to be charged two fees.
Industry commenters also requested that the Board clarify the
application of Sec. 226.52(b)(2)(ii) in a number of additional
scenarios. Accordingly, the Board has revised comment 52(b)(2)(ii)-1 to
provide additional illustrative examples. Otherwise, the comment is
adopted as proposed.
Section 226.56 Requirements for Over-the-Limit Transactions
Section 226.56(e)(1)(i) provides that, in the notice informing
consumers that their affirmative consent (or opt-in) is required for
the card issuer to pay over-the-limit transactions, the issuer must
disclose the dollar amount of any fees or charges assessed by the
issuer on a consumer's account for an over-the-limit transaction. Model
language is provided in Model Forms G-25(A) and G-25(B).
Comment 56(e)-1 states that, if the amount of an over-the-limit fee
may vary, such as based on the amount of the over-the-limit
transaction, the card issuer may indicate that the consumer may be
assessed a fee ``up to'' the maximum fee. For the reasons discussed
below with respect to Model Forms G-25(A) and G-25(B), the Board has
amended comment 56(e)-1 to refer to those model forms for guidance on
how to disclose the amount of the over-the-limit fee consistent with
the substantive restrictions in proposed Sec. 226.52(b).
In addition, because Sec. 226.52(b) imposes additional substantive
limitations on over-the-limit fees, the Board has adopted a new comment
56(j)-6, which provides a cross-reference to Sec. 226.52(b). The Board
did not receive any significant comment on these aspects of the
proposal.
Section 226.59 Reevaluation of Rate Increases
As discussed in the supplementary information to Sec. 226.9(c)(2)
and (g), the Credit Card Act added new TILA Section 148, which requires
creditors that increase an annual percentage rate applicable to a
credit card account under an open-end consumer credit plan, based on
factors including the credit risk of the consumer, market conditions,
or other factors, to consider changes in such factors in subsequently
determining whether to reduce the annual percentage rate. Creditors are
[[Page 37549]]
required to maintain reasonable methodologies for assessing these
factors. The statute also sets forth a timing requirement for this
review. Specifically, at least once every six months, creditors are
required to review accounts as to which the annual percentage rate has
been increased to assess whether these factors have changed. New TILA
Section 148 is effective August 22, 2010 but requires that creditors
review accounts on which an annual percentage rate has been increased
since January 1, 2009.
New TILA Section 148 requires creditors to reduce the annual
percentage rate that was previously increased if a reduction is
``indicated'' by the review. However, new TILA Section 148(c) expressly
provides that no specific amount of reduction in the rate is required.
The Board is implementing the substantive requirements of new TILA
Section 148 in new Sec. 226.59.
As discussed above, in addition to these substantive requirements,
TILA Section 148 also requires creditors to disclose the reasons for an
annual percentage rate increase applicable to a credit card under an
open-end consumer credit plan in the notice required to be provided 45
days in advance of that increase. The Board is implementing the notice
requirements of new TILA Section 148 in Sec. 226.9(c)(2) and (g),
which are discussed in the supplementary information to Sec. 226.9.
The Board proposed to apply Sec. 226.59 to ``credit card accounts
under an open-end (not home-secured) consumer credit plan'' as defined
in Sec. 226.2(a)(15), consistent with the approach the Board has taken
to other provisions of the Credit Card Act that apply to credit card
accounts. The Board received no comments on this aspect of the proposal
and therefore Sec. 226.59 as adopted applies to credit card accounts
under an open-end (not home-secured) consumer credit plan. Therefore,
home-equity lines of credit accessed by credit cards and overdraft
lines of credit accessed by a debit card are not subject to the new
substantive requirements regarding reevaluation of rate increases.
59(a) General Rule
59(a)(1) Evaluation of Increased Rate
Section 226.59(a) of the March 2010 Regulation Z Proposal set forth
the general rule regarding the reevaluation of rate increases. Proposed
Sec. 226.59(a)(1) generally mirrored the statutory language of TILA
Section 148 and stated that if a card issuer increases an annual
percentage rate that applies to a credit card account under an open-end
(not home-secured) consumer credit plan, based on the credit risk of
the consumer, market conditions, or other factors, or increased such a
rate on or after January 1, 2009, the card issuer must review changes
in such factors and, if appropriate based on its review of such
factors, reduce the annual percentage rate applicable to the account.
As discussed below, in other portions of proposed Sec. 226.59 the
Board set forth more specific guidance on the factors that must be
considered when conducting the review required under Sec.
226.59(a)(1), as well as on the policies and procedures that an issuer
must maintain for conducting this evaluation. The Board received a
number of comments on these specific aspects of the proposal, but no
significant comment on the general rule set forth in Sec.
226.59(a)(1). Accordingly, the Board is adopting Sec. 226.59(a)(1)
generally as proposed, with two technical revisions for clarity. As
adopted, Sec. 226.59(a)(1)(i) expressly cross-references the guidance
regarding factors set forth in paragraph Sec. 226.59(d). In addition,
the Board has made one technical amendment to the title of the
paragraph.
Proposed Sec. 226.59(a)(1) would have limited the obligation to
reevaluate rate increases to those increases for which 45 days' advance
notice is required under Sec. 226.9(c)(2) or (g). This limitation was
proposed using the Board's authority under TILA Section 105(a) to
provide for adjustments and exceptions for any class of transactions as
necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). In the
proposal, the Board noted that this limitation is consistent with the
approach Congress adopted in new TILA Section 171(b), which sets forth
the exceptions to the 45-day notice requirement for rate increases and
significant changes in terms. Several industry commenters stated that
this limitation was appropriate and should be retained in the final
rule, while the Board received no comments opposing this aspect of the
proposal.
The Board believes that Congress did not intend for card issuers to
have to reevaluate rate increases in those circumstances where no
advance notice is required, for example, rate increases due to
fluctuations in the index for a properly-disclosed variable rate plan
or rate increases due to the expiration of a properly-disclosed
introductory or promotional rate. The Board also notes that creditors
do not consider factors in connection with the expiration of a
promotional rate or an increase in a variable rate due to fluctuations
in the index on which that rate is based. Thus, the Board continues to
believe that coverage of such rate increases by Sec. 226.59 would be
inconsistent with the purposes of new TILA Section 148. Therefore, the
requirements of Sec. 226.59 do not apply to rate increases for which
45 days' advance notice is not required.
The proposal included several comments intended to clarify the
scope of proposed Sec. 226.59(a)(1). Proposed comment 59(a)-1
clarified that Sec. 226.59(a) applies both to increases in annual
percentage rates imposed on a consumer's account based on circumstances
specific to that consumer, such as changes in the consumer's
creditworthiness, and to increases in annual percentage rates applied
to the account due to factors such as changes in market conditions or
the issuer's cost of funds. The Board noted that this is consistent
with the intent of TILA Section 148, which is broad in scope and
specifically notes ``market conditions'' as a factor for which rate
increases need to be reevaluated. The Board received no comments on
proposed comment 59(a)-1.
Accordingly, the Board is adopting proposed comment 59(a)-1 as new
comment 59(a)(1)-1. The Board has revised comment 59(a)(1)-1 from the
proposal to clarify the applicability of Sec. 226.59(a) to increases
in annual percentage rates imposed due to factors that are not specific
to the consumer. The comment as adopted states in part that Sec.
226.59(a) applies to increases in annual percentage rates imposed based
on factors that are not specific to the consumer, and includes changes
in market conditions or the issuer's cost of funds as examples of such
factors that are not consumer-specific. This list of examples is not
intended to be exhaustive and there may be other factors that are not
consumer-specific on which rate increases that would trigger the
requirements of Sec. 226.59 could be based.
Proposed comment 59(a)-2 clarified that a card issuer must review
changes in factors under Sec. 226.59(a) only if the increased rate is
actually imposed on the consumer's account. For example, the proposed
comment provided that if a card issuer increases the penalty rate
applicable to a consumer's credit card but the consumer's account has
no balances that are currently subject to the penalty rate, the card
issuer is required to provide a notice pursuant to Sec. 226.9(c)(2) of
the change in terms, but the requirements of Sec. 226.59 do not apply.
If the consumer's actions later trigger application of the penalty
rate, the card issuer must provide 45 days' advance notice pursuant to
Sec. 226.9(g) and must, upon imposition of the penalty rate, begin to
periodically review and consider factors to
[[Page 37550]]
determine whether a rate reduction is appropriate under Sec. 226.59.
The Board noted that, until an increased rate is imposed on the
consumer's account, the consumer incurs no costs associated with that
increased rate. In addition, the Credit Card Act and Regulation Z
contain additional protections for consumers against prospective rate
increases, including the general prohibition on increasing the rate
applicable to an outstanding balance set forth in Sec. 226.55 and the
45-day advance notice requirements in Sec. 226.9(c)(2) and (g).
Finally, once an increased rate is imposed on the consumer's account,
the card issuer would then be subject to the requirements of Sec.
226.59. The Board received no significant comment on proposed comment
59(a)-2, which is adopted as comment 59(a)(1)-2.
Proposed comment 59(a)-3 clarified how Sec. 226.59(a) applies to
certain rate increases imposed prior to the effective date of the rule.
Section 226.59(a) and new TILA Section 148 require that card issuers
reevaluate rate increases that occurred between January 1, 2009 and
August 21, 2010. Proposed comment 59(a)-3 stated that for increases in
annual percentage rates on or after January 1, 2009 and prior to August
22, 2010, Sec. 226.59(a) requires a card issuer to review changes in
factors and reduce the rate, as appropriate, if the rate increase is of
a type for which 45 days' advance notice would currently be required
under Sec. 226.9(c)(2) or (g). The requirements of Sec. 226.9(c)(2)
and (g), which were first effective on August 20, 2009 and modified by
the February 2010 Regulation Z Rule were not applicable during the
entire period from January 1, 2009 to August 21, 2010. Therefore, the
relevant test for purposes of proposed Sec. 226.59(a)(1) and comment
59(a)-3 is whether the rate increase is or was of a type for which 45
days' advance notice pursuant to Sec. 226.9(c)(2) or (g) would
currently be required.
Proposed comment 59(a)-3 further illustrated this requirement by
stating, for example, that the requirements of Sec. 226.59 would not
apply to a rate increase due to an increase in the index by which a
properly-disclosed variable rate is determined in accordance with Sec.
226.9(c)(2)(v)(C) or if the increase occurs upon expiration of a
specified period of time and disclosures complying with Sec.
226.9(c)(2)(v)(B) have been provided. The Board received no comments on
proposed comment 59(a)-3, which is adopted as comment 59(a)(1)-3.
In the March 2010 Regulation Z Proposal, the Board proposed comment
59(b)-1, which noted, consistent with TILA Section 148, that even in
circumstances where a rate reduction is required, Sec. 226.59 does not
require that a card issuer decrease the rate to the annual percentage
rate that was in effect prior to the rate increase giving rise to the
obligation to periodically review the consumer's account. The comment
stated that the amount of the rate decrease that is required must be
determined based upon the issuer's reasonable policies and procedures.
Proposed comment 59(b)-1 set forth an illustrative example, which
assumes that a consumer's rate on new purchases is increased from a
variable rate of 15.99% to a variable rate of 23.99% based on the
consumer's making a required minimum periodic payment five days late.
The consumer then makes all of the payments required on the account on
time for the six months following the rate increase. The proposed
comment noted that the card issuer is not required to decrease the
consumer's rate to the 15.99% that applied prior to the rate increase,
but that the card issuer's policies and procedures for performing the
review required by Sec. 226.59(a) must be reasonable and should take
into account any reduction in the consumer's credit risk based upon the
consumer's timely payments.
The Board believes that this proposed comment, which primarily
focuses on the amount of a required rate decrease, is more properly
placed in the commentary to Sec. 226.59(a)(1), which is the paragraph
establishing the obligation to reduce the rate. Accordingly, the Board
is adopting proposed comment 59(b)-1 as comment 59(a)(1)-4, with
several technical changes for clarity. The example set forth in the
comment has also been amended for consistency with Sec. 226.59(d)'s
guidance on the factors required to be considered in the review.
Section 226.59(d) is discussed below in more detail.
Regarding the scope of Sec. 226.59, one issuer asked the Board to
clarify whether the reevaluation requirements in Sec. 226.59 apply
only to increases in purchase rates or to rates applicable to all types
of balances, such as cash advances, balance transfers, or balances
subject to penalty rates. The Board believes that it was clear in the
proposal, and continues to be clear in the final rule, that Sec.
226.59 generally applies to all types of interest rate increases, not
just penalty rate increases. The rule refers broadly to ``an increase
in an annual percentage rate that applies to a credit card account
under an open-end (not home-secured) consumer credit plan,'' not only
to increases in purchase annual percentage rates. Accordingly, examples
in the commentary to Sec. 226.59 refer to cash advance rates, penalty
rates, balance transfer rates, and temporary rates, in addition to
purchase rates.
Another issuer asked the Board to expressly clarify that the
obligation to reevaluate rate increases pursuant to Sec. 226.59 does
not apply to accounts for which variable rate floors were removed in
order to comply with Sec. 226.55(b)(2). The Board believes that no
clarification is necessary in the regulation or commentary. The removal
of a variable rate floor can only result in a decrease in the interest
rate imposed on a consumer's account and therefore would not be a rate
increase for purposes of Sec. 226.59.
Finally, one industry trade association urged the Board to limit
the scope of Sec. 226.59 to require reviews only of those rate
increases that occurred between January 1, 2009 and February 22, 2010,
when the majority of the substantive protections in the Credit Card Act
became effective. The Board believes that this interpretation would be
inconsistent with new TILA Section 148, which imposes an ongoing review
requirement when a creditor increases the annual percentage rate
applicable to a credit card account. If Congress had intended to limit
the review requirement to those rate increases that occurred prior to
February 22, 2010, the Board believes that it would have so provided.
59(a)(2) Rate Reductions
Proposed Sec. 226.59(a)(2) addressed the timing requirements for
rate reductions required under Sec. 226.59. Proposed Sec.
226.59(a)(2) stated that if a card issuer is required to reduce the
rate applicable to an account pursuant to Sec. 226.59(a)(1), the card
issuer must reduce the rate not later than 30 days after completion of
the evaluation. The Board solicited comment on the operational issues
associated with reducing the rate applicable to a consumer's account
and whether a different timing standard for how promptly rate changes
must be implemented should apply.
A number of issuers and industry trade associations urged the Board
to give issuers additional time to implement rate decreases, for
operational reasons. Several commenters specifically noted that the 30
day time period would require issuers to make mid-cycle changes, which
may be difficult and costly depending on the issuer's processing
platforms. Several commenters suggested that the time period for
implementing a rate reduction should be 60 days or two billing cycles
after
[[Page 37551]]
completion of the evaluation. Other commenters indicated that the
appropriate time period is 90 days. Finally, several other commenters
stated that a 45-day time period would be appropriate. These commenters
also noted that a 45-day time period would be consistent with the time
period for advance notice of rate increases under Sec. 226.9(c) and
(g).
Section 226.59(a)(2)(i) of the final rule provides that if a card
issuer is required to reduce the rate applicable to an account pursuant
to Sec. 226.59(a)(1), the card issuer must reduce the rate not later
than 45 days after completion of the evaluation. The Board believes
that intent of new TILA Section 148 is to ensure that the rates on
consumers' accounts are reduced promptly when the card issuer's review
of factors indicates that a rate reduction is required. Therefore, the
Board believes that a longer time period, such as 60 days or 90 days,
would not best effectuate the intent of the statute. The Board believes
that Sec. 226.59(a)(2)(i), as adopted, strikes the appropriate balance
between burden on issuers and benefit to consumers. The 45-day time
period may enable issuers to avoid operationally difficult mid-cycle
changes, while ensuring that consumers promptly receive the benefit of
any rate reduction required by Sec. 226.59.
The March 2010 Regulation Z Proposal did not specify to which
balances a rate reduction required by Sec. 226.59(a) must apply.
Several commenters requested that the Board provide express guidance
regarding the applicability of any required rate reduction, in
particular as to whether the reduction is required to apply to existing
balances or only to new transactions. One industry commenter stated
that issuers should be required to apply the reduced rate only to the
outstanding balances that were subject to the rate increase
reevaluation rather than to all outstanding balances. Another industry
commenter urged the Board to provide flexibility for issuers to apply
the reduced rate to: (1) New transactions only; (2) outstanding
balances that were subject to the rate increase reevaluation; or (3)
new transactions and outstanding balances that were subject to the rate
increase reevaluation. This commenter noted that it would be
operationally burdensome if issuers were required to reduce the rate
applicable to all outstanding balances that were subject to the rate
increase. Finally, one issuer stated that creditors should be permitted
to implement rate decreases through other means, such as through
balance transfer or consolidation offers, which would reduce the
consumer's cost of borrowing without changing the annual percentage
rate.
The Board is adopting new Sec. 226.59(a)(2)(ii) to clarify to
which balances a rate reduction pursuant to Sec. 226.59(a)(1) must
apply. Section 226.59(a)(2)(ii) states that any reduction in an annual
percentage rate required pursuant to Sec. 226.59(a)(1) shall apply to:
(1) Any outstanding balances to which the increased rate described in
Sec. 226.59(a)(1) has been applied; and (2) new transactions that
occur after the effective date of the rate reduction that would
otherwise have been subject to the increased rate. The Board believes
the most appropriate reading of new TILA Section 148 is that it is
intended to require rate reductions on outstanding balances that were
subject to the rate increase, as well as on new transactions. TILA
Section 148 expressly requires issuers to reevaluate rate increases
that have occurred since January 1, 2009. The Board believes that a
rule that permitted issuers to apply reduced rates only to new
transactions would not effectuate this ``look back'' provision, because
it would permit rate increases that occurred after January 1, 2009 to
remain in effect for the life of any balance already subject to the
increased rate. Prior to February 22, 2010, card issuers were permitted
to increase rates applicable to outstanding balances as well as new
transactions, which is no longer permitted under Sec. 226.55 except in
limited circumstances. It would be an anomalous result for the ``look
back'' provision to permit creditors to maintain increased rates on
existing balances given that the Credit Card Act prospectively limited
the circumstances in which a rate increase can be applied to an
outstanding balance. Accordingly, the Board believes that the inclusion
of the ``look back'' provision in TILA Section 148 suggests that
Congress intended for any rate reductions apply to outstanding balances
that were subject to the rate increase.
Similarly, the Board believes that for rates increased on or after
February 22, 2010, the most appropriate reading of new TILA Section 148
is that it requires an issuer to apply any required rate decrease both
to any outstanding balances that were subject to the increased rate and
to any new transactions that would have been subject to the increased
rate. New TILA Section 148 does not distinguish between rate increases
imposed prior to February 22, 2010, which could have applied both to
outstanding balances and new transactions, and rate increases imposed
after February 22, 2010, which in most cases may apply only to new
transactions. The Board believes, therefore, that one uniform rule
regarding the applicability of rate decreases is appropriate and
consistent with the intent of TILA Section 148. A rule that required
rate reductions only on new transactions would in effect permit an
increased rate to apply to balances subject to the increased rate until
they are paid in full. The Board does not believe that this outcome
would be consistent with the intent of TILA Section 148.
However, the Board does not believe that the statute requires an
issuer to decrease the rates applicable to balances that were not
subject to the rate increase giving rise to the review obligation under
Sec. 226.59(a). The requirement to reevaluate the rates applicable to
a consumer's account is only triggered when a rate increase occurs. If
Congress had intended for all issuers to periodically review the rates
applicable to consumer credit card accounts, regardless of whether a
rate increase occurred, it could have so provided. Given that the
review requirement only applies if there is a rate increase, the Board
believes the best interpretation of the statute is that any required
reduction in rate need only apply to the balances that were subject to
that increased rate. Therefore, the final rule does not require that
the rate reduction apply to all outstanding balances, but just to those
outstanding balances that were subject to the increased rate.
For example, assume that a consumer opens a new credit card account
under an open-end (not home-secured) consumer credit plan on January 1
of year one. The rate on purchases is 18%. The consumer makes a $1,000
purchase on June 1 of year one. On January 1 of year two, after
providing 45 days' advance notice in accordance with Sec. 226.9(c),
the card issuer raises the rate applicable to new purchase transactions
to 20%. The consumer makes a $300 purchase on May 1 of year two, which
is subject to the 20% rate. On July 1 of year two, the issuer conducts
a review of the account in accordance with Sec. 226.59(a) and, based
on that review, decreases the rate on purchases from 20% to 17%
effective as of August 15 of year two. The consumer makes a $500
purchase on September 1 of year two. Section 226.59(a)(2)(ii) requires
the issuer to apply the 17% rate to the $300 purchase and the $500
purchase. The issuer is not required to apply the 17% rate to the
$1,000 purchase, which may remain subject to the original 18% rate.
The Board believes that permitting issuers to reduce the interest
charges imposed on a consumer's account
[[Page 37552]]
through other means, such as balance transfer or other promotional
offers, without reducing the annual percentage rate would be
inconsistent with the statute, which requires a creditor to consider
factors in ``determining whether to reduce the annual percentage rate''
applicable to a consumer's account. Furthermore, the Board believes
that permitting issuers to reduce the interest charges imposed on a
consumer's account in such a manner would lack transparency and would
make it difficult for an issuer's regulator to assess whether that
issuer is in compliance with the rule. For example, it would be
difficult to ascertain whether a given promotional rate offer is as
beneficial to a consumer as a rate reduction would be, given that it
would depend on facts, circumstances, and account usage patterns
specific to that consumer.
Section 226.59(a)(2)(ii) requires, in part, that any reduction in
rate required pursuant to Sec. 226.59(a)(1) must apply to new
transactions that occur after the effective date of the rate reduction,
if those transactions would otherwise have been subject to the
increased rate described in Sec. 226.59(a)(1). The Board is adopting a
new comment 59(a)(2)(ii)-1 to clarify to which new transactions any
rate reduction required by Sec. 226.59(a) must apply. A credit card
account may have multiple types of balances, for example, purchases,
cash advances, and balance transfers, to which different rates apply.
The comment sets forth an illustrative example that assumes a new
credit card account opened on January 1 of year one has a rate
applicable to purchases of 15% and a rate applicable to cash advances
and balance transfers of 20%. Effective March 1 of year two, consistent
with the limitations in Sec. 226.55 and upon giving notice required by
Sec. 226.9(c)(2), the card issuer raises the rate applicable to new
purchases to 18% based on market conditions. The only transaction in
which the consumer engages in year two is a $1,000 purchase made on
July 1. The rate for cash advances remains at 20%. Based on a
subsequent review required by Sec. 226.59(a)(1), the card issuer
determines that the rate on purchases must be reduced to 16%. Section
226.59(a)(2)(ii) requires that the 16% rate be applied to the $1,000
purchase made on July 1 and to all new purchases. The rate for new cash
advances and balance transfers may remain at 20%, because there was no
rate increase applicable to those types of transactions and, therefore,
the requirements of Sec. 226.59(a) do not apply.
59(b) Policies and Procedures
Proposed Sec. 226.59(b) provided, consistent with new TILA Section
148, that a card issuer must have reasonable written policies and
procedures in place to review the factors described in Sec. 226.59.
The proposal did not prescribe specific policies and procedures that
issuers must use in order to conduct this analysis. The Board stated
that requiring such policies and procedures to be reasonable would
ensure that issuers undertake due consideration of these factors in
order to determine whether a rate reduction is required on a consumer's
account. However, the proposal solicited comment on whether more
guidance was necessary regarding whether a card issuer's policies and
procedures are ``reasonable.''
Consumer groups and a Federal agency stated that the proposal did
not set forth sufficiently specific guidance regarding whether an
issuer's policies and procedures are reasonable. These commenters
suggested that the Board's rules should provide more rigorous
compliance standards regarding the methodologies that issuers must use
to reevaluate rate increases. In particular, these commenters urged the
Board to require issuers to use an ``empirically derived, demonstrably
and statistically sound model'' or to identify other specific
reasonable methodologies to be used in conducting the reevaluation of
rate increases. Consumer groups noted that the statutory provision
requires issuers to ``maintain reasonable methodologies for assessing
the factors'' used in the reevaluation, and accordingly that the
statute prohibits unreasonable methodologies. One consumer group
supported the requirement that policies and procedures be written, but
stated that the policies and procedures should specify how factors are
measured and weighted.
Two state attorneys general also commented on this aspect of the
proposal. One expressed concern that the Board's proposed rules would
permit banks to perform perfunctory reviews, manipulate the factors
used in the reevaluation to justify rate increases, and otherwise deny
rate reductions even when there has been a decline in consumer credit
risk. This commenter stated that the final rules should expressly
require banks to reduce interest rates when justified by the consumer's
credit risk, and stated that a review that does not result in interest
rate reductions when consumers' credit profiles improve and bank costs
decline cannot be considered ``reasonable.'' The second state attorney
general expressed concern that the flexible reevaluation standard set
forth in the proposal would result in very few interest rate increases
being reversed. This commenter urged the Board to adopt clear and
transparent reevaluation standards and to rigorously supervise card
issuers for compliance with Sec. 226.59.
Several trade associations representing community banks and credit
unions indicated that additional guidance regarding the requirement to
have reasonable policies and procedures would be helpful to
institutions complying with the rule. These commenters urged the Board
to publish such guidance for additional public comment.
Other commenters supported the flexible approach in the proposal.
One public interest group stated that requiring issuers to maintain
written policies and procedures will likely result in greater
accountability for financial institutions and more equitable repricing
of accounts. Several issuers stated that no additional guidance is
necessary regarding ``reasonable'' policies and procedures and opposed
a more prescriptive approach. One of these commenters noted that the
concept of ``reasonable policies and procedures'' is well established
in Regulation Z and that issuers do not require additional guidance.
The Board is adopting Sec. 226.59(b) generally as proposed, with
one nonsubstantive change for clarity. The Board continues to believe
that more prescriptive rules regarding reasonable policies and
procedures could unduly burden creditors and raise safety and soundness
concerns for financial institutions. Because the particular factors
that are the most predictive of the credit risk of a particular
consumer or portfolio of consumers may change over time, the
appropriate manner in which to weigh those factors may also change.
Moreover, the appropriate manner in which to consider or review
underwriting factors can vary greatly among institutions. For example,
underwriting standards--and thus the appropriate policies and
procedures to use when reviewing rate increases--for private label or
retail credit cards will differ from the standards used for general
purpose credit card accounts.
The Board agrees with commenters that TILA Section 148 requires
issuers to perform a meaningful review of rate increases and to
decrease rates when appropriate. The Board further agrees with consumer
groups that new TILA Section 148 requires that an issuer use reasonable
methodologies, and accordingly would not permit an issuer
[[Page 37553]]
to use methodologies for the review of rate increases that are
unreasonable. However, the Board believes that the requirement that an
issuer's policies and procedures be reasonable effectuates this portion
of the statute. This requirement will ensure that, although issuers
have flexibility to design their own reasonable policies and
procedures, they must conduct a meaningful review of factors and reduce
the rate in an appropriate manner when required.
The Board is not requiring issuers to utilize a ``empirically
derived, demonstrably and statistically sound model'' for the
reevaluation of rate increases. Regulation Z does require the use of
such models in other contexts, such as when an issuer uses an estimate
of income under Sec. 226.51 as an alternative to obtaining this
information directly from a consumer. As noted in the supplementary
information to the February 2010 Regulation Z Rule, the Board is aware
of various models that have been developed to estimate a consumer's
income or assets. In the case of estimating a consumer's income, a
third party could develop a model that would meet the ``empirically
derived, demonstrably and statistically sound'' standard that could be
used by all, or a large number of, issuers. However, given the issuer
and product-specific nature of underwriting, the Board believes that it
would not be possible to develop and use a single model for evaluating
factors that would be appropriate for all issuers. Accordingly, each
issuer would have to develop and test its own model, which would create
significant burden, especially for small issuers.
In addition, unlike a model for estimating a consumer's income,
which is designed to estimate a single piece of objective data, it is
unclear how an ``empirically derived, demonstrably and statistically
sound model'' would operate in the context of the reevaluation of rate
increases. The Board believes that to make such a standard feasible,
the rule would have to be far more prescriptive regarding permissible
assumptions for the model. For the reasons discussed above, the Board
is not adopting a prescriptive rule about how an issuer must weigh the
factors it considers; for the same reasons, the Board also declines to
adopt a prescriptive rule about how an issuer may construct its
underwriting models. Furthermore, as discussed in the supplementary
information to Sec. 226.52(b) in the context of the proposed
deterrence method for determining permissible penalty fees, developing
a model for an individual issuer would require testing and periodic
verification. In the course of gathering the data necessary to test or
periodically verify its model, an issuer may at times need to test a
model that is not ``empirically derived, demonstrably and statistically
sound,'' which would create the anomalous result that issuers would
need to test policies and procedures that are not permitted under the
rule.
In addition to the general requirement that an issuer have
reasonable policies and procedures, other portions of the final rule
address specific practices to further ensure that issuers conduct a
meaningful review of rate increases and appropriately implement any
required rate decreases. For example, as discussed above, Sec.
226.59(a)(2)(ii) of the final rule expressly requires that a rate
reduction be applied both to outstanding balances that were subject to
the increased rate and new transactions that would have been subject to
the increased rate. In addition, as discussed below, Sec. 226.59(d) of
the final rule requires an issuer to consider either: (1) The factors
on which it originally based the rate increase; or (2) the factors that
the card issuer currently uses when determining the annual percentage
rates applicable to similar new credit card accounts. As discussed
below, the Board believes that this will ensure that an issuer may not
selectively choose to evaluate only those factors that would continue
to justify a rate increase for existing consumers.
Several consumer group commenters and one state attorney general
urged the Board to establish a data collection requirement for Sec.
226.59. These commenters stated that banks should be required to
publicly disclose their review policies and procedures and issue
periodic reports on the total number of accounts reviewed, the total
number of accounts on which the rate was reduced, and the starting and
ending rates of accounts reviewed. The Board believes that such a
requirement would be inefficient and overly burdensome and is not
necessary to effectuate the purposes of Section 148. In addition, the
Board has concerns that public reporting of underwriting factors would
require issuers to disclose proprietary information, particularly given
that public reporting is not an express requirement of TILA Section
148. An issuer's principal regulator is most familiar with its
operations and is in the best position to evaluate its policies and
procedures under Sec. 226.59(b).
59(c) Timing
Proposed Sec. 226.59(c) clarified the timing requirements for the
reevaluation of rate increases pursuant to Sec. 226.59(a). Consistent
with new TILA Section 148(b)(2), proposed Sec. 226.59(c) required a
card issuer that is subject to Sec. 226.59(a) to review changes in
factors in accordance with Sec. 226.59(a) and (d) not less frequently
than once every six months after the initial rate increase. Proposed
comment 59(c)-1 would clarify that an issuer has flexibility in
determining exactly when to engage in this review for its accounts.
Specifically, proposed comment 59(c)-1 stated that an issuer may review
all of its accounts at the same time once every six months, may review
each account once each six months on a rolling basis based on the date
on which the rate was increased for that account, or may otherwise
review each account not less frequently than once every six months. The
supplementary information to the March 2010 Regulation Z Proposal
stated that as long as the consideration of factors required for each
account subject to Sec. 226.59 is performed at least once every six
months, the Board believes that it is appropriate to provide
flexibility to card issuers to decide upon a schedule for reviewing
their accounts.
Section 226.59(c) is adopted as proposed, with one nonsubstantive
change for clarity. The Board received only two comments on this aspect
of the proposal; one issuer stated that the rule should require a
review once every six billing cycles rather than once every six months,
while another issuer stated that the final rule should require reviews
annually rather than biannually. Consistent with the proposal, the
final rule requires an issuer to conduct the review described in Sec.
226.59(a) not less frequently than once every six months after the rate
increase. New TILA Section 148(b)(2) is clear that the review is
required ``not less frequently than once every 6 months.'' A
requirement that the review occur not less frequently than once every
six billing cycles would mean, for consumers whose billing cycles are
two or three months long, that the review only occurs once every 12 or
18 months. The Board does not believe this is consistent with
Congress's intent. The Board received no comments on comment 59(c)-1,
which also is adopted as proposed.
Proposed comment 59(c)-2 set forth an example of the timing
requirements in Sec. 226.59(c). The proposed example assumed that a
card issuer increases the rates applicable to one half of its credit
card accounts on June 1, 2010, and increases the rates applicable to
the other half of its credit card accounts on September 1, 2010. The
proposed comment stated that the card issuer may review the rate
increases for all of its
[[Page 37554]]
credit card accounts on or before December 1, 2010, and at least every
six months thereafter. In the alternative, the card issuer may first
review the rate increases for the accounts that were repriced on June
1, 2010 on or before December 1, 2010, and may first review the rate
increases for the accounts that were repriced on September 1, 2010 on
or before March 1, 2011.
The Board received only one comment on proposed comment 59(c)-2.
The commenter noted that the dates used in the example in proposed
comment 59(c)-2 were inconsistent with comment 59(c)-3, which is
discussed below. Comment 59(c)-2 is adopted as proposed, except that
the dates in the example have been adjusted to correct this technical
error.
Proposed comment 59(c)-3 clarified the timing requirement for
increases in annual percentage rates applicable to a credit card
account under an open-end (not home-secured) consumer credit plan on or
after January 1, 2009 and prior to August 22, 2010. Proposed comment
59(c)-3 stated that Sec. 226.59(c) requires that the first review for
such rate increases be conducted prior to February 22, 2011.
Consumer groups and a state attorney general stated that issuers
should be required to conduct their first review of rate increases on
August 22. These commenters expressed particular concern regarding rate
increases imposed between January 1, 2009 and February 22, 2010, the
date when the majority of the substantive protections contained in the
Credit Card Act went into effect. A federal agency stated that the
Board should provide an implementation period of no more than three
months from issuance of final rules. In contrast, industry commenters
supported proposed comment 59(c)-3, noting that the guidance in the
comment is necessary to give creditors the time to develop and
implement review policies and procedures based on the final rule prior
to conducting their first reevaluations.
The Board is adopting comment 59(c)-3 as proposed. The Board
believes that it will take issuers several months to develop and
implement their policies and procedures for conducting reviews of rate
increases. Accordingly, the Board believes that requiring issuers to
complete their first review under Sec. 226.59 on August 22, 2010 would
be overly burdensome. For issuers with large or complex credit card
portfolios, a requirement that the first review be completed on August
22, 2010 could in effect require those issuers to have implemented
procedures to comply with this final rule before it is issued. The
Board also believes that this clarification is consistent with the
general timing standard under new TILA Section 148, which requires that
rate increases generally be reevaluated at least once every six months.
Accordingly, the Board believes that six months from the effective date
of TILA Section 148, or February 22, 2011, is the appropriate date by
which the initial review of rate increases that occurred prior to the
effective date of the final rule must take place.
59(d) Factors
Proposed 226.59(d) provided clarification on the factors that a
credit card issuer must consider when performing the evaluation of a
consumer's account under Sec. 226.59(a). Proposed Sec. 226.59(d)
provided that a card issuer is not required to base its review under
Sec. 226.59(a) on the same factors on which a rate increase was based.
Rather, the proposal would have permitted a card issuer to review
either the same factors on which the rate increase was originally
based, or to review the factors that it currently uses when determining
the annual percentage rates applicable to its consumers' credit card
accounts.
The Board explained in the supplementary information to the
proposal that it believes it is appropriate to permit card issuers to
review the factors they currently consider in advancing credit to new
consumers, because a review of these factors may result in the consumer
receiving any reduced rate that he or she would receive if applying for
a new credit card with the same card issuer. The Board also noted that
competition for new consumers is an incentive that may lead an issuer
to lower its rates, and if the rates on existing consumers' accounts
are assessed using the same factors used for new consumers, existing
customers of a card issuer may also benefit from competition in the
market.
Proposed Sec. 226.59(d) did not mandate any specific factors that
card issuers must consider. Similarly, proposed Sec. 226.59(d) would
not have prohibited the consideration of other factors. The Board noted
that a prescriptive rule that sets forth certain factors or excludes
other factors could inadvertently harm consumers, in part by
constraining card issuers' ability to design or utilize new
underwriting models and products that could potentially benefit
consumers.
Industry commenters strongly supported the approach in Sec.
226.59(d) that would permit a card issuer to either consider the
factors on which the rate increase was based or the issuer's current
factors. These commenters stated that proposed Sec. 226.59(d) provides
appropriate flexibility and urged the Board to avoid mandating the
consideration of outdated factors that are no longer relevant. Issuers
noted that they already have an incentive to provide the best rates
they can justify to their existing cardholders, because if they do not
the cardholder may elect to use a different credit card or source of
financing. Issuers also indicated that the costs associated with
developing and maintaining systems to track and apply factors used in
the past to existing reviews would be extremely burdensome.
Several industry commenters urged the Board to clarify that Sec.
226.59(d) permits issuers to review the current factors that apply to
similarly situated existing cardholders, not just new consumers. One
commenter indicated, for example, that an issuer may have one scorecard
that it uses for new applicants and another scorecard that it uses for
account reviews. This commenter suggested that an issuer should be
permitted to use the account review scorecard when conducting the
review under Sec. 226.59. Other industry commenters stated that a card
issuer that considers the factors it uses for new accounts in
conducting the review under Sec. 226.59 should be permitted to take
into account an existing cardholder's payment and performance history
on the account, even if the issuer is not able to consider that data
when evaluating an application for a new account.
Consumer groups indicated that proposed Sec. 226.59(d) did not
adequately limit an issuer's discretion to manipulate and ``cherry
pick'' factors. Consumer groups stated that it is not objectionable to
permit an issuer to evaluate old accounts consistently with the manner
in which it evaluates new applicants, but that the rule should clarify
that issuers do not have the discretion to selectively consider only
those factors that would justify maintaining a rate increase. In
addition, one city consumer protection agency stated that issuers
should be required to take into account all appropriate factors, rather
than just factors that are favorable to the issuer.
Consumer groups also urged the Board to adopt more specific
guidance identifying factors that are permitted to be used and
prohibited from being used in the evaluation. These commenters stated
that the rule should expressly distinguish between rate increases
imposed on an individual consumer and rate increases applied on a
portfolio-wide basis. Consumer groups stated that appropriate factors
for consideration for
[[Page 37555]]
portfolio-wide rate increases include: (1) Cost of funds, to the extent
not reflected in a variable rate; and (2) the issuer's loss rate for
that product. Consumer groups indicated that impermissible factors for
portfolio-wide rate increases should include: (1) Loss rates for other
products; (2) revenue maximization; and (3) the inability to charge
increased rates or fees resulting from legal reforms. Consumer groups
stated that the only permissible factor for rate increases imposed on
an individual consumer's account should be empirically-tested risk
factors related to the ability to repay. In addition, one state
consumer protection agency stated that, for rate increases based on
changes in a consumer's creditworthiness, issuers should be required to
evaluate the consumer's credit score, recent payment history, and other
factors that indicate whether a consumer's creditworthiness has
improved.
Section 226.59(d)(1) of the final rule sets forth the general rule
and states that, except as provided in Sec. 226.59(d)(2) (which is
discussed below), a card issuer must review either: (1) The factors on
which the increase in an annual percentage rate was originally based;
or (2) the factors that the card issuer currently considers when
determining the annual percentage rates applicable to similar new
credit card accounts under an open-end (not home-secured) consumer
credit plan. The Board believes that this rule strikes the appropriate
balance between providing flexibility for changing underwriting
standards and ensuring that consumers receive the benefit of meaningful
reviews of rate increases on their accounts. The Board believes that
requiring a card issuer to consider the factors that it considers when
setting the rates applicable to similar new accounts addresses concerns
regarding issuers selectively identifying those factors that would
permit them to maintain increased rates on existing accounts. In
addition, the Board believes that this rule will permit consumers to
benefit from competition among issuers in the market for new customers.
Accordingly, the final rule would not permit an issuer that complies
with Sec. 226.59 by considering its current factors to use a separate
set of factors for existing accounts than it does for new accounts.
Proposed comment 59(d)-3 provided additional clarification on how
an issuer should identify the factors to consider when evaluating
whether a rate reduction is required. Proposed comment 59(d)-3 stated
that if a card issuer evaluates different factors in determining the
applicable annual percentage rates for different types of credit card
plans, it must review those factors that it considers in determining
annual percentage rates for the consumer's type of credit card plan.
Proposed comment 59(d)-3 also set forth several examples to
illustrate what constitute ``types'' of credit card plans. For example,
the proposed comment noted that a card issuer may review different
factors in determining the annual percentage rate that applies to
credit card plans for which the consumer pays an annual fee and
receives rewards points than it reviews in determining the rates for
credit card plans with no annual fee and no rewards points. Similarly,
the comment noted that a card issuer may review different factors in
determining the annual percentage rate that applies to private label
credit cards than it reviews in determining the rates applicable to
credit cards that can be used at a wider variety of merchants. However,
the proposed comment stated that a card issuer must review the same
factors for credit card accounts with similar features that are offered
for similar purposes and may not consider different factors for each of
its individual credit card accounts.
One consumer group commenter supported proposed comment 59(d)-3.
Three industry commenters urged the Board to withdraw the proposed
comment. These commenters noted that issuers may offer many different
varieties of private label credit card programs and general purpose
credit card programs and that they should be permitted to review
different factors with respect to each type of program. One of these
commenters specifically asked the Board to confirm that a private label
card issuer with multiple card portfolios may comply with the
reevaluation requirements based on the terms and conditions of each
portfolio independently.
The Board is adopting proposed comment 59(d)-3 generally as
proposed, with several technical and wording changes for clarity. The
Board continues to believe that this clarification is appropriate to
ensure that a credit card issuer considers factors for new accounts
that are similar to the existing credit card accounts subject to Sec.
226.59, rather than factors for a dissimilar product that may be
underwritten based on different information. However, the Board has
included an additional example stating that a card issuer may review
different factors in determining the annual percentage rate that
applies to private label credit cards usable only at Merchant A than it
may review for private label credit cards usable only at Merchant B.
The Board believes that this additional example is appropriate to give
guidance to issuers that offer several different private label credit
card plans with different merchants.
The Board also is adopting a new comment 59(d)-4 to clarify a card
issuer's obligations for existing accounts that are not similar to any
new accounts offered by the issuer. The comment notes that in some
circumstances, a card issuer that complies with Sec. 226.59(a) by
reviewing the factors that it currently considers in determining the
annual percentage rates applicable to similar new accounts may not be
able to identify a class of new accounts that are similar to the
existing accounts on which a rate increase has been imposed. For
example, consumers may have existing credit card accounts under an
open-end (not home-secured) consumer credit plan but the card issuer
may no longer offer a product to new consumers with similar
characteristics, such as the availability of rewards, size of credit
line, or other features. Similarly, some consumers' accounts may have
been closed and therefore cannot be used for new transactions, while
all new accounts can be used for new transactions. In those
circumstances, the comment notes that the card issuer must nonetheless
perform a review of the rate increase on the existing customers'
accounts. A card issuer does not comply with Sec. 226.59 by
maintaining an increased rate without performing such an evaluation. In
such circumstances, Sec. 226.59(d)(1)(ii) requires that the card
issuer compare the existing accounts to the most closely comparable new
accounts that it offers.
The Board understands that, for existing accounts, issuers may
possess information about the consumer's payment history or performance
that they would not have for all applicants for new credit. For
example, a consumer may have made a late payment on a credit card
account with the issuer, but the delinquency may not have been reported
to a consumer reporting agency, for example because the payment was
less than 30 days late. The Board is adopting a new comment 59(d)-5 to
clarify that a card issuer that complies with Sec. 226.59(a) by
reviewing the factors that it currently considers in determining the
rates applicable to similar new accounts may consider the consumer's
payment or other account behavior on the existing account only to the
same extent and in the same manner that the issuer considers such
information when one of its current cardholders applies for a new
account with the card issuer. For example, the comment notes that a
card issuer might obtain consumer reports for all of its
[[Page 37556]]
applicants. The consumer reports contain certain information regarding
the applicant's past performance on existing credit card accounts.
However, the card issuer may have additional information about an
existing cardholder's payment history or account usage that does not
appear in the consumer report and that, accordingly, it would not
generally have for all new applicants. For example, a consumer may have
made a payment that is five days late on his or her account with the
card issuer, but this information does not appear on the consumer
report. The card issuer may consider this additional information in
performing its review under Sec. 226.59(a), but only to the extent and
in the manner that it considers such information when a current
cardholder applies for a new account with the issuer.
Consistent with the approach in the proposal, the final rule does
not mandate or prohibit the consideration of any specific factors. The
Board continues to believe that a prescriptive rule would unduly burden
issuers, could create safety and soundness issues, and could
inadvertently harm consumers, by limiting card issuers' ability to
design or utilize new underwriting models and products that could
benefit consumers. For issuers that consider the factors they currently
use in setting the rates that apply to new accounts, the Board believes
that competition for new accounts will create an incentive for issuers
to keep rates as low as possible.
In addition to commenting on the Board's general approach to
identifying factors relevant to the review under Sec. 226.59, several
commenters urged the Board to adopt special provisions for certain
types or classes of rate increases. First, consumer groups and one
state attorney general urged the Board to adopt a more stringent
approach for rate increases imposed between January 1, 2009 and
February 22, 2010. Consumer groups noted their concern about these rate
increases, which were imposed before many of the substantive
protections in the Credit Card Act became effective. Consumer groups
stated that, for portfolio-wide rate increases made between January 1,
2009 and February 22, 2010, the rule should include a presumption that
the rate must be reduced unless the issuer can demonstrate that the
same economic conditions that gave rise to the rate increase still
apply. For accounts on which the rate was increased due to an
individual consumer's risk profile, consumer groups stated that the
rate should be reduced to the original rate if the consumer's credit
score exceeds a certain threshold. The state attorney general urged the
Board to require issuers to reduce rates that were increased between
January 1, 2009 and February 22, 2010, if the review pursuant to Sec.
226.59 indicates that the cardholder has not violated the account terms
and has not experienced a decline in creditworthiness.
In contrast, one issuer commented that the review requirement
should be applied only to accounts where the rate was increased between
January 1, 2009 and February 22, 2010. This issuer stated that the
protections of the Credit Card Act render review of accounts on which a
rate increase was imposed after February 22, 2010 unnecessary, because
a consumer can stop using his or her card for new transactions if the
increased rate does not reflect market conditions or the consumer's
creditworthiness. In contrast, one other issuer urged the Board to
limit the review requirement to rate increases that occurred after
February 22, 2010.
The Board agrees with consumer group commenters that a more
prescriptive approach is appropriate for some rate increases imposed
prior to the February 22, 2010 effective date of the Credit Card Act's
substantive limitations on repricing. Accordingly, new Sec.
226.59(d)(2) sets forth a special rule for certain rate increases
imposed between January 1, 2009 and February 21, 2010. Section
226.59(d)(2) provides that, when conducting the first two reviews
required under Sec. 226.59(a) for rate increases imposed between
January 1, 2009 and February 21, 2010, an issuer must consider the
factors that it currently considers when determining the annual
percentage rates applicable to similar new credit card accounts, unless
the rate increase was based solely upon factors specific to the
consumer, such as a decline in the consumer's credit risk, the
consumer's delinquency or default, or a violation of the terms of the
account.
The Board understands that many card issuers raised rates across
their credit card portfolios following the enactment of the Credit Card
Act but prior to the effective date of many of the substantive
protections contained in the statute. Some of these rate increases that
occurred prior to February 22, 2010 resulted from issuers adjusting
their pricing practices to take into account the limitations that the
Credit Card Act imposed on rate increases on existing balances. The
Board is concerned that permitting card issuers to review the factors
on which the rate increase was based may not result in a meaningful
review in these circumstances, because the legal restrictions imposed
by the Credit Card Act have continuing application. In other words, if
a card issuer were to consider the factors on which the rate increase
was based--i.e., the enactment of the Credit Card Act's legal
restrictions regarding rate increases--it might determine that a rate
decrease is not required.
Accordingly, the Board believes that it is appropriate to require
card issuers to consider, for a brief transition period, the factors
that they use when setting the rates applicable to similar new accounts
for rate increases imposed prior to February 22, 2010, if the rate
increase was not based on consumer-specific factors. The Board believes
that this will permit existing cardholders whose rates were raised
based on general factors, including adjustments to reflect the new
limitations on repricing contained in the Credit Card Act, to benefit
from competition in the market for new customers. The Board further
believes that this rule will help to ensure that a meaningful review is
conducted for accounts repriced during the period from January 1, 2009
to February 21, 2010, and that rate increases are not maintained on
such accounts if new consumers with comparable characteristics would
qualify for an account with a lower rate or rates.
This requirement to consider the factors that an issuer evaluates
when setting the rates applicable to similar new accounts applies only
during the first two review periods following the effective date of
Sec. 226.59 and only for rate increases imposed between January 1,
2009 and February 21, 2010. The Board believes that it is generally
consistent with new TILA Section 148 to permit a card issuer to
evaluate the same factors on which it originally based the rate
increase that triggered the review requirement under Sec. 226.59.
Therefore, the Board is not requiring card issuers to indefinitely
review rate increases imposed between January 1, 2009 and February 21,
2010 that are not based solely on consumer-specific factors by
comparing the account to similar new credit card accounts. However, the
Board believes, for the reasons described above, that it is
appropriate, for the first two review periods, to require issuers to
consider the factors that they use when setting the rates applicable to
similar new accounts.
For rate increases that were based solely on consumer behavior or
other consumer-specific factors, the final rule applies one uniform
standard to rate increases imposed since January 1, 2009 and does not
distinguish between rate increases imposed prior to or after
[[Page 37557]]
February 22, 2010. The Board does not believe that the concerns
articulated above regarding portfolio-wide rate increases apply when
the rate increase was based solely upon the consumer's specific
behavior on the account or consumer-specific factors such as
creditworthiness. Consumer-specific factors, such as a consumer's
credit score or payment history on the account, can and do change over
time. Accordingly, the Board believes that a consideration of the
consumer-specific factors that the issuer considered when imposing the
rate increase would result in a meaningful review and, where
appropriate, rate decreases. In addition, this approach is consistent
with new TILA Section 148, which applies the same review obligations to
all rate increases imposed after January 1, 2009. The statute does not
distinguish between rate increases that occurred prior to February 22,
2010 and rate increases that occurred after the majority of the
substantive protections in the Credit Card Act took effect.
Accordingly, the Board believes that absent the special concerns raised
by portfolio-wide rate increases described above, it is not appropriate
to impose either more or less stringent requirements to rate increases
based on the date on which they were imposed.
Second, several commenters stated that the Board should adopt
special provisions for rate increases that were imposed as a penalty
for violations of the account terms. One consumer group commenter and
one state attorney general urged the Board to adopt special rules
regarding the removal of penalty rate increases. These commenters
indicated that the Board should require issuers to reduce any penalty
interest rate to a non-penalty rate if the account has experienced no
violations of terms for a period of six months. Two issuers commented
that the reevaluation requirement should not apply to accounts that are
subject to delinquency pricing for prospective purchases if those
accounts receive the benefit of a cure after a certain specified number
of on-time payments.
The final rule does not mandate that issuers reduce a penalty rate
to a non-penalty rate if there have been no violations of account terms
for six months. The Board notes that Sec. 226.55(b)(4) specifically
addresses a consumer's right to cure the application of an increased
rate, by making the first six minimum payments on time after the
effective date of the increase, only for rate increases that are the
result of a delinquency of more than 60 days. The Board acknowledged in
the supplementary information to the March 2010 Regulation Z Proposal
that it may appear to be an anomalous result that a consumer whose rate
is increased based on a payment received five days late cannot
automatically cure the application of the increased rate by making six
timely minimum payments, while a consumer whose account is more than 60
days delinquent has that right under Sec. 226.55(b)(4).
However, the Board continues to believe that this is the
appropriate reading of TILA Sections 148 and 171(b)(4), for two
reasons. First, a rate increase based on a consumer making a payment
that is five days late can only apply to new transactions. Therefore, a
consumer has the ability to mitigate the impact of the rate increase by
reducing the number of new transactions in which he or she engages. In
contrast, a creditor may increase the rate on both existing balances
and new transactions when a consumer makes a payment that is more than
60 days late. Second, new TILA Section 171(b)(4) expressly provides the
cure right implemented in Sec. 226.55(b)(4) only for payments that are
more than 60 days late. Congress could have, but did not, adopt an
analogous cure provision for delinquencies of less than 60 days. The
Board believes that for other violations of the account terms, Congress
intended for the review of factors in TILA Section 148 to be the means
by which rate decreases, when appropriate, are required.
Similarly, the Board is not adopting an exception to the review
requirements of Sec. 226.59 for an issuer that provides a cure after a
specified number of on-time payments or a specified number of months
without a violation of the account terms. The Board understands that
many issuers do provide such cure periods, even though it is not
generally required for penalty rates triggered by delinquencies of less
than 60 days or other contractual defaults. While the Board encourages
card issuers to offer or continue offering such cure periods, which
have a benefit to consumers, the Board believes that it would be
inconsistent with TILA Section 148 to provide an exception to Sec.
226.59 in those circumstances. The Board is concerned that providing
such an exception would permit issuers to maintain penalty rates on the
accounts of consumers whose creditworthiness improves, but who
occasionally commit minor violations of the account terms, such as a
payment that is one day late or a small over-the-limit transaction,
when in some cases those consumers might be eligible for a rate
decrease if the issuer reviewed the account in accordance with Sec.
226.59(a).
Proposed comment 59(d)-1 clarified the requirements of Sec.
226.59(d) in the circumstances where a creditor has recently changed
the factors that it evaluates in determining annual percentage rates
applicable to its credit card accounts. Proposed comment 59(d)-1 noted
that a creditor that complies with Sec. 226.59(a) by reviewing the
factors it currently considers in determining the annual percentage
rates applicable to its credit card accounts may change those factors
from time to time. The proposed comment clarified that when a creditor
changes the factors it considers in determining the annual percentage
rates applicable to its credit card accounts from time to time, it may
comply with Sec. 226.59(a) for a brief transition period by reviewing
the set of factors it considered immediately prior to the change in
factors, or may consider the new factors. The Board noted in the
supplementary information to the March 2010 Regulation Z Proposal that
this provision is intended to permit a card issuer to consider its
prior set of factors only for a brief period after it changes the
factors it uses to determine the rates applicable to new accounts, for
operational reasons.
The proposed comment set forth an example in which a creditor
changes the factors it uses to determine the rates applicable to new
credit card accounts on January 1, 2011. The creditor reviews the rates
applicable to its existing accounts that have been subject to a rate
increase pursuant to Sec. 226.59(a) on January 25, 2011. The proposed
comment stated that the creditor complies with Sec. 226.59(a) by
reviewing, at its option, either the factors that it considered on
December 31, 2010 when determining the rates applicable to its new
credit card accounts or the factors that it considers as of January 25,
2011.
In the proposal, the Board solicited comment on whether the rule
should establish an express safe harbor regarding what constitutes ``a
brief transition period'' following a change in factors. Issuers who
commented on the proposal suggested safe harbors of 60 or 90 days, to
provide issuers with adequate time to revise their written policies and
procedures and implement the new policy, while conducting ongoing rate
evaluations.
The Board believes that a transition period of 60 days following a
change in factors is appropriate and has revised comment 59(d)-1 to
expressly state that, for purposes of compliance with Sec. 226.59(d),
a transition period of 60 days from the change of factors constitutes a
brief transition period. The Board believes that it is important that
the transition period be brief, to ensure
[[Page 37558]]
that consumers' accounts are evaluated by using up-to-date factors. The
Board is otherwise adopting comment 59(d)-1 as proposed, with several
technical changes to conform to the requirement in Sec. 226.59(d) that
an issuer that considers its current factors must consider the factors
applicable to similar new accounts. In addition, the dates used in the
example in comment 59(d)-1 have been adjusted for consistency with
comment 59(c)-3.
Proposed comment 59(d)-2 clarified that the review of factors need
not result in existing accounts being subject to the same rates and
rate structure as a creditor imposes on new accounts, even if a
creditor evaluates the same factors for both types of accounts. For
example, the proposed comment noted that a creditor may offer variable
rates on new accounts that are computed by adding a margin that depends
on various factors to the value of the LIBOR index. The account that
the creditor is required to review pursuant to Sec. 226.59(a) may have
variable rates that were determined by adding a different margin,
depending on different factors, to a prime rate. In performing the
review required by Sec. 226.59(a), a creditor may review the factors
it uses to determine the rates applicable to its new accounts. If a
rate reduction is required, however, the proposed comment stated that
the creditor need not base the variable rate for the existing account
on the LIBOR index but may continue to use the prime rate. The amount
of the rate on the existing account after the reduction, however, as
determined by adding the prime rate and margin, must be comparable to
the rate, as determined by adding the margin and LIBOR, charged on a
new account (except for any promotional rate) for which the factors are
comparable. The Board received no significant comments on proposed
comment 59(d)-2, which is adopted generally as proposed, with several
technical amendments for clarity. In addition, for consistency with the
requirements of Sec. 226.55(b)(2), the reference to the prime rate has
been changed to refer to a published prime rate. See comment 55(b)(2)-2
for additional guidance on when an index is deemed to be outside the
card issuer's control.
59(e) Rate Increases Subject to Sec. 226.55(b)(4)
Proposed Sec. 226.59(e) set forth a special timing rule for card
issuers that increase a rate pursuant to Sec. 226.55(b)(4) based on
the card issuer not receiving the consumer's required minimum periodic
payment within 60 days after the due date for that payment. In such
circumstances, Sec. 226.55(b)(4)(ii) requires a card issuer to reduce
the annual percentage rate to the rate that applied prior to the
increase if the consumer makes the first six consecutive required
minimum periodic payments on time after the effective date of the
increase.
Proposed Sec. 226.59(e) provided that a card issuer is not
required to review factors in accordance with Sec. 226.59(a) prior to
the sixth payment due date following the effective date of the rate
increase when the rate increase results from a consumer's account
becoming more than 60 days delinquent. At that time, if the rate has
not been decreased based on the consumer making six consecutive timely
minimum payments, proposed Sec. 226.59(e) required an issuer to begin
performing a review of factors for subsequent six-month periods.
Three issuers stated that the review requirement should not apply
to rate increases imposed due to the consumer's failure to make a
minimum payment within 60 days of the due date for that payment. These
issuers suggested that new TILA Section 171(b)(4)(B), as implemented in
Sec. 226.55(b)(4)(ii), is the exclusive mechanism provided by Congress
for obtaining a rate decrease if the increase is based on a default of
more than 60 days. Consumer groups, on the other hand, supported
proposed Sec. 226.59(e) and the requirement that if the consumer fails
to qualify for the cure under Sec. 226.55(b)(4)(ii) by making six
months of on-time payments, the reevaluation requirements in Sec.
226.59 begin to apply.
The Board is adopting Sec. 226.59(e) generally as proposed, with
several technical changes for clarity. The Board believes that it is
appropriate that a creditor review a consumer's account under Sec.
226.59(a) after the statutory cure right expires if the consumer's rate
has not been reduced. A consumer's credit risk or other factors might
change after the cure period expires, warranting a rate reduction at
that time. The Board further notes that it would create an anomalous
result if new TILA Section 148 provided less protection in respect of a
rate increase applicable to both existing balances and new transactions
than for rate increases that are applicable only to new transactions.
59(f) Termination of Obligation To Review Factors
TILA Section 148 does not expressly state when the obligation to
review factors and determine whether to reduce the annual percentage
rate applicable to a consumer's credit card account terminates.
Proposed Sec. 226.59(f)(1) and (f)(2) provided that the obligation to
review factors under Sec. 226.59(a) ceases to apply if the issuer
reduces the annual percentage rate to a rate equal to or less than the
rate applicable immediately prior to the increase, or, if the rate
applicable immediately prior to the increase was a variable rate, to a
rate equal to or less than a variable rate determined by the same index
and margin that applied prior the increase. Commenters generally
supported this aspect of the proposal. Accordingly, Sec. 226.59(f)(1)
and (f)(2) are adopted as proposed.
In the supplementary information to the March 2010 Regulation Z
Proposal, the Board noted that proposed Sec. 226.59 could require card
issuers to review the annual percentage rates applicable to certain
credit card accounts for an extended period of time. Under the proposed
rule, an issuer would be required to continue to review a consumer's
account each six months unless and until the rate is reduced to the
rate in effect prior to the increase. In some circumstances, this could
mean that the review required by Sec. 226.59(a) would need to occur
each six months for an indefinite period. The Board solicited comment
on whether the obligation to review the rate applicable to a consumer's
account should terminate after some specific time period elapses
following the initial increase, for example after five years. The Board
also solicited comment on whether there is significant benefit to
consumers from requiring card issuers to continue reviewing factors
under Sec. 226.59 even after an extended period of time.
Many issuers and several industry trade associations commented on
proposed Sec. 226.59(f). Industry commenters stated that the Board
should not require that rate increases be reviewed indefinitely, and
indicated that requiring periodic reviews for an indefinite period
would increase the cost and complexity associated with compliance and
compliance examinations. Industry commenters also indicated that the
consumer benefit of requiring rate reviews to continue indefinitely is
questionable, particularly given that the costs associated with ongoing
reviews would be passed on to consumers in the form of higher fees and
rates and more closed accounts. Most issuers requested a specific time
limit for the review process. The time periods suggested by commenters
ranged from one year to five years after the rate increase. Most
issuers advocated a review period of two or three years. Other industry
commenters stated that the obligation to review the account should
terminate on the date
[[Page 37559]]
when the account is at the same pricing offered to new accounts with
comparable risk profiles.
Consumer groups, on the other hand, urged the Board not to limit
the review obligation under Sec. 226.59 to five years or any other
time frame. These commenters noted that accounts are constantly
reviewed as a matter of business practice to determine whether to
increase a consumer's rate. These commenters also noted that changes in
economic conditions or a consumer's creditworthiness can occur over an
extended period, in some cases greater than five years, and that the
Credit Card Act intended for consumers' accounts to be reevaluated when
such factors change regardless of how much time has elapsed since the
initial rate increase.
The Board is not adopting a specific time limit for the review
obligation under Sec. 226.59. New TILA Section 148 does not expressly
create such a time limit. The Board believes that creating such a time
limit is not appropriate, because in some cases it may be beneficial to
a consumer to have his or her rate reevaluated when market conditions
change or the consumer's creditworthiness improves, even if a number of
years have elapsed since the rate increase initially giving rise to the
review requirement. The Board also believes that many issuers will
implement automated systems to perform the periodic reevaluation of
rate increases and, accordingly, once these systems are in place, there
should not be undue burden associated with the ongoing review of
accounts subject to Sec. 226.59.
The Board also believes that it is inappropriate for the review
requirement to automatically terminate when the account is at the same
pricing offered to new accounts with comparable risk profiles. Issuers
that perform the review under Sec. 226.59(a) by considering the
factors they use to determine the rates applicable to new accounts
under Sec. 226.59(d) will generally be required to adjust the rate
based on the review so that it is comparable to the rate offered to
similarly situated new consumers. Therefore, if Sec. 226.59(f)
permitted the review requirement to terminate when the account is at
the same pricing offered to new accounts with comparable risk profiles,
a consumer would only receive one six-month review before the
requirement terminated. The Board does not believe that this is
consistent with the intent of new TILA Section 148, which contemplates
ongoing reviews.
The Board acknowledges that this may create seemingly anomalous
results. For example, in year one Consumer A may open a credit card
account with a rate applicable to purchases of 10%. Due to a change in
market conditions, that consumer's rate may be increased in year three
to 15%, to the extent permitted by Sec. 226.55. A similarly situated
consumer, Consumer B, who applies for credit in year three may also
receive a rate on purchases of 15%. The issuer would be required to
perform periodic reviews of the rate increase on Consumer A's account.
However, Consumer B's account, which also has a 15% rate on purchases,
would not be subject to the review requirement. However, the Board
believes that this is consistent with new TILA Section 148, which
requires that periodic reviews be conducted only if there is a rate
increase. Consumer A applied for an account with a 10% rate, so the
rate of 15% represents an increase over the initial terms to which the
consumer agreed, notwithstanding the fact that Consumer A would receive
a 15% rate if applying for a new credit card with the issuer. Consumer
B, on the other hand, applied for and received a card with a rate of
15%.
One issuer asked the Board for clarification regarding the
applicability of Sec. 226.59(f) to promotional rates that are
increased due to a consumer's violation of the account terms. This
commenter stated that if a promotional rate has been increased to a
penalty rate \61\ and the promotional period has subsequently expired,
a card issuer should be required to review the penalty rate increase
only until the rate is reduced to the standard rate that would have
applied upon expiration of the promotion. Other commenters asked the
Board more generally to exempt the loss of promotional rates due to
violations of the account terms from the requirements of Sec. 226.59.
Some of these commenters noted particular concern regarding loss of
long-term promotional rates between January 1, 2009 and February 22,
2010, which occurred before the limitations in Sec. 226.55 on the loss
of a promotional rate became effective.
---------------------------------------------------------------------------
\61\ See Sec. 226.55 for limitations on the revocation of
promotional rates.
---------------------------------------------------------------------------
The final rule does not exempt the loss of a promotional rate from
the requirements of Sec. 226.59. The Board believes that such an
exemption would be inappropriate, for several reasons. First, new TILA
Section 148 covers all rate increases, including those due to changes
in the consumer's creditworthiness or other factors. The Board believes
that a loss of a promotional rate due to a violation of the contract
terms is properly characterized as a rate increase based on the
consumer's creditworthiness or other factors relevant to that
individual consumer and therefore is covered by the statute. In
addition, it would be difficult to distinguish by regulation between
promotional rates and other types of stepped-rate arrangements. For
example, an issuer might offer a consumer a 5% rate on purchases for 18
months, after which the rate on purchases will increase to 15%. In
contrast, an issuer might offer a consumer a 10% rate on purchases for
year one, a 15% rate for year two, and a 20% rate thereafter. It is
difficult to identify a principled rationale for distinguishing between
these scenarios, and the Board believes that it is appropriate for a
review requirement to apply whenever a temporary reduced rate is
increased due to a consumer's violation of the contract terms.
The Board also believes that coverage of the loss of a promotional
rate is consistent with the purposes of new TILA Section 148. In the
case of a long-term promotional rate lasting several years, a consumer
might commit a minor violation of the account terms, such as a payment
that is one day late or a transaction that exceeds the credit limit by
a small amount, resulting in the revocation of that promotional rate to
the extent permitted by Sec. 226.55. However, the consumer's
creditworthiness might improve over the course of the remaining
promotional period, such that it is appropriate to reinstate the
promotional rate or otherwise decrease the rate applicable to the
consumer's account for the remainder of the promotional period.
However, the Board does believe that it is appropriate to clarify
the duration of the review requirement for temporary rates that have
expired. Accordingly, the Board is adopting new comment 59(f)-1.i to
clarify when the review requirement terminates under Sec. 226.59(f).
New comment 59(f)-1.i states that if an annual percentage rate is
increased due to revocation of a temporary rate, Sec. 226.59(a)
requires that the card issuer periodically review the increased rate.
The comment clarifies that in contrast, if the rate increase results
from the expiration of a temporary rate previously disclosed in
accordance with Sec. 226.9(c)(2)(v)(B), the review requirements in
Sec. 226.59(a) do not apply. If a temporary rate is revoked such that
the requirements of Sec. 226.59(a) apply, Sec. 226.59(f) permits an
issuer to terminate the review of the rate increase if and when the
applicable rate is the same as the rate that would have applied if the
increase had not occurred.
[[Page 37560]]
Comment 59(f)-1.ii sets forth several illustrative examples.
The Board also is adopting a new comment 9(c)(2)(v)-12 to clarify
the relationship between Sec. 226.9(c)(2)(v)(B) and Sec. 226.59 when
a temporary rate has been revoked but subsequently is reinstated based
on an issuer's review. The comment notes that Sec. 226.59 requires a
card issuer to review rate increases imposed due to the revocation of a
temporary rate. In some circumstances, Sec. 226.59 may require an
issuer to reinstate a reduced temporary rate based on that review. If,
based on a review required by Sec. 226.59, a creditor reinstates a
temporary rate that had been revoked, the comment states that a card
issuer is not required to provide an additional notice to the consumer
when the reinstated temporary rate expires, if the card issuer provided
the disclosures required by Sec. 226.9(c)(2)(v)(B) prior to the
original commencement of the temporary rate. The comment sets forth an
illustrative example.
The Board believes that a card issuer that has provided disclosures
of a temporary rate pursuant to Sec. 226.9(c)(2)(v)(B) prior to
commencement of the promotion has already notified the consumer of the
length of the promotional period and the rate that will apply at the
end of the promotional period. Accordingly, the Board does not believe
that an additional notice is necessary.
59(g) Acquired Accounts
Proposed Sec. 226.59(g) addressed existing credit card accounts
acquired by a card issuer. Proposed Sec. 226.59(g)(1) set forth the
general rule that, except as provided in Sec. 226.59(g)(2), the
obligation to review changes in factors in Sec. 226.59(a) applies even
to such acquired accounts. Consistent with the rule in Sec. 226.59(d),
the proposal for acquired accounts permitted a card issuer to review
either the factors that the original issuer considered when imposing
the rate increase or the factors that the acquiring card issuer
currently considers in determining the annual percentage rates
applicable to its credit card accounts. The Board noted that in some
cases, a card issuer may not know whether accounts that it acquired
were subject to a rate increase by the prior issuer. In these cases,
the proposal permitted a card issuer complying with Sec. 226.59(g)(1)
to review factors in accordance with Sec. 226.59(a) for all of its
acquired accounts rather than seeking to identify just those accounts
to which a rate increase was applied.
Proposed Sec. 226.59(g)(2) set forth an alternate means for
compliance with Sec. 226.59 for acquired accounts. Proposed Sec.
226.59(g)(2) applied if a card issuer reviews all of the credit card
accounts it acquires, as soon as reasonably practicable after the
acquisition of such accounts, in accordance with the factors that it
currently uses in determining the rates applicable to its credit card
accounts. Following the card issuer's initial review of its acquired
accounts, proposed Sec. 226.59(g)(2)(i) provided that the card issuer
generally must review changes in factors for those acquired accounts in
accordance with Sec. 226.59(a) only for rate increases imposed as a
result of that review. Similarly, proposed Sec. 226.59(g)(2)(ii)
provided that the card issuer generally is not required to review
changes in factors in accordance with Sec. 226.59(a) for any rate
increases made prior to the card issuer's acquisition of such accounts.
Consumer groups supported the coverage of acquired accounts in
Sec. 226.59(g)(1), but opposed the alternate means of compliance set
forth in proposed Sec. 226.59(g)(2). These commenters stated that an
issuer should be able to obtain information regarding past rate
increases when it acquires a portfolio of accounts. These commenters
believe that the rule should encourage the retention of information
about rate increases rather than creating an alternative means of
compliance.
One issuer opposed the coverage of acquired accounts in Sec.
226.59(g)(1). This commenter stated that imposing requirements to
reevaluate the rates on acquired accounts could have the unintended
consequence of chilling the market for portfolio acquisitions. The
commenter noted that disclosure of the information necessary to enable
an acquiring issuer to conduct reevaluations of rate increases in
accordance with Sec. 226.59 could require the selling issuer to reveal
proprietary information to a competitor. This commenter stated that the
alternative means of compliance in proposed Sec. 226.59(g)(2) is not
sufficient to address the issue, because it could result in rate
decrease after acquisition. The issuer urged the Board to clarify that
accounts acquired from an unaffiliated issuer may be treated like new
accounts and rates do not need to be evaluated unless and until the
acquiring issuer increases the rate.
Other industry commenters supported the alternative means of
compliance in proposed Sec. 226.59(g)(2). These commenters stated that
it is unlikely that issuers will have sufficient information about the
selling issuer's pricing practices to perform the evaluation based on
the factors used by the seller. These commenters noted that in many
cases, accounts are being sold because of problems with the selling
issuer's underwriting. In addition to being burdensome, these
commenters stated that compelling the acquirer to rely on the same
factors used by the seller could have the anomalous result of requiring
the acquirer to rely on flawed underwriting models or factors.
In addition to the general rule for the alternate means of
compliance set forth in Sec. 226.59(g)(2)(i) and (g)(2)(ii), the Board
proposed a new Sec. 226.59(g)(2)(iii), which stated that if as a
result of the card issuer's review, an account is subject to, or
continues to be subject to, an increased rate as a penalty or due to
the consumer's delinquency or default, the requirements to review the
account under Sec. 226.59(a) would apply. The Board noted that penalty
rates are often much higher than the standard rates that apply to
consumers' credit card accounts and that the imposition of a penalty
rate for an extended period of time can be very costly to a consumer.
Accordingly, the requirements to review accounts under proposed Sec.
226.59(a) applied if a card issuer imposes, or continues to impose, a
penalty rate on an acquired account. Proposed comment 59(g)(2)-2 set
forth an example of the application of Sec. 226.59(g)(2)(iii) when a
penalty rate is imposed on an acquired account. The Board received no
comments on this aspect of the proposal.
The Board is adopting Sec. 226.59(g) generally as proposed, with
several technical and wording changes to conform to the requirements of
Sec. 226.59(a) and for clarity. Section 226.59(g)(1) has been revised
from the proposal to state that, except as provided in Sec.
226.59(g)(2), Sec. 226.59 applies to credit card accounts that have
been acquired by the card issuer from another card issuer. Accordingly,
an issuer that complies with Sec. 226.59(g)(1) is subject to the
guidance regarding factors in Sec. 226.59(d). Section 226.59(g)(1)
clarifies, consistent with the proposal, that a card issuer that
complies with Sec. 226.59 by reviewing the factors described in
paragraph (d)(1)(i) must review the factors considered by the card
issuer from which it acquired the accounts in connection with the rate
increase. However, consistent with Sec. 226.59(d)(1)(ii), an issuer
may, in the alternative, consider the factors that the issuer currently
considers when determining the rates applicable to similar new credit
card accounts. The Board continues to believe that permitting an issuer
to reevaluate acquired accounts using its own factors is appropriate
because a card issuer may
[[Page 37561]]
not have full information regarding rate increases imposed by the prior
issuer.
The Board notes that the special rule for certain rate increases
imposed between January 1, 2009 and February 21, 2010, which is set
forth in Sec. 226.59(d)(2), generally applies to acquired accounts.
Accordingly, the Board is adopting a new comment 59(g)(1)-1 to clarify
the application of Sec. 226.59(d)(2) to acquired accounts. The comment
states that if a card issuer acquires accounts on which a rate increase
was imposed between January 1, 2009 and February 21, 2010 that was not
based solely upon consumer-specific factors, the acquiring card issuer
must consider the factors that it currently considers when determining
the annual percentage rates applicable to similar new credit card
accounts, if it conducts either or both of the first two reviews of
such accounts that are required after August 22, 2010 under Sec.
226.59(a).
For example, assume that card issuer A increased the rates
applicable to all of its credit card accounts from 15% to 20%, not due
to consumer-specific factors, on June 1, 2009. Assume further that card
issuer B acquired card issuer A's portfolio of accounts on January 1,
2010. When conducting the first two reviews of such accounts after
August 22, 2010, card issuer B must consider the factors that it
currently considers when determining the annual percentage rates
applicable to similar new credit card accounts.
In the alternative, assume that card issuer A increased the rates
applicable to all of its credit card accounts under an open-end (not
home-secured) consumer credit plan, not due to consumer-specific
factors, on June 1, 2009. Assume that card issuer A conducts the first
two reviews of such accounts in accordance with Sec. 226.59(a) and
(d)(2) on January 1, 2011 and July 1, 2011 but, based on those reviews,
is not required to decrease the rate. Assume that card issuer B
acquires card issuer A's portfolio of accounts on August 1, 2011.
Because the first two reviews of the acquired accounts were completed
by card issuer A, Sec. 226.59(d)(2) does not apply to subsequent rate
reevaluations conducted by card issuer B.
The final rule retains the alternative means of compliance for
acquired accounts in Sec. 226.59(g)(2). The Board believes that this
alternative means of compliance is more appropriate than an exception
for acquired accounts, because coverage of acquired accounts is
consistent with the purposes of new TILA Section 148. If a card issuer
reviews all of the accounts that it acquires in accordance with the
factors that it currently uses in determining the rates applicable to
its new credit card accounts, this will ensure that acquired accounts
are subject to the same rates that would apply if the consumer opened a
new credit card account with the acquiring issuer. The Board believes
that this will promote fair pricing of acquired accounts. If the card
issuer raises the rate applicable to a consumer's account as a result
of that review, it will have full information about the rate that
applied prior to that increase and therefore the requirements of Sec.
226.59(a) would apply with regard to that rate increase.
The Board notes that any rate increases the acquiring card issuer
makes as a result of its review pursuant to Sec. 226.59(g)(2) are
subject to the substantive and notice requirements regarding rate
increases in Sec. Sec. 226.9 and 226.55. Consistent with the proposal,
Sec. 226.59(g)(2) of the final rule contains an express cross-
reference to those sections.
Proposed comments 59(g)(2)-1 and 59(g)(2)-2 set forth examples of
the alternative means of compliance in Sec. 226.59(g)(2). The Board
received no significant comment on these examples, which are adopted
generally as proposed, with several technical changes to conform to the
requirements of Sec. 226.59(a) of the final rule.
In the proposal, the Board solicited comment on whether additional
guidance is necessary regarding the requirement in Sec. 226.59(g)(2)
that the review of acquired accounts occur ``as soon as reasonably
practicable'' after the acquisition of those accounts. One issuer
commented that ``as soon as reasonably practicable'' should permit for
a transition period of up to one year. This issuer stated that acquired
accounts often have differences in systems, must be migrated to new
vendors and processors, and must be adapted to the acquiring issuer's
underwriting policies. One other issuer stated that the time in which
the acquirer must conduct a reevaluation should be measured from the
date of conversion to the acquiring issuer's platform, not the date of
acquisition.
The Board understands that converting newly acquired accounts to
the acquiring issuer's platform may be a time-consuming process, for
the reasons noted by commenters. However, the Board believes that for
consistency with new TILA Section 148, issuers using the alternate
means of compliance must conduct their initial review no later than six
months after the acquisition of a new portfolio. If this were not the
case, the alternative means of compliance could in effect delay the
review of a consumer's account for longer than the period established
by statute. Accordingly, Sec. 226.59(g)(2) of the final rule requires
that an issuer using the alternative means of compliance review the
accounts it acquires not later than six months after their acquisition.
59(h) Exceptions
March 2010 Regulation Z Proposal
The Board proposed two exceptions to the requirements of Sec.
226.59, using its authority under TILA Section 105(a), which were set
forth in proposed Sec. 226.59(h). The first proposed exception applied
to rate increases imposed when the requirement to reduce rates pursuant
to the Servicemembers Civil Relief Act (SCRA), 50 U.S.C. app. 501 et
seq., ceases to apply. Specifically, 50 U.S.C. app. 527(a)(1) provides
that ``[a]n obligation or liability bearing interest at a rate in
excess of 6 percent per year that is incurred by a servicemember, or
the servicemember and the servicemember's spouse jointly, before the
servicemember enters military service shall not bear interest at a rate
in excess of 6 percent. * * * '' With respect to credit card accounts,
this restriction applies during the period of military service. See 50
U.S.C. app. 527(a)(1)(B).\62\ Proposed Sec. 226.59(h)(1) stated that
the requirements of Sec. 226.59 do not apply to increases in an annual
percentage rate that was previously decreased pursuant to 50 U.S.C.
app. 527, provided that such a rate increase is made in accordance with
Sec. 226.55(b)(6). Section 226.55(b)(6) provides that the rate may be
increased when the SCRA ceases to apply, but that the increased rate
may not exceed the rate that applied prior to the decrease.
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\62\ 50 U.S.C. app. 527(a)(1)(B) applies to obligations or
liabilities that do not consist of a mortgage, trust deed, or other
security in the nature of a mortgage.
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The second proposed exception applied to charged off accounts.
Proposed Sec. 226.59(h)(2) provided that the requirements of Sec.
226.59 do not apply to accounts that the card issuer has charged off in
accordance with loan-loss provisions. For safety and soundness reasons,
card issuers charge off accounts that have serious delinquencies,
typically of 180 days or six months. For such accounts, full payment is
generally due immediately.
Commenters that addressed proposed Sec. 226.59(h), including
several issuers and a consumer group, supported these exceptions.
Accordingly, the Board is
[[Page 37562]]
adopting Sec. 226.59(h)(1) and (h)(2) as proposed.
Other Exceptions
Industry commenters suggested that the Board adopt several
additional exceptions to the reevaluation requirements of Sec. 226.59.
For example, one commenter urged the Board to adopt an exception from
the review requirements for accounts with zero balances, even if there
is subsequent use of the account. A second commenter requested an
exception for rate increases that were not applied to outstanding
balances or where the cardholder was given a right to opt out of the
increase. A third comment letter stated that the final rule should
include an exception for rate increases that were made for market
conditions if a subsequent rate increase has been imposed on the
account due to a violation of the account terms by the consumer.
The Board does not believe that these exceptions would be
appropriate. The Board notes that new TILA Section 148 is intended to
have a broad scope and to require periodic reviews of all types of rate
increases, regardless of whether those increases can apply only to new
transactions or to existing balances. Furthermore, the Board believes
that TILA Section 148 requires that periodic reviews occur even if a
consumer's account is subject to multiple or successive rate increases.
In this case, the Board notes that an issuer could comply with Sec.
226.59(a) and (d) by performing combined reviews of the increased rate
or rates based on the factors it considers when determining the rates
applicable to its new credit card accounts (subject to the timing rule
in Sec. 226.59(c)).
Appendix G--Open-End Model Forms and Clauses
For consistency with the substantive limitations in proposed Sec.
226.52(b), the Board has amended the model language in Appendix G for
the disclosure of late payment fees, over-the-limit fees, and returned
payment fees.
Samples G-10(B) & G-10(C)--Applications and Solicitations Samples
(Credit Cards) (Sec. 226.5a(b))
Sample G-10(E)--Applications and Solicitations Sample (Charge Cards)
(Sec. 226.5a(b))
Samples G-17(B) & G-17(C)--Account-Opening Samples (Sec. 226.6(b)(2))
Sections 226.5a and 226.6 require creditors to disclose late
payment fees, over-the-limit fees, and returned payment fees in,
respectively, the application and solicitation disclosures and the
account-opening disclosures. See Sec. Sec. 226.5a(b)(9), (b)(10),
(b)(12); Sec. Sec. 226.6(b)(2)(viii), (b)(2)(ix), (b)(2)(xi). Model
language is provided in Samples G-10(B), G-10(C), and G-10(E) and in G-
17(B) and G-17(C). The model language generally reflects current fee
practices by disclosing specific amounts for over-the-limit and
returned payment fees, while disclosing a lower late payment fee if the
account balance is less than or equal to a specified amount ($1,000 in
the model forms) and a higher fee if the account balance is more than
that amount.\63\
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\63\ Specifically, the model language in Samples G-10(B), G-
10(C), G-17(B), and G-17(C) disclosed the late payment fee as
follows: ``$29 if balance is less than or equal to $1,000; $35 if
balance is more than $1,000.''
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As discussed above, Sec. 226.52(b) establishes new substantive
restrictions on the amount of credit card penalty fees, including late
payment fees, over-the-limit fees, and returned payment fees.
Accordingly, for consistency with Sec. 226.52(b), the Board has
amended the model language in Samples G-10(B) and G-10(C) and in G-
17(B) and G-17(C) to disclose late payment fees, over-the-limit fees,
and returned payment fees as ``up to $35.'' In this model language, $35
represents the maximum fee under the safe harbors in Sec.
226.52(b)(1)(ii)(A)-(B). Card issuers that set their fees based on a
cost analysis pursuant to Sec. 226.52(b)(1)(i) would instead disclose
the dollar amount that represents a reasonable proportion of the total
costs incurred by the issuer as a result of the type of violation.
However, consistent with the safe harbor for charge cards in Sec.
226.52(b)(1)(ii)(C), the Board has amended G-10(E) to disclose the late
payment fee as: ``Up to $35. If you do not pay for two consecutive
billing cycles, your fee will be $35 or 3% of the past due amount,
whichever is greater.''
The Board recognizes that, because the maximum safe harbor fee in
Sec. 226.52(b)(1)(ii)(B) only applies when a violation occurs again
during the six billing cycles following the initial violation, this
disclosure overstates the amount of the penalty fee that will be
imposed for the initial violation. For example, an issuer utilizing the
safe harbors in Sec. 226.52(b)(1)(ii)(A)-(B) would disclose its late
payment fee as ``up to $35,'' even though Sec. 226.52(b)(1)(i)(A)
would only permit the card issuer to impose a $25 fee for the first
late payment. Nevertheless, a consumer who incorrectly assumes that a
$35 penalty fee will be imposed for all violations will not be harmed
if--when a violation actually occurs--a lower penalty fee is imposed.
Furthermore, disclosing the highest possible penalty fee under the safe
harbors in Sec. 226.52(b)(1)(ii)(A)-(B) may deter some consumers from
violating the terms or other requirements of an account, which would be
consistent with new TILA Section 149(c)(2).
Commenters generally supported this approach, although some
expressed concern that consumers would receive incomplete information
about how penalty fees are calculated. The Board shares this concern.
However, it is unclear whether providing additional detail would
increase the possibility of consumer confusion without substantially
improving the accuracy of the model disclosures. Nevertheless, the
Board notes that an ``up to'' disclosure is not the only means of
accurately disclosing penalty fees in a manner that is substantially
similar to the applicable tables in G-10 or G-17 of appendix G.
For example, as discussed above with respect to Sec. 226.7,
penalty fees may be accurately disclosed as a range under certain
circumstances. Specifically, disclosing the late payment fee as a range
from $25 to $35 would be accurate if the issuer utilizes the safe
harbors in Sec. 226.52(b)(1)(ii)(A)-(B) and the issuer's minimum
payment formula set a minimum payment amount of $25 or higher.
Furthermore, because the dollar amount associated with a returned
payment for purposes of Sec. 226.52(b)(2)(i) is also the relevant
minimum payment, the same range could also accurately describe the
returned payment fee in these circumstances. Similarly, a card issuer
that complies with the safe harbors in Sec. 226.52(b)(1)(ii)(A)-(B)
could accurately disclose its over-the-limit fee as a range from $25 to
$35 if the issuer chooses not to impose an over-the-limit fee when the
total amount of credit extended in excess of the credit limit is less
than $25. In addition, a card issuer could use the same range to
accurately describe a declined access check fee if the issuer chose not
to impose a fee unless the amount of the access check is $25 or higher.
The Board also notes that, for purposes of Sec. Sec. 226.5a and
226.6, a card issuer is not precluded from disclosing both the $25 and
$35 safe harbor amounts in Sec. 226.52(b)(1)(ii)(A)-(B), provided the
disclosure accurately describes the circumstances under which each
amount may be imposed. Furthermore, as noted above, the Board
previously adopted model language disclosing a lower late payment fee
if the account balance is less than or equal to a specified amount and
a higher fee if the account balance is more than that amount. This
model language reflected the Board's understanding of fee practices
prior to enactment of the
[[Page 37563]]
Credit Card Act in general and new TILA Sec. 149 in particular. The
Board has not included similar model language in this final rule
because it is unclear whether card issuers will continue to impose
different penalty fee amounts based on the account balance. However, a
card issuer that does so consistent with the limitations in Sec.
226.52(b) may disclose the amounts in the applicable tables consistent
with Sec. Sec. 226.5a and 226.6.
Samples G-18(B), G-18(D), G-18(F), and G-18(G)--Periodic Statement
Forms (Sec. 226.7(b))
As noted above, Sec. 226.7(b)(11)(i)(B) requires card issuers to
disclose the amount of any late payment fee and any increased rate that
may be imposed on the account as a result of a late payment. Currently,
the model language in Sample G-18(B) states: ``Late Payment Warning: If
we do not receive your minimum payment by the date listed above, you
may have to pay a $35 late fee and your APRs may be increased up to the
Penalty APR of 28.99%.'' This language is restated in Samples G-18(D),
G-18(F), and G-18(G). Consistent with the amendments to Samples G-
10(B), G-10(C), G-17(B), and G-17(C), the Board is amending the late
payment warning in Samples G-18(B), G-18(D), G-18(F), and G-18(G) to
read as follows: ``If we do not receive your minimum payment by the
date listed above, you may have to pay a late fee of up to $35 and your
APRs may be increased up to the Penalty APR of 28.99%.'' \64\
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\64\ The Board notes that no model language is required for
charge card accounts because Sec. 226.7(b)(11) does not apply to
such accounts. See Sec. 226.7(b)(11)(ii)(A).
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Sample G-21--Change-in-Terms Sample (Increase in Fees) (Sec.
226.9(c)(2))
The Board is amending the model language in Sample G-21 disclosing
a change in a late payment fee for consistency with the amendments to
Samples G-10(B), G-10(C), G-17(B), and G-17(C).
Model Form G-25(A)--Consent Form for Over-the-Limit Transactions (Sec.
226.56)
Model Form G-25(B)--Revocation Notice for Periodic Statement Regarding
Over-the-Limit Transactions (Sec. 226.56)
As noted above, Sec. 226.56(e)(1)(i) provides that, in the notice
informing consumers that they must affirmatively consent (or opt in) to
the card issuer's payment of over-the-limit transactions, the card
issuer must disclose the dollar amount of any fees or charges assessed
by the issuer on a consumer's account for an over-the-limit
transaction. Model language is provided in Model Forms G-25(A) and G-
25(B). For consistency with Sec. 226.52(b) and the amendments to
Samples G-10(B), G-10(C), G-17(B), and G-17(C) discussed above, the
Board is revising Model Forms G-25(A) and G-25(B) to disclose the
amount of the over-the-limit fee as ``up to $35.''
V. Mandatory Compliance Dates
A. General mandatory compliance date. The consumer protections in
new TILA Sections 148 and 149 go into effect on August 22, 2010. See
new TILA Section 148(d); new TILA Section 149(b). Accordingly, the
final rule is effective August 22, 2010. In addition, the mandatory
compliance date for the amendments to Sec. Sec. 226.9, 226.52, and
226.59 and the amendments to Model Forms G-20 and G-22 is August 22,
2010. The amendments to the change-in-terms disclosures in Model Forms
G-18(F) and G-18(G) also have a mandatory compliance date of August 22,
2010. These amendments implement the statutory requirements in new TILA
Sections 148 and 149.
B. Prospective application of new rules. The final rule is
prospective in application. The following paragraphs set forth
additional guidance and examples as to how a creditor must comply with
the final rule by the relevant mandatory compliance date.
C. Special mandatory compliance date for amendments to penalty fee
disclosures. The mandatory compliance date for the amendments to the
penalty fee disclosures in Sec. Sec. 226.5a, 226.6, 226.7, and 226.56
and in Model Forms G-10(B), G-10(C), G-10(E), G-17(B), G-17(C), G-
18(B), G-18(D), G-18(F), G-18(G), G-21, G-25(A), and G-25(B) is
December 1, 2010. Although card issuers may not charge late payment
fees, returned payment fees, or over-the-limit fees that are
inconsistent with Sec. 226.52(b) after August 22, 2010, the Board
understands that it may not be possible for some card issuers to revise
the disclosures for such fees prior to August 22. Accordingly, the
Board has established a mandatory compliance date of December 1, 2010
for the amendments to the penalty fee disclosure requirements.
Until December 1, 2010, a card issuer complies with Sec. Sec.
226.5a, 226.6, 226.7, and 226.56 if it discloses an amount for a late
payment fee, returned payment fee, over-the-limit fee, or other penalty
fee that exceeds the amount permitted by Sec. 226.52(b). For example,
a card issuer that imposed a late payment fee of $39 prior to August
22, 2010 may continue to disclose the amount of its late payment fee as
$39 until December 1, 2010, even if--consistent with the safe harbors
in Sec. 226.52(b)(1)(ii)--the card issuer does not actually impose a
fee that exceeds $35. However, the card issuer may begin to disclose
the amount of the late payment fee as ``up to $35'' or otherwise comply
with the amendments to Sec. Sec. 226.5a, 226.6, 226.7, and 226.56
prior to December 1, 2010. Additional guidance and examples as to how a
creditor must comply with the final rule are provided below.
The Board recognizes that, for a period of time, some consumers may
receive disclosures containing fee amounts that are inconsistent with
Sec. 226.52(b). However, a consumer who is told, for example, that a
$39 penalty fee will be imposed for late payments will not be harmed
if--when he or she pays late--a lower penalty fee is imposed.
D. Tabular summaries that accompany applications or solicitations
(Sec. 226.5a). Credit and charge card applications provided or made
available to consumers on or after December 1, 2010 must comply with
the final rule. For example, if a direct-mail application or
solicitation is mailed to a consumer on November 30, 2010, it is not
required to comply with the new requirements, even if the consumer does
not receive it until December 7, 2010. If a direct-mail application or
solicitation is mailed to consumers on or after December 1, 2010,
however, it must comply with the final rule. If a card issuer makes an
application or solicitation available to the general public, such as
``take-one'' applications, any new applications or solicitations issued
by the card issuer on or after December 1, 2010 must comply with the
new rule. However, if a card issuer issues an application or
solicitation by making it available to the public prior to December 1,
2010, for example by restocking an in-store display of ``take-one''
applications on November 15, 2010, those applications need not comply
with the new rule, even if a consumer may pick up one of the
applications from the display on or after December 1, 2010. Any ``take-
one'' applications that the card issuer uses to restock the display on
or after December 1, 2010, however, must comply with the final rule.
E. Account-opening disclosures (Sec. 226.6). Account-opening
disclosures furnished on or after December 1, 2010 must comply with the
final rule. The relevant date for purposes of this requirement is the
date on which the disclosures are furnished, not when the consumer
applies for the account. For example, if a consumer applies for an
account on November 30, 2010, but the account-opening disclosures are
not
[[Page 37564]]
mailed until December 2, 2010, those disclosures must comply with the
final rule. In addition, if the disclosures are furnished by mail, the
relevant date is the day on which the disclosures were sent, not the
date on which the consumer receives the disclosures. Thus, if a
creditor mails the account-opening disclosures on November 30, 2010,
even if the consumer receives those disclosures on December 7, 2010,
the disclosures are not required to comply with the final rule.
F. Periodic statements (Sec. 226.7). Periodic statements mailed or
delivered on or after December 1, 2010 must comply with the final
rule's revised penalty fee disclosures. For example, if a card issuer
mails a periodic statement to the consumer on November 30, 2010, that
statement is not required to comply with the final rule's revised
penalty fee disclosures, even if the consumer does not receive the
statement until December 7, 2010. However, as discussed below, if the
periodic statement contains a notice of a rate increase, the
requirements of Sec. 226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6) of the
final rule apply to that notice if the periodic statement is mailed on
or after August 22, 2010.
G. Subsequent disclosure requirements (Sec. 226.9).
Notice of rate increases (Sec. 226.9(c) and (g)). Sections
226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6) of the final rule require
that notices disclosing rate increases for credit card accounts under
an open-end (not home-secured) consumer credit plan state no more than
four principal reasons for the increase. The requirements of Sec.
226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6) apply to notices of rate
increases mailed or delivered on or after August 22, 2010.
Changes necessary to comply with final rule (Sec. 226.9(c)). The
Board understands that, in order to comply with Sec. Sec. 226.52(b)
and 226.59 by August 22, 2010, card issuers may have to make changes to
the account terms set forth in a consumer's credit card agreement or
similar legal documents. Card issuers should notify consumers of such
changes as soon as reasonably practicable. However, the Board
understands that, given the amount of time between issuance of this
final rule and the statutory effective date, it may not be possible for
some card issuers to comply with the provision in Sec. 226.9(c)(2)
stating that any required notice must be provided 45 days in advance of
a change that is effective August 22. In these circumstances, the card
issuer must comply with the applicable substantive provisions set forth
in Sec. Sec. 226.52(b) and 226.59 on August 22, even if the terms of
the account have not been amended consistent with Sec. 226.9(c)(2).
Otherwise, the notice requirements in Sec. 226.9(c)(2) could permit
card issuers to continue to engage in practices that are inconsistent
with Sec. Sec. 226.52(b) and 226.59 after August 22, which would not
be consistent with Congress' intent.
For example, in order to comply with Sec. 226.52(b), card issuers
may have to change the terms governing the imposition of fees for
violating those terms or other requirements of the account. If the
change involves a reduction in the amount of the fee, Sec.
226.9(c)(2)(v)(A) provides that no notice is required under Sec.
226.9(c) (although, as discussed below, notice may be required under
Sec. 226.9(e)). However, if a change does not involve a reduction in a
fee and a card issuer provides a notice of the change on July 10, 2010,
Sec. 226.9(c)(2) technically prohibits the issuer from applying those
changes to the account until August 24, 2010. In these circumstances,
notwithstanding the 45-day notice requirement in Sec. 226.9(c)(2), the
card issuer cannot impose a penalty fee that is inconsistent with Sec.
226.52(b) on or after August 22, 2010.
For these reasons, if Sec. 226.9(c)(2) requires a card issuer to
provide notice of a change that is necessary to comply with this final
rule, the card issuer is not required to provide that notice 45 days
before the effective date of the change. Furthermore, because it would
not be appropriate to permit consumers to reject a change that is
necessary to comply with this final rule, card issuers are not required
to provide consumers with the right to reject pursuant to Sec.
226.9(h) in these circumstances. Additional guidance regarding changes
necessary to comply with Sec. 226.52(b) is provided below.
Renewal notices (Sec. 226.9(e)). As amended by the February 2010
Regulation Z Rule, Sec. 226.9(e), in part, requires card issuers to
provide a notice at least 30 days prior to renewal of a credit or
charge card if the card issuer has changed or amended any term of a
cardholder's account required to be disclosed under Sec. 226.6(b)(1)
and (b)(2) that has not previously been disclosed to the cardholder.
The Board is aware that as creditors implement changes to their systems
and pricing structures to comply with Sec. Sec. 226.52(b) and 226.59,
they may make changes to terms required to be disclosed under Sec.
226.6(b)(1) and (b)(2) for which advance notice is not required under
Sec. 226.9(c)(2) or (g). For example, a creditor may decrease its
penalty fees to comply with Sec. 226.52(b) or may change its
contractual provisions regarding penalty pricing in order to facilitate
compliance with Sec. 226.59. To the extent that these changes result
in the reduction of finance or other charges, Sec. 226.9(c)(2)(v)(A)
provides that advance notice is not required. However, such changes may
give rise to the requirement to provide disclosures under Sec.
226.9(e) prior to the scheduled renewal of the card.
The Board understands that an issuer's credit or charge card
accounts may renew on a rolling basis, and that, given the short
compliance period for this final rule, providing the notice under Sec.
226.9(e) 30 days in advance of renewal may pose significant operational
issues for issuers that are making changes to comply or facilitate
compliance with new Sec. Sec. 226.52(b) or Sec. Sec. 226.59.
Accordingly, for a brief transition period after the effective date of
this final rule, a card issuer that makes changes to terms required to
be disclosed under 226.6(b)(1) and (b)(2) that are not otherwise
required to be disclosed in advance under Sec. 226.9(c) or (g) in
order to comply or facilitate compliance with Sec. 226.52(b) or Sec.
226.59 may provide the notice under Sec. 226.9(e) as soon as
reasonably practicable after such changes become effective. The Board
understands that in some cases this will mean that a consumer will
receive the notice required under Sec. 226.9(e) less than 30 days
before, or even shortly after, the renewal of the account.
This transition guidance is intended to apply only in those
circumstances where the renewal notice is required because of changes
to terms required to be disclosed under Sec. 226.6(b)(1) or (b)(2)
that have not previously been disclosed to the consumer. If the card
issuer imposes an annual or other periodic fee for renewal, Sec.
226.9(e) requires that the renewal notice be mailed or delivered at
least 30 days or one billing cycle, whichever is less, before the
mailing or delivery of the periodic statement on which any renewal fee
is initially charged to the account.
The Board understands that some card issuers may both (1) impose an
annual or other periodic fee for renewal and (2) make changes to terms
required to be disclosed under Sec. 226.6(b)(1) or (b)(2), in order to
comply or facilitate compliance with Sec. Sec. 226.52(b) or 226.59,
that have not previously been disclosed to the consumer. In these
circumstances, the notice required by Sec. 226.9(e) must be mailed or
delivered at least 30 days or one billing cycle, whichever is less,
before the mailing or delivery of the periodic statement on which any
renewal fee is initially charged to the
[[Page 37565]]
account. The Board understands that, for a brief transition period, it
may be operationally difficult or impossible for issuers to disclose
changes to terms that were made to comply or facilitate compliance with
Sec. Sec. 226.52(b) or 226.59 in such a Sec. 226.9(e) notice. In
these circumstances, a card issuer may disclose the changes made to
comply with or facilitate compliance with Sec. Sec. 226.52(b) or
226.59 in the next Sec. 226.9(e) notice that it provides for a
subsequent renewal of the account.
H. Limitations on credit card penalty fees (Sec. 226.52(b)).
Generally. The effective date for new TILA Section 149 is August
22, 2010. Accordingly, card issuers must comply with Sec. 226.52(b)
beginning on August 22, 2010. However, unlike new TILA Section 148
(which expressly applies to rate increases that occurred prior to its
statutory effective date), nothing in new TILA Section 149 indicates
that Congress intended the ``reasonable and proportional'' standard to
apply retroactively. Accordingly, Sec. 226.52(b) does not apply to
fees imposed prior to August 22, 2010. Furthermore, the Board notes
that this final rule should not be construed as suggesting that penalty
fees imposed prior to August 22, 2010 were unreasonable.
Fees based on costs (Sec. 226.52(b)(1)(i)). A card issuer that
begins imposing penalty fees pursuant to Sec. 226.52(b)(1)(i) on
August 22, 2010 must have previously determined that the dollar amount
of the fee represents a reasonable proportion of the total costs
incurred by the card issuer as a result of that type of violation.
Safe harbors (Sec. 226.52(b)(1)(ii)). The Board understands that
some card issuers will not be able to perform the cost analysis
required by Sec. 226.52(b)(1)(i) prior to August 22, 2010 and will
therefore be required to comply with the safe harbors in Sec.
226.52(b)(1)(ii) for a period of time. In these circumstances, the card
issuer may impose penalty fees that are consistent with the safe
harbors in Sec. 226.52(b)(1)(ii) beginning on August 22, 2010, even if
corresponding amendments to the terms of the account have not yet been
made consistent with the advance notice requirements in Sec.
226.9(c)(2) (as applicable). Furthermore, because it would not be
appropriate to permit consumers to reject changes to account terms that
are consistent with the safe harbors in Sec. 226.52(b)(1)(ii), card
issuers are not required to provide consumers with the right to reject
pursuant to Sec. 226.9(h) in these circumstances.
If a card issuer utilizes the safe harbors in Sec.
226.52(b)(1)(ii), the first penalty fee imposed on or after August 22,
2010 generally must comply with the $25 safe harbor in Sec.
226.52(b)(1)(ii)(A). For example, if the required minimum periodic
payment due on August 25 is late, the amount of the late payment fee
cannot exceed $25, even if the payment due on July 25 was also late. As
discussed above, the safe harbors in Sec. 226.52(b)(1)(ii)(A)-(B) are
designed to balance the statutory factors of cost, deterrence, and
consumer conduct by limiting the fee for an initial violation to $25
while permitting an increased fee of $35 for additional violations of
the same type during the next six billing cycles. Thus, it would be
inconsistent with this purpose to permit a card issuer to impose a $35
penalty fee after August 22 based on a violation that occurred prior to
August 22.
However, the safe harbor in Sec. 226.52(b)(1)(ii)(C) is intended
to permit charge card issuers to effectively manage seriously
delinquent accounts. Thus, Sec. 226.52(b)(1)(ii)(C) applies once the
required payment for a charge card account has not been received for
two or more consecutive billing cycles, even if the delinquency began
prior to August 22, 2010. For example, assume that a charge card issuer
requires payment of outstanding balances in full at the end of each
billing cycle and that the billing cycles for the account begin on the
first day of the month and end on the last day of the month. If the
required payment due at the end of the July 2010 billing cycle has not
been received by the end of the August 2010 billing cycle, Sec.
226.52(b)(1)(ii)(C) permits the charge card issuer to impose a late
payment fee that does not exceed 3% of the delinquent balance.
Closed account fees (Sec. 226.52(b)(2)(i)(B)(3)). Section
226.52(b)(2)(i)(B)(3) prohibits a card issuer from imposing a fee based
on the closure or termination of an account. Comment 226.52(b)(2)(i)-6
clarifies that Sec. 226.52(b)(2)(i)(B)(3) does not prohibit a card
issuer from continuing to impose a periodic fee that was imposed before
the account was closed or terminated. Similarly, to the extent that a
permissible periodic fee was charged on a closed account prior to
August 22, 2010, Sec. 226.52(b)(2)(i)(B)(3) does not prohibit a card
issuer from continuing to impose that fee with respect to that account
after August 22 (although the card issuer is not permitted to increase
the amount of the fee).
The Board notes that, effective February 22, 2010, Sec.
226.55(d)(1) prohibited card issuers from imposing a periodic fee based
solely on the balance on a closed account (such as a closed account
fee) if that fee was not charged before the account was closed. See
comment 55(d)-1. In other words, beginning on February 22, card issuers
were no longer permitted to begin charging a periodic fee when an
account with a balance was closed.
Accordingly, Sec. 226.52(b)(2)(i)(B)(3) does not, for example,
prohibit a card issuer that imposed a $10 monthly closed account fee on
a specific account prior to August 22 from continuing to charge that
$10 monthly fee after August 22. However, consistent with Sec.
226.55(d)(1), the card issuer must have begun charging the $10 monthly
fee to the account prior to February 22.
Multiple fees based on a single event or transaction (Sec.
226.52(b)(2)(ii)). Beginning on August 22, 2010, Sec. 226.52(b)(2)(ii)
prohibits card issuers from imposing more than one penalty fee based on
a single event or transaction. However, Sec. 226.52(b)(2)(ii) permits
card issuers to comply with this prohibition by imposing no more than
one penalty fee during a billing cycle. A card issuer that uses this
method to comply with Sec. 226.52(b)(2)(ii) is not required to
determine whether multiple penalty fees were imposed during a billing
cycle that begins prior to August 22, 2010.
I. Requirements for over-the-limit transactions (Sec. 226.56).
Notices provided pursuant to Sec. 226.56 on or after December 1, 2010
must comply with the final rule. For example, if a creditor mails an
opt-in notice to a consumer on November 30, 2010, that notice is not
required to comply with the final rule, even if the consumer does not
receive the notice until December 7, 2010. However, if a card issuer
mails an opt-in notice to a consumer on December 1, that notice must
comply with the final rule.
J. Reevaluation of rate increases (Sec. 226.59). Section 226.59
generally requires that rate increases be reviewed in accordance with
that section no less frequently than once every six months. As
discussed in comment 59(c)-3, the review of annual percentage rates
increased on or after January 1, 2009 and prior to August 22, 2010 must
be completed prior to February 22, 2011. For annual percentage rates
increased on or after August 22, 2010, any review required by Sec.
226.59 must be completed within six months of the effective date of the
increase.
VI. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
requires an agency to perform an initial and final regulatory
flexibility analysis on the impact a rule is expected to have on small
entities.
[[Page 37566]]
The Board received no significant comments addressing the initial
regulatory flexibility analysis. Therefore, based on its analysis and
for the reasons stated below, the Board has concluded that this final
rule will have a significant economic impact on a substantial number of
small entities. Accordingly, the Board has prepared the following final
regulatory flexibility analysis pursuant to section 604 of the RFA.
1. Statement of the need for, and objectives of, the final rule.
The final rule implements new substantive requirements and updates to
disclosure provisions in the Credit Card Act, which establishes fair
and transparent practices relating to the extension of open-end
consumer credit plans. The supplementary information above describes in
detail the reasons, objectives, and legal basis for each component of
the final rule.
2. Summary of the significant issues raised by public comment in
response to the Board's initial analysis, the Board's assessment of
such issues, and a statement of any changes made as a result of such
comments. As discussed above, the Board's initial regulatory
flexibility analysis reached the preliminary conclusion that the
proposed rule would have a significant economic impact on a substantial
number of small entities. See 75 FR 12354-12355 (Mar. 15, 2010). The
Board received no comments specifically addressing this analysis.
3. Small entities affected by the final rule. All creditors that
offer credit card accounts under open-end (not home-secured) consumer
credit plans are subject to the final rule. The Board is relying on the
analysis in the January 2009 FTC Act Rule, in which the Board, the OTS,
and the NCUA estimated that approximately 3,500 small entities offer
credit card accounts. See 74 FR 5549-5550 (January 29, 2009). The Board
acknowledges, however, that the total number of small entities likely
to be affected by the final rule is unknown, in part because the
estimate in the January 2009 FTC Act Rule does not include card issuers
that are not banks, savings associations, or credit unions.
4. Recordkeeping, reporting, and compliance requirements. The final
rule does not impose any new recordkeeping or reporting requirements.
The final rule, however, imposes new compliance requirements. The
compliance requirements of this final rule are described above in IV.
Section-by-Section Analysis. The Board notes that the precise costs to
small entities to conform their open-end credit disclosures to the
final rule and the costs of updating their systems to comply with the
rule are difficult to predict. These costs depend on a number of
factors that are unknown to the Board, including, among other things,
the specifications of the current systems used by such entities to
prepare and provide disclosures and administer credit card accounts,
the complexity of the terms of the credit card products that they
offer, and the range of such product offerings.
Provisions Regarding Consumer Credit Card Accounts
This subsection summarizes several of the amendments to Regulation
Z and their likely impact on small entities that offer open-end credit.
More information regarding these and other changes can be found in IV.
Section-by-Section Analysis.
Sections 226.5a and 226.6 require creditors to disclose late
payment fees, over-the-limit fees, and returned payment fees in,
respectively, the application and solicitation disclosures and the
account-opening disclosures. For consistency with Sec. 226.52(b)
(discussed below), the final rule amends Sec. Sec. 226.5a(a)(2)(iv)
and 226.6(b)(1)(i) to require creditors (including creditors that are
small entities) to use bold text when disclosing maximum limits on fees
in the application and solicitation table and the account-opening
table, respectively. Creditors that are small entities are already
required to provide this information so the Board does not anticipate
any significant additional burden on small entities by requiring the
use of bold text. In order to reduce the burden on small entities, the
Board has provided model forms which can be used to comply with the
final rule.
Section 226.7(b)(11)(i)(B) generally requires card issuers
(including issuers that are small entities) to disclose the amount of
any late payment fee and any increased rate that may be imposed on the
account as a result of a late payment. Previously, if a range of late
payment fees could be assessed, Sec. 226.7(b)(11)(i)(B) permitted card
issuers to disclose the highest fee and, at the card issuer's option,
an indication that the fee imposed could be lower (such as a disclosure
that the late payment fee is ``up to $35''). For consistency with Sec.
226.52(b) (discussed below), the final rule amends Sec.
226.7(b)(11)(i)(B) to clarify that it is no longer optional to disclose
an indication that the late payment fee may be lower than the disclosed
amount. However, Sec. 226.7(b)(11)(i)(B) already requires card issuers
to disclose late payment fee information on the periodic statement so
the Board does not anticipate any significant additional burden on
small entities. The Board also seeks to reduce the burden on small
entities by providing model forms which can be used to ease compliance
with the final rule.
Under the final rule, Sec. Sec. 226.9(c)(2)(iv)(A)(8) and
226.9(g)(3)(i)(A)(6) generally require card issuers (including issuers
that are small entities) to disclose no more than four reasons for an
annual percentage rate increase in the notice required to be provided
45 days in advance of that increase. Although Sec. Sec. 226.9(c) and
(g) already require card issuers to provide 45 days' notice prior to an
annual percentage rate increase, Sec. Sec. 226.9(c)(2)(iv)(A)(8) and
226.9(g)(3)(i)(A)(6) may require some small entities to establish
processes and alter their systems in order to comply with the
provision. The cost of such change will depend on the size of the
institution and the composition of its portfolio. In order to reduce
the burden on small entities, the Board has provided model forms which
can be used to comply with the final rule.
The final rule amends Sec. 226.52 by creating a new Sec.
226.52(b), which generally limits the dollar amount of penalty fees
imposed by card issuers (including issuers that are small entities).
Specifically, credit card penalty fees must be based on an analysis of
the costs incurred by the issuer as a result of violations of the terms
or other requirements of an account or on one of the safe harbors
established by the final rule. In addition, Sec. 226.52(b) prohibits
penalty fees that exceed the dollar amount associated with the
violation and certain types of penalty fees without an associated
dollar amount. As discussed above, compliance with Sec. 226.52(b) will
require card issuers that are small entities to conform certain penalty
fee disclosures already required under Sec. Sec. 226.5a, 226.6, and
226.7.\65\
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\65\ In addition, compliance with Sec. 226.52(b) will require
card issuers that are small entities to revise the disclosure of
over-the-limit fees in the notice provided pursuant to 226.56. In
order to assist card issuers in complying with the final rule, the
Board has revised the model language for these disclosures.
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The final rule creates a new Sec. 226.59, which generally requires
card issuers (including issuers that are small entities) to reevaluate
an increased annual percentage rate no less than every six months. In
addition, Sec. 226.59 requires card issuers (including issuers that
are small entities) to reduce the annual percentage rate, if
appropriate based on such reevaluation. Section 226.59 will require
some small entities
[[Page 37567]]
to establish processes and alter their systems in order to comply with
the provision. The cost of such change will depend on the size of the
institution and the composition of its portfolio. In addition, this
provision will reduce revenue that some small entities derive from
finance charges.
Accordingly, the Board believes that, in the aggregate, the
provisions of its final rule will have a significant economic impact on
a substantial number of small entities.
5. Other federal rules. The Board has not identified any federal
rules that duplicate, overlap, or conflict with the Board's revisions
to Regulation Z.
6. Significant alternatives to the final revisions. The provisions
of the final rule implement the statutory requirements of the Credit
Card Act that go into effect on August 22, 2010. The Board sought to
avoid imposing additional burden, while effectuating the statute in a
manner that is beneficial to consumers. In particular, in order to
reduce the burden of revising penalty fee disclosures, the Board has
established a mandatory compliance date of December 1, 2010 for the
amendments to Sec. Sec. 226.5a, 226.6, 226.7, and 226.56. The Board
did not receive any comment on any significant alternatives, consistent
with the Credit Card Act, which would minimize impact of the final rule
on small entities.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 appendix A.1), the Board reviewed the
final rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). The collection of information that is
required by this final rule is found in 12 CFR part 226. The Federal
Reserve may not conduct or sponsor, and an organization is not required
to respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.\66\
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\66\ In 2009, the information collection was re-titled--
Reporting, Recordkeeping and Disclosure Requirements associated with
Regulation Z (Truth in Lending) and Regulation AA (Unfair or
Deceptive Acts or Practices).
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This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). The respondents/
recordkeepers are creditors and other entities subject to Regulation Z,
including for-profit financial institutions. TILA and Regulation Z are
intended to ensure effective disclosure of the costs and terms of
credit to consumers. For open-end credit, creditors are required, among
other things, to disclose information about the initial costs and terms
and to provide periodic statements of account activity, notices of
changes in terms, and statements of rights concerning billing error
procedures. Regulation Z requires specific types of disclosures for
credit and charge card accounts and home-equity plans. TILA and
Regulation Z also contain rules concerning credit advertising.
Creditors are required to retain evidence of compliance for twenty-four
months (Sec. 226.25), but Regulation Z does not specify the types of
records that must be retained.
Under the PRA, the Federal Reserve accounts for the paperwork
burden associated with Regulation Z for the state member banks and
other creditors supervised by the Federal Reserve that engage in
lending covered by Regulation Z and, therefore, are respondents under
the PRA. Appendix I of Regulation Z defines the Federal Reserve-
regulated institutions as: state member banks, branches and agencies of
foreign banks (other than federal branches, federal agencies, and
insured state branches of foreign banks), commercial lending companies
owned or controlled by foreign banks, and organizations operating under
section 25 or 25A of the Federal Reserve Act. Other federal agencies
account for the paperwork burden on other entities subject to
Regulation Z. To ease the burden and cost of complying with Regulation
Z (particularly for small entities), the Federal Reserve provides model
forms, which are appended to the regulation.
As discussed in I. Background, a notice of proposed rulemaking
(NPR) was published in the Federal Register on March 15, 2010 (75 FR
12334). The comment period for the Board's preliminary PRA analysis
expired on May 14, 2010. No comments specifically addressing the
paperwork burden estimates were received; therefore, the estimates will
remain unchanged as published in the NPR.
Under sections Sec. Sec. 226.5a(a)(2)(iv) and 226.6(b)(1)(i), the
use of bold text is required when disclosing maximum limits on fees in
the application and solicitation table and the account-opening table,
respectively. The Board anticipates that creditors will incorporate,
with little change, the formatting change with the disclosures already
required under Sec. Sec. 226.5a(a)(2)(iv) and 226.6(b)(1)(i). In an
effort to reduce burden, the Board has amended Appendix G-18 to provide
guidance on complying with the final rule.
Under Sec. 226.7(b)(11)(i)(B), a card issuer is required to
disclose the amount of any late payment fee and any increased rate that
may be imposed on the account as a result of a late payment.
Previously, if a range of late payment fees could be assessed, Sec.
226.7(b)(11)(i)(B) permitted card issuers to disclose the highest fee
and, at the card issuer's option, an indication that the fee imposed
could be lower (such as a disclosure that the late payment fee is ``up
to $35''). For consistency with Sec. 226.52(b) (discussed below), the
final rule amends Sec. 226.7(b)(11)(i)(B) to clarify that it is no
longer optional to disclose an indication that the late payment fee may
be lower than the disclosed amount. The Board anticipates that card
issuers, with little additional burden, will incorporate the final
rule's disclosure requirement with the disclosures already required
under Sec. 226.7(b)(11)(i)(B). In an effort to reduce burden, the
Board amends Appendix G-18 to provide guidance on an ``up to''
disclosure.
Under Sec. Sec. 226.9(c)(2)(iv)(A)(8) and 226.9(g)(3)(i)(A)(6), a
card issuer is required to disclose no more than four reasons for an
annual percentage rate increase in the notice required to be provided
45 days in advance of that increase. The Board anticipates that card
issuers, with little additional burden, will incorporate the final
rule's disclosure requirement with the disclosures already required
under Sec. 226.9(c) and Sec. 226.9(g). In an effort to reduce burden,
the Board has amended Appendix G-18 to provide guidance on complying
with the final rule.
Section 226.52(b) generally limits the dollar amount of penalty
fees imposed by card issuers. Specifically, credit card penalty fees
must be based on an analysis of the costs incurred by the issuer as a
result of violations of the terms or other requirements of an account
or on one of the safe harbors established by the final rule. In
addition, Sec. 226.52(b) prohibits penalty fees that exceed the dollar
amount associated with the violation and certain types of penalty fees
without an associated dollar amount. As discussed above, compliance
with Sec. 226.52(b) will require card issuers to conform certain
penalty fee disclosures already required under Sec. Sec. 226.5a,
226.6, and 226.7.\67\
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\67\ In addition, compliance with Sec. 226.52(b) will require
card issuers that are small entities to revise the disclosure of
over-the-limit fees in the notice provided pursuant to 226.56. In
order to assist card issuers in complying with the final rule, the
Board has revised the model language in Appendix G-18 for these
disclosures.
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The Board estimates that the final rule will impose a one-time
increase in the
[[Page 37568]]
total annual burden under Regulation Z. The 1,138 respondents will
take, on average, 40 hours to update their systems to comply with the
disclosure requirements addressed in this final rule. The total annual
burden is estimated to increase by 45,520 hours, from 1,442,594 to
1,488,114 hours.\68\
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\68\ The burden estimate for this rulemaking does not include
the burden addressing changes to implement the following provisions
announced in separate rulemakings:
1. Closed-End Mortgages (Docket No. R-1366) (74 FR 43232).
2. Home-Equity Lines of Credit (Docket No. R-1367) (74 FR
43428).
3. Notification of the sale or transfer of mortgage loans
(Docket No. R-1378) (74 FR 60143).
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The total one-time burden increase represents averages for all
respondents regulated by the Federal Reserve. The Federal Reserve
expects that the amount of time required to implement the changes
adopted by the final rule for a given financial institution or entity
may vary based on the size and complexity of the respondent.
The other Federal financial agencies: The Office of the Comptroller
of the Currency (OCC), the Office of Thrift Supervision (OTS), the
Federal Deposit Insurance Corporation (FDIC), and the National Credit
Union Administration (NCUA) are responsible for estimating and
reporting to OMB the total paperwork burden for the domestically
chartered commercial banks, thrifts, and federal credit unions and U.S.
branches and agencies of foreign banks for which they have primary
administrative enforcement jurisdiction under TILA Section 108(a), 15
U.S.C. 1607(a). These agencies are permitted, but are not required, to
use the Board's burden estimation methodology. Using the Board's
method, the total current estimated annual burden for the approximately
16,200 domestically chartered commercial banks, thrifts, and federal
credit unions and U.S. branches and agencies of foreign banks
supervised by the Federal Reserve, OCC, OTS, FDIC, and NCUA under TILA
will be approximately 18,962,245 hours. The final rule will impose a
one-time increase in the estimated annual burden for such institutions
by 648,000 hours to 19,610,245 hours. The above estimates represent an
average across all respondents; the Board expects variations between
institutions based on their size, complexity, and practices.
The Board has a continuing interest in the public's opinion of the
collection of information. Comments on the collection of information
should be sent to Michelle Shore, Federal Reserve Board Clearance
Officer, Division of Research and Statistics, Mail Stop 95-A, Board of
Governors of the Federal Reserve System, Washington, DC 20551, with
copies of such comments sent to the Office of Management and Budget,
Paperwork Reduction Project (7100-0199), Washington, DC 20503.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System, Reporting
and recordkeeping requirements, Truth in Lending.
Text of Final Revisions
For the reasons set forth in the preamble, the Board is amending
Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
0
1. In Sec. 226.5a, revise paragraph (a)(2)(iv) to read as follows:
Sec. 226.5a Credit and charge card applications and solicitations.
(a) * * *
(2) * * *
(iv) When a tabular format is required, any annual percentage rate
required to be disclosed pursuant to paragraph (b)(1) of this section,
any introductory rate required to be disclosed pursuant to paragraph
(b)(1)(ii) of this section, any rate that will apply after a premium
initial rate expires required to be disclosed under paragraph
(b)(1)(iii) of this section, and any fee or percentage amounts or
maximum limits on fee amounts disclosed pursuant to paragraphs (b)(2),
(b)(4), (b)(8) through (b)(13) of this section must be disclosed in
bold text. However, bold text shall not be used for: The amount of any
periodic fee disclosed pursuant to paragraph (b)(2) of this section
that is not an annualized amount; and other annual percentage rates or
fee amounts disclosed in the table.
* * * * *
0
2. In Sec. 226.6, revise paragraph (b)(1)(i) to read as follows:
Sec. 226.6 Account-opening disclosures.
* * * * *
(b) * * *
(1) * * *
(i) Highlighting. In the table, any annual percentage rate required
to be disclosed pursuant to paragraph (b)(2)(i) of this section; any
introductory rate permitted to be disclosed pursuant to paragraph
(b)(2)(i)(B) or required to be disclosed under paragraph (b)(2)(i)(F)
of this section, any rate that will apply after a premium initial rate
expires permitted to be disclosed pursuant to paragraph (b)(2)(i)(C) or
required to be disclosed pursuant to paragraph (b)(2)(i)(F), and any
fee or percentage amounts or maximum limits on fee amounts disclosed
pursuant to paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) through
(b)(2)(xii) of this section must be disclosed in bold text. However,
bold text shall not be used for: The amount of any periodic fee
disclosed pursuant to paragraph (b)(2) of this section that is not an
annualized amount; and other annual percentage rates or fee amounts
disclosed in the table.
* * * * *
0
3. In Sec. 226.7, revise paragraph (b)(11)(i)(B) to read as follows:
Sec. 226.7 Periodic statement.
* * * * *
(b) * * *
(11) * * *
(i) * * *
(B) The amount of any late payment fee and any increased periodic
rate(s) (expressed as an annual percentage rate(s)) that may be imposed
on the account as a result of a late payment. If a range of late
payment fees may be assessed, the card issuer may state the range of
fees, or the highest fee and an indication that the fee imposed could
be lower. If the rate may be increased for more than one feature or
balance, the card issuer may state the range of rates or the highest
rate that could apply and at the issuer's option an indication that the
rate imposed could be lower.
* * * * *
0
4. In Sec. 226.9, revise paragraphs (c)(2) and (g) to read as follows:
Sec. 226.9 Subsequent disclosure requirements.
* * * * *
(c) * * *
(2) Rules affecting open-end (not home-secured) plans--(i) Changes
where written advance notice is required--(A) General. For plans other
than home-equity plans subject to the requirements of Sec. 226.5b,
except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and
(c)(2)(v) of this section, when a significant change in account terms
as described in paragraph (c)(2)(ii) of this section is made to a term
required to be disclosed under Sec. 226.6(b)(3), (b)(4) or (b)(5) or
the required minimum periodic payment is increased, a creditor must
provide a written notice of the change at least 45 days prior to the
effective date of the change to each consumer who may be affected. The
45-day timing requirement does not apply if the consumer has agreed to
a particular change; the notice shall be given, however, before the
effective date of the change. Increases in the rate applicable to a
consumer's
[[Page 37569]]
account due to delinquency, default or as a penalty described in
paragraph (g) of this section that are not due to a change in the
contractual terms of the consumer's account must be disclosed pursuant
to paragraph (g) of this section instead of paragraph (c)(2) of this
section.
(B) Changes agreed to by the consumer. A notice of change in terms
is required, but it may be mailed or delivered as late as the effective
date of the change if the consumer agrees to the particular change.
This paragraph (c)(2)(i)(B) applies only when a consumer substitutes
collateral or when the creditor can advance additional credit only if a
change relatively unique to that consumer is made, such as the
consumer's providing additional security or paying an increased minimum
payment amount. The following are not considered agreements between the
consumer and the creditor for purposes of this paragraph (c)(2)(i)(B):
The consumer's general acceptance of the creditor's contract
reservation of the right to change terms; the consumer's use of the
account (which might imply acceptance of its terms under state law);
the consumer's acceptance of a unilateral term change that is not
particular to that consumer, but rather is of general applicability to
consumers with that type of account; and the consumer's request to
reopen a closed account or to upgrade an existing account to another
account offered by the creditor with different credit or other
features.
(ii) Significant changes in account terms. For purposes of this
section, a ``significant change in account terms'' means a change to a
term required to be disclosed under Sec. 226.6(b)(1) and (b)(2), an
increase in the required minimum periodic payment, or the acquisition
of a security interest.
(iii) Charges not covered by Sec. 226.6(b)(1) and (b)(2). Except
as provided in paragraph (c)(2)(vi) of this section, if a creditor
increases any component of a charge, or introduces a new charge,
required to be disclosed under Sec. 226.6(b)(3) that is not a
significant change in account terms as described in paragraph
(c)(2)(ii) of this section, a creditor may either, at its option:
(A) Comply with the requirements of paragraph (c)(2)(i) of this
section; or
(B) Provide notice of the amount of the charge before the consumer
agrees to or becomes obligated to pay the charge, at a time and in a
manner that a consumer would be likely to notice the disclosure of the
charge. The notice may be provided orally or in writing.
(iv) Disclosure requirements--(A) Significant changes in account
terms. If a creditor makes a significant change in account terms as
described in paragraph (c)(2)(ii) of this section, the notice provided
pursuant to paragraph (c)(2)(i) of this section must provide the
following information:
(1) A summary of the changes made to terms required by Sec.
226.6(b)(1) and (b)(2), a description of any increase in the required
minimum periodic payment, and a description of any security interest
being acquired by the creditor;
(2) A statement that changes are being made to the account;
(3) For accounts other than credit card accounts under an open-end
(not home-secured) consumer credit plan subject to Sec.
226.9(c)(2)(iv)(B), a statement indicating the consumer has the right
to opt out of these changes, if applicable, and a reference to
additional information describing the opt-out right provided in the
notice, if applicable;
(4) The date the changes will become effective;
(5) If applicable, a statement that the consumer may find
additional information about the summarized changes, and other changes
to the account, in the notice;
(6) If the creditor is changing a rate on the account, other than a
penalty rate, a statement that if a penalty rate currently applies to
the consumer's account, the new rate described in the notice will not
apply to the consumer's account until the consumer's account balances
are no longer subject to the penalty rate;
(7) If the change in terms being disclosed is an increase in an
annual percentage rate, the balances to which the increased rate will
be applied. If applicable, a statement identifying the balances to
which the current rate will continue to apply as of the effective date
of the change in terms; and
(8) If the change in terms being disclosed is an increase in an
annual percentage rate for a credit card account under an open-end (not
home-secured) consumer credit plan, a statement of no more than four
principal reasons for the rate increase, listed in their order of
importance.
(B) Right to reject for credit card accounts under an open-end (not
home-secured) consumer credit plan. In addition to the disclosures in
paragraph (c)(2)(iv)(A) of this section, if a card issuer makes a
significant change in account terms on a credit card account under an
open-end (not home-secured) consumer credit plan, the creditor must
generally provide the following information on the notice provided
pursuant to paragraph (c)(2)(i) of this section. This information is
not required to be provided in the case of an increase in the required
minimum periodic payment, an increase in a fee as a result of a
reevaluation of a determination made under Sec. 226.52(b)(1)(i) or an
adjustment to the safe harbors in Sec. 226.52(b)(1)(ii) to reflect
changes in the Consumer Price Index, a change in an annual percentage
rate applicable to a consumer's account, a change in the balance
computation method applicable to consumer's account necessary to comply
with Sec. 226.54, or when the change results from the creditor not
receiving the consumer's required minimum periodic payment within 60
days after the due date for that payment:
(1) A statement that the consumer has the right to reject the
change or changes prior to the effective date of the changes, unless
the consumer fails to make a required minimum periodic payment within
60 days after the due date for that payment;
(2) Instructions for rejecting the change or changes, and a toll-
free telephone number that the consumer may use to notify the creditor
of the rejection; and
(3) If applicable, a statement that if the consumer rejects the
change or changes, the consumer's ability to use the account for
further advances will be terminated or suspended.
(C) Changes resulting from failure to make minimum periodic payment
within 60 days from due date for credit card accounts under an open-end
(not home-secured) consumer credit plan. For a credit card account
under an open-end (not home-secured) consumer credit plan:
(1) If the significant change required to be disclosed pursuant to
paragraph (c)(2)(i) of this section is an increase in an annual
percentage rate or a fee or charge required to be disclosed under Sec.
226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) based on the consumer's
failure to make a minimum periodic payment within 60 days from the due
date for that payment, the notice provided pursuant to paragraph
(c)(2)(i) of this section must state that the increase will cease to
apply to transactions that occurred prior to or within 14 days of
provision of the notice, if the creditor receives six consecutive
required minimum periodic payments on or before the payment due date,
beginning with the first payment due following the effective date of
the increase.
(2) If the significant change required to be disclosed pursuant to
paragraph (c)(2)(i) of this section is an increase in a fee or charge
required to be disclosed under Sec. 226.6(b)(2)(ii), (b)(2)(iii), or
[[Page 37570]]
(b)(2)(xii) based on the consumer's failure to make a minimum periodic
payment within 60 days from the due date for that payment, the notice
provided pursuant to paragraph (c)(2)(i) of this section must also
state the reason for the increase.
(D) Format requirements--(1) Tabular format. The summary of changes
described in paragraph (c)(2)(iv)(A)(1) of this section must be in a
tabular format (except for a summary of any increase in the required
minimum periodic payment), with headings and format substantially
similar to any of the account-opening tables found in G-17 in appendix
G to this part. The table must disclose the changed term and
information relevant to the change, if that relevant information is
required by Sec. 226.6(b)(1) and (b)(2). The new terms shall be
described in the same level of detail as required when disclosing the
terms under Sec. 226.6(b)(2).
(2) Notice included with periodic statement. If a notice required
by paragraph (c)(2)(i) of this section is included on or with a
periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must be disclosed on the front of any
page of the statement. The summary of changes described in paragraph
(c)(2)(iv)(A)(1) of this section must immediately follow the
information described in paragraph (c)(2)(iv)(A)(2) through
(c)(2)(iv)(A)(7) and, if applicable, paragraphs (c)(2)(iv)(A)(8),
(c)(2)(iv)(B), and (c)(2)(iv)(C) of this section, and be substantially
similar to the format shown in Sample G-20 or G-21 in appendix G to
this part.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(2)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(2)(iv)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of changes required to be in a table pursuant to paragraph
(c)(2)(iv)(A)(1) of this section may be on more than one page, and may
use both the front and reverse sides, so long as the table begins on
the front of the first page of the notice and there is a reference on
the first page indicating that the table continues on the following
page. The summary of changes described in paragraph (c)(2)(iv)(A)(1) of
this section must immediately follow the information described in
paragraph (c)(2)(iv)(A)(2) through (c)(2)(iv)(A)(7) and, if applicable,
paragraphs (c)(2)(iv)(A)(8), (c)(2)(iv)(B), and (c)(2)(iv)(C), of this
section, substantially similar to the format shown in Sample G-20 or G-
21 in appendix G to this part.
(v) Notice not required. For open-end plans (other than home equity
plans subject to the requirements of Sec. 226.5b) a creditor is not
required to provide notice under this section:
(A) When the change involves charges for documentary evidence; a
reduction of any component of a finance or other charge; suspension of
future credit privileges (except as provided in paragraph (c)(2)(vi) of
this section) or termination of an account or plan; when the change
results from an agreement involving a court proceeding; when the change
is an extension of the grace period; or if the change is applicable
only to checks that access a credit card account and the changed terms
are disclosed on or with the checks in accordance with paragraph (b)(3)
of this section;
(B) When the change is an increase in an annual percentage rate
upon the expiration of a specified period of time, provided that:
(1) Prior to commencement of that period, the creditor disclosed in
writing to the consumer, in a clear and conspicuous manner, the length
of the period and the annual percentage rate that would apply after
expiration of the period;
(2) The disclosure of the length of the period and the annual
percentage rate that would apply after expiration of the period are set
forth in close proximity and in equal prominence to the first listing
of the disclosure of the rate that applies during the specified period
of time; and
(3) The annual percentage rate that applies after that period does
not exceed the rate disclosed pursuant to paragraph (c)(2)(v)(B)(1) of
this paragraph or, if the rate disclosed pursuant to paragraph
(c)(2)(v)(B)(1) of this section was a variable rate, the rate following
any such increase is a variable rate determined by the same formula
(index and margin) that was used to calculate the variable rate
disclosed pursuant to paragraph (c)(2)(v)(B)(1);
(C) When the change is an increase in a variable annual percentage
rate in accordance with a credit card agreement that provides for
changes in the rate according to operation of an index that is not
under the control of the creditor and is available to the general
public; or
(D) When the change is an increase in an annual percentage rate, a
fee or charge required to be disclosed under Sec. 226.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii), or the required minimum periodic payment
due to the completion of a workout or temporary hardship arrangement by
the consumer or the consumer's failure to comply with the terms of such
an arrangement, provided that:
(1) The annual percentage rate or fee or charge applicable to a
category of transactions or the required minimum periodic payment
following any such increase does not exceed the rate or fee or charge
or required minimum periodic payment that applied to that category of
transactions prior to commencement of the arrangement or, if the rate
that applied to a category of transactions prior to the commencement of
the workout or temporary hardship arrangement was a variable rate, the
rate following any such increase is a variable rate determined by the
same formula (index and margin) that applied to the category of
transactions prior to commencement of the workout or temporary hardship
arrangement; and
(2) The creditor has provided the consumer, prior to the
commencement of such arrangement, with a clear and conspicuous
disclosure of the terms of the arrangement (including any increases due
to such completion or failure). This disclosure must generally be
provided in writing. However, a creditor may provide the disclosure of
the terms of the arrangement orally by telephone, provided that the
creditor mails or delivers a written disclosure of the terms of the
arrangement to the consumer as soon as reasonably practicable after the
oral disclosure is provided.
(vi) Reduction of the credit limit. For open-end plans that are not
subject to the requirements of Sec. 226.5b, if a creditor decreases
the credit limit on an account, advance notice of the decrease must be
provided before an over-the-limit fee or a penalty rate can be imposed
solely as a result of the consumer exceeding the newly decreased credit
limit. Notice shall be provided in writing or orally at least 45 days
prior to imposing the over-the-limit fee or penalty rate and shall
state that the credit limit on the account has been or will be
decreased.
* * * * *
(g) Increase in rates due to delinquency or default or as a
penalty--(1) Increases subject to this section. For plans other than
home-equity plans subject to the requirements of Sec. 226.5b, except
as provided in paragraph (g)(4) of this section, a creditor must
provide a written notice to each consumer who may be affected when:
(i) A rate is increased due to the consumer's delinquency or
default; or
(ii) A rate is increased as a penalty for one or more events
specified in the
[[Page 37571]]
account agreement, such as making a late payment or obtaining an
extension of credit that exceeds the credit limit.
(2) Timing of written notice. Whenever any notice is required to be
given pursuant to paragraph (g)(1) of this section, the creditor shall
provide written notice of the increase in rates at least 45 days prior
to the effective date of the increase. The notice must be provided
after the occurrence of the events described in paragraphs (g)(1)(i)
and (g)(1)(ii) of this section that trigger the imposition of the rate
increase.
(3)(i) Disclosure requirements for rate increases--(A) General. If
a creditor is increasing the rate due to delinquency or default or as a
penalty, the creditor must provide the following information on the
notice sent pursuant to paragraph (g)(1) of this section:
(1) A statement that the delinquency or default rate or penalty
rate, as applicable, has been triggered;
(2) The date on which the delinquency or default rate or penalty
rate will apply;
(3) The circumstances under which the delinquency or default rate
or penalty rate, as applicable, will cease to apply to the consumer's
account, or that the delinquency or default rate or penalty rate will
remain in effect for a potentially indefinite time period;
(4) A statement indicating to which balances the delinquency or
default rate or penalty rate will be applied;
(5) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the
rate increase, unless a consumer fails to make a minimum periodic
payment within 60 days from the due date for that payment; and
(6) For a credit card account under an open-end (not home-secured)
consumer credit plan, a statement of no more than four principal
reasons for the rate increase, listed in their order of importance.
(B) Rate increases resulting from failure to make minimum periodic
payment within 60 days from due date. For a credit card account under
an open-end (not home-secured) consumer credit plan, if the rate
increase required to be disclosed pursuant to paragraph (g)(1) of this
section is an increase pursuant to Sec. 226.55(b)(4) based on the
consumer's failure to make a minimum periodic payment within 60 days
from the due date for that payment, the notice provided pursuant to
paragraph (g)(1) of this section must also state that the increase will
cease to apply to transactions that occurred prior to or within 14 days
of provision of the notice, if the creditor receives six consecutive
required minimum periodic payments on or before the payment due date,
beginning with the first payment due following the effective date of
the increase.
(ii) Format requirements. (A) If a notice required by paragraph
(g)(1) of this section is included on or with a periodic statement, the
information described in paragraph (g)(3)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement, above the notice described in paragraph (c)(2)(iv)
of this section if that notice is provided on the same statement.
(B) If a notice required by paragraph (g)(1) of this section is not
included on or with a periodic statement, the information described in
paragraph (g)(3)(i) of this section must be disclosed on the front of
the first page of the notice. Only information related to the increase
in the rate to a penalty rate may be included with the notice, except
that this notice may be combined with a notice described in paragraph
(c)(2)(iv) or (g)(4) of this section.
(4) Exception for decrease in credit limit. A creditor is not
required to provide a notice pursuant to paragraph (g)(1) of this
section prior to increasing the rate for obtaining an extension of
credit that exceeds the credit limit, provided that:
(i) The creditor provides at least 45 days in advance of imposing
the penalty rate a notice, in writing, that includes:
(A) A statement that the credit limit on the account has been or
will be decreased.
(B) A statement indicating the date on which the penalty rate will
apply, if the outstanding balance exceeds the credit limit as of that
date;
(C) A statement that the penalty rate will not be imposed on the
date specified in paragraph (g)(4)(i)(B) of this section, if the
outstanding balance does not exceed the credit limit as of that date;
(D) The circumstances under which the penalty rate, if applied,
will cease to apply to the account, or that the penalty rate, if
applied, will remain in effect for a potentially indefinite time
period;
(E) A statement indicating to which balances the penalty rate may
be applied; and
(F) If applicable, a description of any balances to which the
current rate will continue to apply as of the effective date of the
rate increase, unless the consumer fails to make a minimum periodic
payment within 60 days from the due date for that payment; and
(ii) The creditor does not increase the rate applicable to the
consumer's account to the penalty rate if the outstanding balance does
not exceed the credit limit on the date set forth in the notice and
described in paragraph (g)(4)(i)(B) of this section.
(iii)(A) If a notice provided pursuant to paragraph (g)(4)(i) of
this section is included on or with a periodic statement, the
information described in paragraph (g)(4)(i) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement; or
(B) If a notice required by paragraph (g)(4)(i) of this section is
not included on or with a periodic statement, the information described
in paragraph (g)(4)(i) of this section must be disclosed on the front
of the first page of the notice. Only information related to the
reduction in credit limit may be included with the notice, except that
this notice may be combined with a notice described in paragraph
(c)(2)(iv) or (g)(1) of this section.
* * * * *
0
5. Section 226.52(b) is added to read as follows:
Sec. 226.52 Limitations on fees.
* * * * *
(b) Limitations on penalty fees. A card issuer must not impose a
fee for violating the terms or other requirements of a credit card
account under an open-end (not home-secured) consumer credit plan
unless the dollar amount of the fee is consistent with paragraphs
(b)(1) and (b)(2) of this section.
(1) General rule. Except as provided in paragraph (b)(2) of this
section, a card issuer may impose a fee for violating the terms or
other requirements of a credit card account under an open-end (not
home-secured) consumer credit plan if the dollar amount of the fee is
consistent with either paragraph (b)(1)(i) or (b)(1)(ii) of this
section.
(i) Fees based on costs. A card issuer may impose a fee for
violating the terms or other requirements of an account if the card
issuer has determined that the dollar amount of the fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation. A card issuer must reevaluate this
determination at least once every twelve months. If as a result of the
reevaluation the card issuer determines that a lower fee represents a
reasonable proportion of the total costs incurred by the card issuer as
a result of that type of violation, the card issuer must begin imposing
the lower fee within 45 days after completing the reevaluation. If as a
result of the reevaluation the card issuer determines that a higher fee
represents a reasonable proportion of the total costs incurred by
[[Page 37572]]
the card issuer as a result of that type of violation, the card issuer
may begin imposing the higher fee after complying with the notice
requirements in Sec. 226.9.
(ii) Safe harbors. A card issuer may impose a fee for violating the
terms or other requirements of an account if the dollar amount of the
fee does not exceed:
(A) For the first violation of a particular type, $25.00, adjusted
annually by the Board to reflect changes in the Consumer Price Index;
(B) For an additional violation of the same type during the next
six billing cycles, $35.00, adjusted annually by the Board to reflect
changes in the Consumer Price Index; or
(C) When a card issuer has not received the required payment for
two or more consecutive billing cycles for a charge card account that
requires payment of outstanding balances in full at the end of each
billing cycle, three percent of the delinquent balance.
(2) Prohibited fees--(i) Fees that exceed dollar amount associated
with violation. (A) Generally. A card issuer must not impose a fee for
violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan that exceeds
the dollar amount associated with the violation.
(B) No dollar amount associated with violation. A card issuer must
not impose a fee for violating the terms or other requirements of a
credit card account under an open-end (not home-secured) consumer
credit plan when there is no dollar amount associated with the
violation. For purposes of paragraph (b)(2)(i) of this section, there
is no dollar amount associated with the following violations:
(1) Transactions that the card issuer declines to authorize;
(2) Account inactivity; and
(3) The closure or termination of an account.
(ii) Multiple fees based on a single event or transaction. A card
issuer must not impose more than one fee for violating the terms or
other requirements of a credit card account under an open-end (not
home-secured) consumer credit plan based on a single event or
transaction. A card issuer may, at its option, comply with this
prohibition by imposing no more than one fee for violating the terms or
other requirements of an account during a billing cycle.
0
6. Section 226.59 is added to read as follows:
Sec. 226.59 Reevaluation of rate increases.
(a) General rule--(1) Evaluation of increased rate. If a card
issuer increases an annual percentage rate that applies to a credit
card account under an open-end (not home-secured) consumer credit plan,
based on the credit risk of the consumer, market conditions, or other
factors, or increased such a rate on or after January 1, 2009, and 45
days' advance notice of the rate increase is required pursuant to Sec.
226.9(c)(2) or (g), the card issuer must:
(i) Evaluate the factors described in paragraph (d) of this
section; and
(ii) Based on its review of such factors, reduce the annual
percentage rate applicable to the consumer's account, as appropriate.
(2) Rate reductions--(i) Timing. If a card issuer is required to
reduce the rate applicable to an account pursuant to paragraph (a)(1)
of this section, the card issuer must reduce the rate not later than 45
days after completion of the evaluation described in paragraph (a)(1).
(ii) Applicability of rate reduction. Any reduction in an annual
percentage rate required pursuant to paragraph (a)(1) of this section
shall apply to:
(A) Any outstanding balances to which the increased rate described
in paragraph (a)(1) of this section has been applied; and
(B) New transactions that occur after the effective date of the
rate reduction that would otherwise have been subject to the increased
rate.
(b) Policies and procedures. A card issuer must have reasonable
written policies and procedures in place to conduct the review
described in paragraph (a) of this section.
(c) Timing. A card issuer that is subject to paragraph (a) of this
section must conduct the review described in paragraph (a)(1) of this
section not less frequently than once every six months after the rate
increase.
(d) Factors--(1) In general. Except as provided in paragraph (d)(2)
of this section, a card issuer must review either:
(i) The factors on which the increase in an annual percentage rate
was originally based; or
(ii) The factors that the card issuer currently considers when
determining the annual percentage rates applicable to similar new
credit card accounts under an open-end (not home-secured) consumer
credit plan.
(2) Rate increases imposed between January 1, 2009 and February 21,
2010. For rate increases imposed between January 1, 2009 and February
21, 2010, an issuer must consider the factors described in paragraph
(d)(1)(ii) when conducting the first two reviews required under
paragraph (a) of this section, unless the rate increase subject to
paragraph (a) of this section was based solely upon factors specific to
the consumer, such as a decline in the consumer's credit risk, the
consumer's delinquency or default, or a violation of the terms of the
account.
(e) Rate increases subject to Sec. 226.55(b)(4). If an issuer
increases a rate applicable to a consumer's account pursuant to Sec.
226.55(b)(4) based on the card issuer not receiving the consumer's
required minimum periodic payment within 60 days after the due date,
the issuer is not required to perform the review described in paragraph
(a) of this section prior to the sixth payment due date after the
effective date of the increase. However, if the annual percentage rate
applicable to the consumer's account is not reduced pursuant to Sec.
226.55(b)(4)(ii), the card issuer must perform the review described in
paragraph (a) of this section. The first such review must occur no
later than six months after the sixth payment due following the
effective date of the rate increase.
(f) Termination of obligation to review factors. The obligation to
review factors described in paragraph (a) and (d) of this section
ceases to apply:
(1) If the issuer reduces the annual percentage rate applicable to
a credit card account under an open-end (not home-secured) consumer
credit plan to the rate applicable immediately prior to the increase,
or, if the rate applicable immediately prior to the increase was a
variable rate, to a variable rate determined by the same formula (index
and margin) that was used to calculate the rate applicable immediately
prior to the increase; or
(2) If the issuer reduces the annual percentage rate to a rate that
is lower than the rate described in paragraph (f)(1) of this section.
(g) Acquired accounts--(1) General. Except as provided in paragraph
(g)(2) of this section, this section applies to credit card accounts
that have been acquired by the card issuer from another card issuer. A
card issuer that complies with this section by reviewing the factors
described in paragraph (d)(1)(i) must review the factors considered by
the card issuer from which it acquired the accounts in connection with
the rate increase.
(2) Review of acquired portfolio. If, not later than six months
after the acquisition of such accounts, a card issuer reviews all of
the credit card accounts it acquires in accordance with the factors
that it currently considers in determining the rates applicable to its
similar new credit card accounts:
(i) Except as provided in paragraph (g)(2)(iii), the card issuer is
required to conduct reviews described in paragraph
[[Page 37573]]
(a) of this section only for rate increases that are imposed as a
result of its review under this paragraph. See Sec. Sec. 226.9 and
226.55 for additional requirements regarding rate increases on acquired
accounts.
(ii) Except as provided in paragraph (g)(2)(iii) of this section,
the card issuer is not required to conduct reviews in accordance with
paragraph (a) of this section for any rate increases made prior to the
card issuer's acquisition of such accounts.
(iii) If as a result of the card issuer's review, an account is
subject to, or continues to be subject to, an increased rate as a
penalty, or due to the consumer's delinquency or default, the
requirements of paragraph (a) of this section apply.
(h) Exceptions--(1) Servicemembers Civil Relief Act exception. The
requirements of this section do not apply to increases in an annual
percentage rate that was previously decreased pursuant to 50 U.S.C.
app. 527, provided that such a rate increase is made in accordance with
Sec. 226.55(b)(6).
(2) Charged off accounts. The requirements of this section do not
apply to accounts that the card issuer has charged off in accordance
with loan-loss provisions.
0
7. Appendix G to part 226 is amended by revising Forms G-10(B), G-
10(C), G-10(E), G-17(B), G-17(C), G-18(B), G-18(D), G-18(F), G-18(G),
G-20, G-21, G-22, G-25(A), and G-25(B).
Appendix G To Part 226--Open-End Model Forms And Clauses
* * * * *
BILLING CODE 6210-01-P
[GRAPHIC] [TIFF OMITTED] TR29JN10.000
[[Page 37574]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.001
* * * * *
[[Page 37575]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.002
* * * * *
[[Page 37576]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.003
[[Page 37577]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.004
BILLING CODE 6210-01-C
G-18(B)--Late Payment Fee Sample
Late Payment Warning: If we do not receive your minimum payment
by the date listed above, you may have to pay a late fee of up to
$35 and your APRs may be increased up to the Penalty APR of 28.99%.
* * * * *
[[Page 37578]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.005
* * * * *
[[Page 37579]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.006
[[Page 37580]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.007
[[Page 37581]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.008
* * * * *
[[Page 37582]]
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[GRAPHIC] [TIFF OMITTED] TR29JN10.010
[GRAPHIC] [TIFF OMITTED] TR29JN10.011
* * * * *
[[Page 37583]]
[GRAPHIC] [TIFF OMITTED] TR29JN10.012
G-25(A)--Consent Form for Over-the-Credit Limit Transactions
Your choice regarding over-the-credit limit coverage
Unless you tell us otherwise, we will decline any transaction
that causes you to go over your credit limit. If you want us to
authorize these transactions, you can request over-the-credit limit
coverage.
If you have over-the-credit limit coverage and you go over your
credit limit, we will charge you a fee of up to $35. We may also
increase your APRs to the Penalty APR of XX.XX%. You will only pay
one fee per billing cycle, even if you go over your limit multiple
times in the same cycle.
Even if you request over-the-credit limit coverage, in some
cases we may still decline a transaction that would cause you to go
over your limit, such as if you are past due or significantly over
your credit limit.
If you want over-the-limit coverage and to allow us to authorize
transactions that go over your credit limit, please:
--Call us at [telephone number];
--Visit [Web site]; or
--Check or initial the box below, and return the form to us at
[address].
-----------------------------------------------------------------------
-- I want over-the-limit coverage. I understand that if I go
over my credit limit, my APRs may be increased and I will be charged
a fee of up to $35. [I have the right to cancel this coverage at any
time.]
[-- I do not want over-the-limit coverage. I understand that
transactions that exceed my credit limit will not be authorized.]
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------
G-25(B)--Revocation Notice for Periodic Statement Regarding Over-the-
Credit Limit Transactions
You currently have over-the-credit limit coverage on your
account, which means that we pay transactions that cause you go to
over your credit limit. If you do go over your credit limit, we will
charge you a fee of up to $35. We may also increase your APRs. To
remove over-the-credit-limit coverage from your account, call us at
1-800-xxxxxxx or visit [insert web site]. [You may also write us at:
[insert address].]
[You may also check or initial the box below and return this
form to us at: [insert address].
-- I want to cancel over-the-limit coverage for my account.
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------
0
8. In Supplement I to Part 226:
0
A. Under Section 226.5a[horbar]Credit and Charge Card Applications and
Solicitations, under 5a(a) General rules, under 5a(a)(2) Form of
disclosures; tabular format, paragraph 5.ii. is revised.
0
B. Under Section 226.9-Subsequent Disclosure Requirements:
0
(i) Under 9(c) Change in terms, the heading 9(c)(2)(iv) Significant
charges in account terms is removed.
0
(ii) Under 9(c) Change in terms, under 9(c)(2)(iv) Disclosure
requirements, paragraphs 1. through 10. are revised and paragraph 11.
is added.
0
(iii) Under 9(c) Change in terms, under 9(c)(2)(v) Notice not required,
paragraph 12. is added.
0
(iii) Under 9(g) Increase in rates due to delinquency or default or as
a penalty, paragraphs 1. through 6. are revised and paragraph 7. is
added.
0
C. Under Section 226.52--Limitations on Fees, 52(b) Limitations on
penalty fees is added.
0
D. Under Section 226.56--Requirements for over-the-limit transactions:
0
(i) Under 56(e) Content, paragraph 1. is revised; and
0
(ii) Under 56(j) Prohibited practices, paragraph 6. is added.
0
E. Section 226.59-Reevaluation of Rate Increases is added.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Section 226.5a--Credit and Charge Card Applications and Solicitations
* * * * *
5a(a) General rules.
* * * * *
5a(a)(2) Form of disclosures; tabular format.
* * * * *
5. * * *
ii. Maximum limits on fees. Section 226.5a(a)(2)(iv) provides
that any maximum limits on fee amounts must be disclosed in bold
text. For example, assume that, consistent with Sec.
226.52(b)(1)(ii), a card issuer's late payment fee will not exceed
$35. The maximum limit of $35 for the late payment fee must be
highlighted in bold. Similarly, assume an issuer will charge a cash
advance fee of $5 or 3 percent of the cash advance transaction
amount, whichever is greater, but the fee will not exceed $100. The
maximum limit of $100 for the cash advance fee must be highlighted
in bold.
* * * * *
Section 226.9--Subsequent Disclosure Requirements
* * * * *
9(c) Change in terms.
* * * * *
9(c)(2)(iv) Disclosure requirements.
1. Changing margin for calculating a variable rate. If a
creditor is changing a margin used to calculate a variable rate, the
creditor must disclose the amount of the new rate (as calculated
using the new margin) in the table described in Sec.
226.9(c)(2)(iv), and include a reminder that the rate is a variable
rate. For example, if a creditor is changing the margin for a
variable rate that uses the prime rate as an index, the creditor
must disclose in the table the new rate (as calculated using the new
margin) and indicate that the rate varies with the market based on
the prime rate.
2. Changing index for calculating a variable rate. If a creditor
is changing the index used to calculate a variable rate, the
creditor must disclose the amount of the new rate (as calculated
using the new index) and indicate that the rate varies and how the
rate is determined, as explained in Sec. 226.6(b)(2)(i)(A). For
example, if a creditor is changing from using a prime rate to using
the LIBOR in calculating a variable rate, the creditor would
disclose in the table the new rate (using the new index) and
indicate that the rate varies with the market based on the LIBOR.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing a rate applicable to a consumer's account from
a variable rate to a non-variable rate, the creditor must provide a
notice as otherwise required under Sec. 226.9(c) even if the
variable rate at the time of the change is higher than the non-
variable rate.
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing a rate applicable to a consumer's account from
a non-variable rate to a variable rate, the creditor must provide a
notice as otherwise required under Sec. 226.9(c) even if the non-
variable rate is higher than the variable rate at the time of the
change.
[[Page 37584]]
5. Changes in the penalty rate, the triggers for the penalty
rate, or how long the penalty rate applies. If a creditor is
changing the amount of the penalty rate, the creditor must also
redisclose the triggers for the penalty rate and the information
about how long the penalty rate applies even if those terms are not
changing. Likewise, if a creditor is changing the triggers for the
penalty rate, the creditor must redisclose the amount of the penalty
rate and information about how long the penalty rate applies. If a
creditor is changing how long the penalty rate applies, the creditor
must redisclose the amount of the penalty rate and the triggers for
the penalty rate, even if they are not changing.
6. Changes in fees. If a creditor is changing part of how a fee
that is disclosed in a tabular format under Sec. 226.6(b)(1) and
(b)(2) is determined, the creditor must redisclose all relevant
information related to that fee regardless of whether this other
information is changing. For example, if a creditor currently
charges a cash advance fee of ``Either $5 or 3% of the transaction
amount, whichever is greater. (Max: $100),'' and the creditor is
only changing the minimum dollar amount from $5 to $10, the issuer
must redisclose the other information related to how the fee is
determined. For example, the creditor in this example would disclose
the following: ``Either $10 or 3% of the transaction amount,
whichever is greater. (Max: $100).''
7. Combining a notice described in Sec. 226.9(c)(2)(iv) with a
notice described in Sec. 226.9(g)(3). If a creditor is required to
provide a notice described in Sec. 226.9(c)(2)(iv) and a notice
described in Sec. 226.9(g)(3) to a consumer, the creditor may
combine the two notices. This would occur if penalty pricing has
been triggered, and other terms are changing on the consumer's
account at the same time.
8. Content. Sample G-20 contains an example of how to comply
with the requirements in Sec. 226.9(c)(2)(iv) when a variable rate
is being changed to a non-variable rate on a credit card account.
The sample explains when the new rate will apply to new transactions
and to which balances the current rate will continue to apply.
Sample G-21 contains an example of how to comply with the
requirements in Sec. 226.9(c)(2)(iv) when the late payment fee on a
credit card account is being increased, and the returned payment fee
is also being increased. The sample discloses the consumer's right
to reject the changes in accordance with Sec. 226.9(h).
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required
under Sec. 226.9(c)(2)(iv)(A)(1).
10. Terminology. See Sec. 226.5(a)(2) for terminology
requirements applicable to disclosures required under Sec.
226.9(c)(2)(iv)(A)(1).
11. Reasons for increase. i. In general. Section
226.9(c)(2)(iv)(A)(8) requires card issuers to disclose the
principal reason(s) for increasing an annual percentage rate
applicable to a credit card account under an open-end (not home-
secured) consumer credit plan. The regulation does not mandate a
minimum number of reasons that must be disclosed. However, the
specific reasons disclosed under Sec. 226.9(c)(2)(iv)(A)(8) are
required to relate to and accurately describe the principal factors
actually considered by the card issuer in increasing the rate. A
card issuer may describe the reasons for the increase in general
terms. For example, the notice of a rate increase triggered by a
decrease of 100 points in a consumer's credit score may state that
the increase is due to ``a decline in your creditworthiness'' or ``a
decline in your credit score.'' Similarly, a notice of a rate
increase triggered by a 10% increase in the card issuer's cost of
funds may be disclosed as ``a change in market conditions.'' In some
circumstances, it may be appropriate for a card issuer to combine
the disclosure of several reasons in one statement. However, Sec.
226.9(c)(2)(iv)(A)(8) requires that the notice specifically disclose
any violation of the terms of the account on which the rate is being
increased, such as a late payment or a returned payment, if such
violation of the account terms is one of the four principal reasons
for the rate increase.
ii. Example. Assume that a consumer made a late payment on the
credit card account on which the rate increase is being imposed,
made a late payment on a credit card account with another card
issuer, and the consumer's credit score decreased, in part due to
such late payments. The card issuer may disclose the reasons for the
rate increase as a decline in the consumer's credit score and the
consumer's late payment on the account subject to the increase.
Because the late payment on the credit card account with the other
issuer also likely contributed to the decline in the consumer's
credit score, it is not required to be separately disclosed.
However, the late payment on the credit card account on which the
rate increase is being imposed must be specifically disclosed even
if that late payment also contributed to the decline in the
consumer's credit score.
9(c)(2)(v) Notice not required.
* * * * *
12. Temporary rates--relationship to Sec. 226.59. i. General.
Section 226.59 requires a card issuer to review rate increases
imposed due to the revocation of a temporary rate. In some
circumstances, Sec. 226.59 may require an issuer to reinstate a
reduced temporary rate based on that review. If, based on a review
required by Sec. 226.59, a creditor reinstates a temporary rate
that had been revoked, the card issuer is not required to provide an
additional notice to the consumer when the reinstated temporary rate
expires, if the card issuer provided the disclosures required by
Sec. 226.9(c)(2)(v)(B) prior to the original commencement of the
temporary rate. See Sec. 226.55 and the associated commentary for
guidance on the permissibility and applicability of rate increases.
ii. Example. A consumer opens a new credit card account under an
open-end (not home-secured) consumer credit plan on January 1, 2011.
The annual percentage rate applicable to purchases is 18%. The card
issuer offers the consumer a 15% rate on purchases made between
January 1, 2012 and January 1, 2014. Prior to January 1, 2012, the
card issuer discloses, in accordance with Sec. 226.9(c)(2)(v)(B),
that the rate on purchases made during that period will increase to
the standard 18% rate on January 1, 2014. In March 2012, the
consumer makes a payment that is ten days late. The card issuer,
upon providing 45 days' advance notice of the change under Sec.
226.9(g), increases the rate on new purchases to 18% effective as of
June 1, 2012. On December 1, 2012, the issuer performs a review of
the consumer's account in accordance with Sec. 226.59. Based on
that review, the card issuer is required to reduce the rate to the
original 15% temporary rate as of January 15, 2013. On January 1,
2014, the card issuer may increase the rate on purchases to 18%, as
previously disclosed prior to January 1, 2012, without providing an
additional notice to the consumer.
* * * * *
9(g) Increase in rates due to delinquency or default or as a
penalty.
1. Relationship between Sec. 226.9(c) and (g) and Sec.
226.55--examples. Card issuers subject to Sec. 226.55 are
prohibited from increasing the annual percentage rate for a category
of transactions on any consumer credit card account unless
specifically permitted by one of the exceptions in Sec. 226.55(b).
See comments 55(a)-1 and 55(b)-3 and the commentary to Sec.
226.55(b)(4) for examples that illustrate the relationship between
the notice requirements of Sec. 226.9(c) and (g) and Sec. 226.55.
2. Affected consumers. If a single credit account involves
multiple consumers that may be affected by the change, the creditor
should refer to Sec. 226.5(d) to determine the number of notices
that must be given.
3. Combining a notice described in Sec. 226.9(g)(3) with a
notice described in Sec. 226.9(c)(2)(iv). If a creditor is required
to provide notices pursuant to both Sec. 226.9(c)(2)(iv) and (g)(3)
to a consumer, the creditor may combine the two notices. This would
occur when penalty pricing has been triggered, and other terms are
changing on the consumer's account at the same time.
4. Content. Sample G-22 contains an example of how to comply
with the requirements in Sec. 226.9(g)(3)(i) when the rate on a
consumer's credit card account is being increased to a penalty rate
as described in Sec. 226.9(g)(1)(ii), based on a late payment that
is not more than 60 days late. Sample G-23 contains an example of
how to comply with the requirements in Sec. 226.9(g)(3)(i) when the
rate increase is triggered by a delinquency of more than 60 days.
5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required
under Sec. 226.9(g).
6. Terminology. See Sec. 226.5(a)(2) for terminology
requirements applicable to disclosures required under Sec.
226.9(g).
7. Reasons for increase. See comment 9(c)(2)(iv)-11 for guidance
on disclosure of the reasons for a rate increase for a credit card
account under an open-end (not home-secured) consumer credit plan.
* * * * *
Section 226.52--Limitations on Fees
* * * * *
52(b) Limitations on penalty fees.
1. Fees for violating the account terms or other requirements.
For purposes of
[[Page 37585]]
Sec. 226.52(b), a fee includes any charge imposed by a card issuer
based on an act or omission that violates the terms of the account
or any other requirements imposed by the card issuer with respect to
the account, other than charges attributable to periodic interest
rates. Accordingly, for purposes of Sec. 226.52(b), a fee does not
include charges attributable to an increase in an annual percentage
rate based on an act or omission that violates the terms or other
requirements of an account.
i. The following are examples of fees that are subject to the
limitations in Sec. 226.52(b) or are prohibited by Sec. 226.52(b):
A. Late payment fees and any other fees imposed by a card issuer
if an account becomes delinquent or if a payment is not received by
a particular date.
B. Returned payment fees and any other fees imposed by a card
issuer if a payment received via check, automated clearing house, or
other payment method is returned.
C. Any fee or charge for an over-the-limit transaction as
defined in Sec. 226.56(a), to the extent the imposition of such a
fee or charge is permitted by Sec. 226.56.
D. Any fee imposed by a card issuer if payment on a check that
accesses a credit card account is declined.
E. Any fee or charge for a transaction that the card issuer
declines to authorize. See Sec. 226.52(b)(2)(i)(B).
F. Any fee imposed by a card issuer based on account inactivity
(including the consumer's failure to use the account for a
particular number or dollar amount of transactions or a particular
type of transaction). See Sec. 226.52(b)(2)(i)(B).
G. Any fee imposed by a card issuer based on the closure or
termination of an account. See Sec. 226.52(b)(2)(i)(B).
ii. The following are examples of fees to which Sec. 226.52(b)
does not apply:
A. Balance transfer fees.
B. Cash advance fees.
C. Foreign transaction fees.
D. Annual fees and other fees for the issuance or availability
of credit described in Sec. 226.5a(b)(2), except to the extent that
such fees are based on account inactivity. See Sec.
226.52(b)(2)(i)(B).
E. Fees for insurance described in Sec. 226.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
226.4(b)(10) written in connection with a credit transaction,
provided that such fees are not imposed as a result of a violation
of the account terms or other requirements of an account.
F. Fees for making an expedited payment (to the extent permitted
by Sec. 226.10(e)).
G. Fees for optional services (such as travel insurance).
H. Fees for reissuing a lost or stolen card.
2. Rounding to nearest whole dollar. A card issuer may round any
fee that complies with Sec. 226.52(b) to the nearest whole dollar.
For example, if Sec. 226.52(b) permits a card issuer to impose a
late payment fee of $21.50, the card issuer may round that amount up
to the nearest whole dollar and impose a late payment fee of $22.
However, if the late payment fee permitted by Sec. 226.52(b) were
$21.49, the card issuer would not be permitted to round that amount
up to $22, although the card issuer could round that amount down and
impose a late payment fee of $21.
52(b)(1) General rule.
1. Relationship between Sec. 226.52(b)(1)(i), (b)(1)(ii), and
(b)(2).
i. Relationship between Sec. 226.52(b)(1)(i) and (b)(1)(ii). A
card issuer may impose a fee for violating the terms or other
requirements of an account pursuant to either Sec. 226.52(b)(1)(i)
or (b)(1)(ii).
A. A card issuer that complies with the safe harbors in Sec.
226.52(b)(1)(ii) is not required to determine that its fees
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of a type of violation under Sec.
226.52(b)(1)(i).
B. A card issuer may impose a fee for one type of violation
pursuant to Sec. 226.52(b)(1)(i) and may impose a fee for a
different type of violation pursuant to Sec. 226.52(b)(1)(ii). For
example, a card issuer may impose a late payment fee of $30 based on
a cost determination pursuant to Sec. 226.52(b)(1)(i) but impose
returned payment and over-the-limit fees of $25 or $35 pursuant to
the safe harbors in Sec. 226.52(b)(1)(ii).
C. A card issuer that previously based the amount of a penalty
fee for a particular type of violation on a cost determination
pursuant to Sec. 226.52(b)(1)(i) may begin to impose a penalty fee
for that type of violation that is consistent with Sec.
226.52(b)(1)(ii) at any time (subject to the notice requirements in
Sec. 226.9), provided that the first fee imposed pursuant to Sec.
226.52(b)(1)(ii) is consistent with Sec. 226.52(b)(1)(ii)(A). For
example, assume that a late payment occurs on January 15 and that,
based on a cost determination pursuant to Sec. 226.52(b)(1)(i), the
card issuer imposes a $30 late payment fee. Another late payment
occurs on July 15. The card issuer may impose another $30 late
payment fee pursuant to Sec. 226.52(b)(1)(i) or may impose a $25
late payment fee pursuant to Sec. 226.52(b)(1)(ii)(A). However, the
card issuer may not impose a $35 late payment fee pursuant to Sec.
226.52(b)(1)(ii)(B). If the card issuer imposes a $25 fee pursuant
to Sec. 226.52(b)(1)(ii)(A) for the July 15 late payment and
another late payment occurs on September 15, the card issuer may
impose a $35 fee for the September 15 late payment pursuant to Sec.
226.52(b)(1)(ii)(B).
ii. Relationship between Sec. 226.52(b)(1) and (b)(2). Section
226.52(b)(1) does not permit a card issuer to impose a fee that is
inconsistent with the prohibitions in Sec. 226.52(b)(2). For
example, if Sec. 226.52(b)(2)(i) prohibits the card issuer from
imposing a late payment fee that exceeds $15, Sec. 226.52(b)(1)(ii)
does not permit the card issuer to impose a higher late payment fee.
52(b)(1)(i) Fees based on costs.
1. Costs incurred as a result of violations. Section
226.52(b)(1)(i) does not require a card issuer to base a fee on the
costs incurred as a result of a specific violation of the terms or
other requirements of an account. Instead, for purposes of Sec.
226.52(b)(1)(i), a card issuer must have determined that a fee for
violating the terms or other requirements of an account represents a
reasonable proportion of the costs incurred by the card issuer as a
result of that type of violation. A card issuer may make a single
determination for all of its credit card portfolios or may make
separate determinations for each portfolio. The factors relevant to
this determination include:
i. The number of violations of a particular type experienced by
the card issuer during a prior period of reasonable length (for
example, a period of twelve months).
ii. The costs incurred by the card issuer during that period as
a result of those violations.
iii. At the card issuer's option, the number of fees imposed by
the card issuer as a result of those violations during that period
that the card issuer reasonably estimates it will be unable to
collect. See comment 52(b)(1)(i)-5.
iv. At the card issuer's option, reasonable estimates for an
upcoming period of changes in the number of violations of that type,
the resulting costs, and the number of fees that the card issuer
will be unable to collect. See illustrative examples in comments
52(b)(1)(i)-6 through -9.
2. Amounts excluded from cost analysis. The following amounts
are not costs incurred by a card issuer as a result of violations of
the terms or other requirements of an account for purposes of Sec.
226.52(b)(1)(i):
i. Losses and associated costs (including the cost of holding
reserves against potential losses and the cost of funding delinquent
accounts).
ii. Costs associated with evaluating whether consumers who have
not violated the terms or other requirements of an account are
likely to do so in the future (such as the costs associated with
underwriting new accounts). However, once a violation of the terms
or other requirements of an account has occurred, the costs
associated with preventing additional violations for a reasonable
period of time are costs incurred by a card issuer as a result of
violations of the terms or other requirements of an account for
purposes of Sec. 226.52(b)(1)(i).
3. Third party charges. As a general matter, amounts charged to
the card issuer by a third party as a result of a violation of the
terms or other requirements of an account are costs incurred by the
card issuer for purposes of Sec. 226.52(b)(1)(i). For example, if a
card issuer is charged a specific amount by a third party for each
returned payment, that amount is a cost incurred by the card issuer
as a result of returned payments. However, if the amount is charged
to the card issuer by an affiliate or subsidiary of the card issuer,
the card issuer must have determined that the charge represents a
reasonable proportion of the costs incurred by the affiliate or
subsidiary as a result of the type of violation. For example, if an
affiliate of a card issuer provides collection services to the card
issuer on delinquent accounts, the card issuer must have determined
that the amounts charged to the card issuer by the affiliate for
such services represent a reasonable proportion of the costs
incurred by the affiliate as a result of late payments.
4. Amounts charged by other card issuers. The fact that a card
issuer's fees for violating the terms or other requirements of an
account are comparable to fees assessed by other card issuers does
not satisfy the requirements of Sec. 226.52(b)(1)(i).
5. Uncollected fees. For purposes of Sec. 226.52(b)(1)(i), a
card issuer may consider
[[Page 37586]]
fees that it is unable to collect when determining the appropriate
fee amount. Fees that the card issuer is unable to collect include
fees imposed on accounts that have been charged off by the card
issuer, fees that have been discharged in bankruptcy, and fees that
the card issuer is required to waive in order to comply with a legal
requirement (such as a requirement imposed by 12 CFR part 226 or 50
U.S.C. app. 527). However, fees that the card issuer chooses not to
impose or chooses not to collect (such as fees the card issuer
chooses to waive at the request of the consumer or under a workout
or temporary hardship arrangement) are not relevant for purposes of
this determination. See illustrative examples in comments
52(b)(2)(i)-6 through -9.
6. Late payment fees.
i. Costs incurred as a result of late payments. For purposes of
Sec. 226.52(b)(1)(i), the costs incurred by a card issuer as a
result of late payments include the costs associated with the
collection of late payments, such as the costs associated with
notifying consumers of delinquencies and resolving delinquencies
(including the establishment of workout and temporary hardship
arrangements).
ii. Examples.
A. Late payment fee based on past delinquencies and costs.
Assume that, during year one, a card issuer experienced 1 million
delinquencies and incurred $26 million in costs as a result of those
delinquencies. For purposes of Sec. 226.52(b)(1)(i), a $26 late
payment fee would represent a reasonable proportion of the total
costs incurred by the card issuer as a result of late payments
during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as above except that the card issuer imposed a late
payment fee for each of the 1 million delinquencies experienced
during year one but was unable to collect 25% of those fees (in
other words, the card issuer was unable to collect 250,000 fees,
leaving a total of 750,000 late payments for which the card issuer
did collect or could have collected a fee). For purposes of Sec.
226.52(b)(2)(i), a late payment fee of $35 would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of late payments during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as paragraphs A. and B. above except the card issuer
reasonably estimates that--based on past delinquency rates and other
factors relevant to potential delinquency rates for year two--it
will experience a 2% decrease in delinquencies during year two (in
other words, 20,000 fewer delinquencies for a total of 980,000). The
card issuer also reasonably estimates that it will be unable to
collect the same percentage of fees (25%) during year two as during
year one (in other words, the card issuer will be unable to collect
245,000 fees, leaving a total of 735,000 late payments for which the
card issuer will be able to collect a fee). The card issuer also
reasonably estimates that--based on past changes in costs incurred
as a result of delinquencies and other factors relevant to potential
costs for year two--it will experience a 5% increase in costs during
year two (in other words, $1.3 million in additional costs for a
total of $27.3 million). For purposes of Sec. 226.52(b)(1)(i), a
$37 late payment fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of late payments
during year two.
7. Returned payment fees.
i. Costs incurred as a result of returned payments. For purposes
of Sec. 226.52(b)(1)(i), the costs incurred by a card issuer as a
result of returned payments include:
A. Costs associated with processing returned payments and
reconciling the card issuer's systems and accounts to reflect
returned payments;
B. Costs associated with investigating potential fraud with
respect to returned payments; and
C. Costs associated with notifying the consumer of the returned
payment and arranging for a new payment.
ii. Examples.
A. Returned payment fee based on past returns and costs. Assume
that, during year one, a card issuer experienced 150,000 returned
payments and incurred $3.1 million in costs as a result of those
returned payments. For purposes of Sec. 226.52(b)(1)(i), a $21
returned payment fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of returned
payments during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as above except that the card issuer imposed a returned
payment fee for each of the 150,000 returned payments experienced
during year one but was unable to collect 15% of those fees (in
other words, the card issuer was unable to collect 22,500 fees,
leaving a total of 127,500 returned payments for which the card
issuer did collect or could have collected a fee). For purposes of
Sec. 226.52(b)(2)(i), a returned payment fee of $24 would represent
a reasonable proportion of the total costs incurred by the card
issuer as a result of returned payments during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as paragraphs A. and B. above except the card issuer
reasonably estimates that--based on past returned payment rates and
other factors relevant to potential returned payment rates for year
two--it will experience a 2% increase in returned payments during
year two (in other words, 3,000 additional returned payments for a
total of 153,000). The card issuer also reasonably estimates that it
will be unable to collect 25% of returned payment fees during year
two (in other words, the card issuer will be unable to collect
38,250 fees, leaving a total of 114,750 returned payments for which
the card issuer will be able to collect a fee). The card issuer also
reasonably estimates that--based on past changes in costs incurred
as a result of returned payments and other factors relevant to
potential costs for year two--it will experience a 1% decrease in
costs during year two (in other words, a $31,000 reduction in costs
for a total of $3.069 million). For purposes of Sec.
226.52(b)(1)(i), a $27 returned payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of returned payments during year two.
8. Over-the-limit fees.
i. Costs incurred as a result of over-the-limit transactions.
For purposes of Sec. 226.52(b)(1)(i), the costs incurred by a card
issuer as a result of over-the-limit transactions include:
A. Costs associated with determining whether to authorize over-
the-limit transactions; and
B. Costs associated with notifying the consumer that the credit
limit has been exceeded and arranging for payments to reduce the
balance below the credit limit.
ii. Costs not incurred as a result of over-the-limit
transactions. For purposes of Sec. 226.52(b)(1)(i), costs
associated with obtaining the affirmative consent of consumers to
the card issuer's payment of transactions that exceed the credit
limit consistent with Sec. 226.56 are not costs incurred by a card
issuer as a result of over-the-limit transactions.
iii. Examples.
A. Over-the-limit fee based on past fees and costs. Assume that,
during year one, a card issuer authorized 600,000 over-the-limit
transactions and incurred $4.5 million in costs as a result of those
over-the-limit transactions. However, because of the affirmative
consent requirements in Sec. 226.56, the card issuer was only
permitted to impose 200,000 over-the-limit fees during year one. For
purposes of Sec. 226.52(b)(1)(i), a $23 over-the-limit fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of over-the-limit transactions during year
two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as above except that the card issuer was unable to
collect 30% of the 200,000 over-the-limit fees imposed during year
one (in other words, the card issuer was unable to collect 60,000
fees, leaving a total of 140,000 over-the-limit transactions for
which the card issuer did collect or could have collected a fee).
For purposes of Sec. 226.52(b)(2)(i), an over-the-limit fee of $32
would represent a reasonable proportion of the total costs incurred
by the card issuer as a result of over-the-limit transactions during
year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as paragraphs A. and B. above except the card issuer
reasonably estimates that--based on past over-the-limit transaction
rates, the percentages of over-the-limit transactions that resulted
in an over-the-limit fee in the past (consistent with Sec. 226.56),
and factors relevant to potential changes in those rates and
percentages for year two--it will authorize approximately the same
number of over-the-limit transactions during year two (600,000) and
impose approximately the same number of over-the-limit fees
(200,000). The card issuer also reasonably estimates that it will be
unable to collect the same percentage of fees (30%) during year two
as during year one (in other words, the card issuer was unable to
collect 60,000 fees, leaving a total of 140,000 over-the-limit
transactions for which the card issuer will be able to collect a
fee). The card issuer also reasonably estimates that--based on past
changes in costs incurred as a result of over-the-limit transactions
and other factors
[[Page 37587]]
relevant to potential costs for year two--it will experience a 6%
decrease in costs during year two (in other words, a $270,000
reduction in costs for a total of $4.23 million). For purposes of
Sec. 226.52(b)(1)(i), a $30 over-the-limit fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of over-the-limit transactions during year two.
9. Declined access check fees.
i. Costs incurred as a result of declined access checks. For
purposes of Sec. 226.52(b)(1)(i), the costs incurred by a card
issuer as a result of declining payment on a check that accesses a
credit card account include:
A. Costs associated with determining whether to decline payment
on access checks;
B. Costs associated with processing declined access checks and
reconciling the card issuer's systems and accounts to reflect
declined access checks;
C. Costs associated with investigating potential fraud with
respect to declined access checks; and
D. Costs associated with notifying the consumer and the merchant
or other party that accepted the access check that payment on the
check has been declined.
ii. Example. Assume that, during year one, a card issuer
declined 100,000 access checks and incurred $2 million in costs as a
result of those declined checks. The card issuer imposed a fee for
each declined access check but was unable to collect 10% of those
fees (in other words, the card issuer was unable to collect 10,000
fees, leaving a total of 90,000 declined access checks for which the
card issuer did collect or could have collected a fee). For purposes
of Sec. 226.52(b)(1)(i), a $22 declined access check fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of declined access checks during year two.
52(b)(1)(ii) Safe harbors.
1. Multiple violations of same type. Section 226.52(b)(1)(ii)(A)
permits a card issuer to impose a fee that does not exceed $25 for
the first violation of a particular type. For a subsequent violation
of the same type during the next six billing cycles, Sec.
226.52(b)(1)(ii)(B) permits the card issuer to impose a fee that
does not exceed $35.
i. Next six billing cycles. A fee may be imposed pursuant to
Sec. 226.52(b)(1)(ii)(B) if, during the six billing cycles
following the billing cycle in which a violation occurred, another
violation of the same type occurs.
A. Late payments. For purposes of Sec. 226.52(b)(1)(ii), a late
payment occurs during the billing cycle in which the payment may
first be treated as late consistent with the requirements of 12 CFR
Part 226 and the terms or other requirements of the account.
B. Returned payments. For purposes of Sec. 226.52(b)(1)(ii), a
returned payment occurs during the billing cycle in which the
payment is returned to the card issuer.
C. Transactions that exceed the credit limit. For purposes of
Sec. 226.52(b)(1)(ii), a transaction that exceeds the credit limit
for an account occurs during the billing cycle in which the
transaction occurs or is authorized by the card issuer.
D. Declined access checks. For purposes of Sec.
226.52(b)(1)(ii), a check that accesses a credit card account is
declined during the billing cycle in which the card issuer declines
payment on the check.
ii. Relationship to Sec. Sec. 226.52(b)(2)(ii) and
226.56(j)(1)(i). If multiple violations are based on the same event
or transaction such that Sec. 226.52(b)(2)(ii) prohibits the card
issuer from imposing more than one fee, the event or transaction
constitutes a single violation for purposes of Sec.
226.52(b)(1)(ii). Furthermore, consistent with Sec.
226.56(j)(1)(i), no more than one violation for exceeding an
account's credit limit can occur during a single billing cycle for
purposes of Sec. 226.52(b)(1)(ii).
iii. Examples: The following examples illustrate the application
of Sec. 226.52(b)(1)(ii)(A) and (b)(1)(ii)(B) with respect to
credit card accounts under an open-end (not home-secured) consumer
credit plan that are not charge card accounts. For purposes of these
examples, assume that the billing cycles for the account begin on
the first day of the month and end on the last day of the month and
that the payment due date for the account is the twenty-fifth day of
the month.
A. Violations of same type (late payments). A required minimum
periodic payment of $50 is due on March 25. On March 26, a late
payment has occurred because no payment has been received.
Accordingly, consistent with Sec. 226.52(b)(1)(ii)(A), the card
issuer imposes a $25 late payment fee on March 26. In order for the
card issuer to impose a $35 late payment fee pursuant to Sec.
226.52(b)(1)(ii)(B), a second late payment must occur during the
April, May, June, July, August, or September billing cycles.
(1) The card issuer does not receive any payment during the
March billing cycle. A required minimum periodic payment of $100 is
due on April 25. On April 20, the card issuer receives a $50
payment. No further payment is received during the April billing
cycle. Accordingly, consistent with Sec. 226.52(b)(1)(ii)(B), the
card issuer may impose a $35 late payment fee on April 26.
Furthermore, the card issuer may impose a $35 late payment fee for
any late payment that occurs during the May, June, July, August,
September, or October billing cycles.
(2) Same facts as in paragraph A. above. On March 30, the card
issuer receives a $50 payment and the required minimum periodic
payments for the April, May, June, July, August, and September
billing cycles are received on or before the payment due date. A
required minimum periodic payment of $60 is due on October 25. On
October 26, a late payment has occurred because the required minimum
periodic payment due on October 25 has not been received. However,
because this late payment did not occur during the six billing
cycles following the March billing cycle, Sec. 226.52(b)(1)(ii)
only permits the card issuer to impose a late payment fee of $25.
B. Violations of different types (late payment and over the
credit limit). The credit limit for an account is $1,000. Consistent
with Sec. 226.56, the consumer has affirmatively consented to the
payment of transactions that exceed the credit limit. A required
minimum periodic payment of $30 is due on August 25. On August 26, a
late payment has occurred because no payment has been received.
Accordingly, consistent with Sec. 226.52(b)(1)(ii)(A), the card
issuer imposes a $25 late payment fee on August 26. On August 30,
the card issuer receives a $30 payment. On September 10, a
transaction causes the account balance to increase to $1,150, which
exceeds the account's $1,000 credit limit. On September 11, a second
transaction increases the account balance to $1,350. On September
23, the card issuer receives the $50 required minimum periodic
payment due on September 25, which reduces the account balance to
$1,300. On September 30, the card issuer imposes a $25 over-the-
limit fee, consistent with Sec. 226.52(b)(1)(ii)(A). On October 26,
a late payment has occurred because the $60 required minimum
periodic payment due on October 25 has not been received.
Accordingly, consistent with Sec. 226.52(b)(1)(ii)(B), the card
issuer imposes a $35 late payment fee on October 26.
C. Violations of different types (late payment and returned
payment). A required minimum periodic payment of $50 is due on July
25. On July 26, a late payment has occurred because no payment has
been received. Accordingly, consistent with Sec.
226.52(b)(1)(ii)(A), the card issuer imposes a $25 late payment fee
on July 26. On July 30, the card issuer receives a $50 payment. A
required minimum periodic payment of $50 is due on August 25. On
August 24, a $50 payment is received. On August 27, the $50 payment
is returned to the card issuer for insufficient funds. In these
circumstances, Sec. 226.52(b)(2)(ii) permits the card issuer to
impose either a late payment fee or a returned payment fee but not
both because the late payment and the returned payment result from
the same event or transaction. Accordingly, for purposes of Sec.
226.52(b)(1)(ii), the event or transaction constitutes a single
violation. However, if the card issuer imposes a late payment fee,
Sec. 226.52(b)(1)(ii)(B) permits the issuer to impose a fee of $35
because the late payment occurred during the six billing cycles
following the July billing cycle. In contrast, if the card issuer
imposes a returned payment fee, the amount of the fee may be no more
than $25 pursuant to Sec. 226.52(b)(1)(ii)(A).
2. Adjustments based on Consumer Price Index. For purposes of
Sec. 226.52(b)(1)(ii)(A) and (b)(1)(ii)(B), the Board shall
calculate each year price level adjusted amounts using the Consumer
Price Index in effect on June 1 of that year. When the cumulative
change in the adjusted minimum value derived from applying the
annual Consumer Price level to the current amounts in Sec.
226.52(b)(1)(ii)(A) and (b)(1)(ii)(B) has risen by a whole dollar,
those amounts will be increased by $1.00. Similarly, when the
cumulative change in the adjusted minimum value derived from
applying the annual Consumer Price level to the current amounts in
Sec. 226.52(b)(1)(ii)(A) and (b)(1)(ii)(B) has decreased by a whole
dollar, those amounts will be decreased by $1.00. The Board will
publish adjustments to the amounts in Sec. 226.52(b)(1)(ii)(A) and
(b)(1)(ii)(B).
3. Delinquent balance for charge card accounts. Section
226.52(b)(1)(ii)(C) provides
[[Page 37588]]
that, when a charge card issuer that requires payment of outstanding
balances in full at the end of each billing cycle has not received
the required payment for two or more consecutive billing cycles, the
card issuer may impose a late payment fee that does not exceed three
percent of the delinquent balance. For purposes of Sec.
226.52(b)(1)(ii)(C), the delinquent balance is any previously billed
amount that remains unpaid at the time the late payment fee is
imposed pursuant to Sec. 226.52(b)(1)(ii)(C). Consistent with Sec.
226.52(b)(2)(ii), a charge card issuer that imposes a fee pursuant
to Sec. 226.52(b)(1)(ii)(C) with respect to a late payment may not
impose a fee pursuant to Sec. 226.52(b)(1)(ii)(B) with respect to
the same late payment. The following examples illustrate the
application of Sec. 226.52(b)(1)(ii)(C):
i. Assume that a charge card issuer requires payment of
outstanding balances in full at the end of each billing cycle and
that the billing cycles for the account begin on the first day of
the month and end on the last day of the month. At the end of the
June billing cycle, the account has a balance of $1,000. On July 5,
the card issuer provides a periodic statement disclosing the $1,000
balance consistent with Sec. 226.7. During the July billing cycle,
the account is used for $300 in transactions, increasing the balance
to $1,300. At the end of the July billing cycle, no payment has been
received and the card issuer imposes a $25 late payment fee
consistent with Sec. 226.52(b)(1)(ii)(A). On August 5, the card
issuer provides a periodic statement disclosing the $1,325 balance
consistent with Sec. 226.7. During the August billing cycle, the
account is used for $200 in transactions, increasing the balance to
$1,525. At the end of the August billing cycle, no payment has been
received. Consistent with Sec. 226.52(b)(1)(ii)(C), the card issuer
may impose a late payment fee of $40, which is 3% of the $1,325
balance that was due at the end of the August billing cycle. Section
226.52(b)(1)(ii)(C) does not permit the card issuer to include the
$200 in transactions that occurred during the August billing cycle.
ii. Same facts as above except that, on August 25, a $100
payment is received. Consistent with Sec. 226.52(b)(1)(ii)(C), the
card issuer may impose a late payment fee of $37, which is 3% of the
unpaid portion of the $1,325 balance that was due at the end of the
August billing cycle ($1,225).
iii. Same facts as in paragraph A. above except that, on August
25, a $200 payment is received. Consistent with Sec.
226.52(b)(1)(ii)(C), the card issuer may impose a late payment fee
of $34, which is 3% of the unpaid portion of the $1,325 balance that
was due at the end of the August billing cycle ($1,125). In the
alternative, the card issuer may impose a late payment fee of $35
consistent with Sec. 226.52(b)(1)(ii)(B). However, Sec.
226.52(b)(2)(ii) prohibits the card issuer from imposing both fees.
52(b)(2) Prohibited fees.
1. Relationship to Sec. 226.52(b)(1). A card issuer does not
comply with Sec. 226.52(b) if it imposes a fee that is inconsistent
with the prohibitions in Sec. 226.52(b)(2). Thus, the prohibitions
in Sec. 226.52(b)(2) apply even if a fee is consistent with Sec.
226.52(b)(1)(i) or (b)(1)(ii). For example, even if a card issuer
has determined for purposes of Sec. 226.52(b)(1)(i) that a $27 fee
represents a reasonable proportion of the total costs incurred by
the card issuer as a result of a particular type of violation, Sec.
226.52(b)(2)(i) prohibits the card issuer from imposing that fee if
the dollar amount associated with the violation is less than $27.
Similarly, even if Sec. 226.52(b)(1)(ii) permits a card issuer to
impose a $25 fee, Sec. 226.52(b)(2)(i) prohibits the card issuer
from imposing that fee if the dollar amount associated with the
violation is less than $25.
52(b)(2)(i) Fees that exceed dollar amount associated with
violation.
1. Late payment fees. For purposes of Sec. 226.52(b)(2)(i), the
dollar amount associated with a late payment is the amount of the
required minimum periodic payment due immediately prior to
assessment of the late payment fee. Thus, Sec. 226.52(b)(2)(i)(A)
prohibits a card issuer from imposing a late payment fee that
exceeds the amount of that required minimum periodic payment. For
example:
i. Assume that a $15 required minimum periodic payment is due on
September 25. The card issuer does not receive any payment on or
before September 25. On September 26, the card issuer imposes a late
payment fee. For purposes of Sec. 226.52(b)(2)(i), the dollar
amount associated with the late payment is the amount of the
required minimum periodic payment due on September 25 ($15). Thus,
under Sec. 226.52(b)(2)(i)(A), the amount of that fee cannot exceed
$15 (even if a higher fee would be permitted under Sec.
226.52(b)(1)).
ii. Same facts as above except that, on September 25, the card
issuer receives a $10 payment. No further payments are received. On
September 26, the card issuer imposes a late payment fee. For
purposes of Sec. 226.52(b)(2)(i), the dollar amount associated with
the late payment is the full amount of the required minimum periodic
payment due on September 25 ($15), rather than the unpaid portion of
that payment ($5). Thus, under Sec. 226.52(b)(2)(i)(A), the amount
of the late payment fee cannot exceed $15 (even if a higher fee
would be permitted under Sec. 226.52(b)(1)).
iii. Assume that a $15 required minimum periodic payment is due
on October 28 and the billing cycle for the account closes on
October 31. The card issuer does not receive any payment on or
before November 3. On November 3, the card issuer determines that
the required minimum periodic payment due on November 28 is $50. On
November 5, the card issuer imposes a late payment fee. For purposes
of Sec. 226.52(b)(2)(i), the dollar amount associated with the late
payment is the amount of the required minimum periodic payment due
on October 28 ($15), rather than the amount of the required minimum
periodic payment due on November 28 ($50). Thus, under Sec.
226.52(b)(2)(i)(A), the amount of that fee cannot exceed $15 (even
if a higher fee would be permitted under Sec. 226.52(b)(1)).
2. Returned payment fees. For purposes of Sec. 226.52(b)(2)(i),
the dollar amount associated with a returned payment is the amount
of the required minimum periodic payment due immediately prior to
the date on which the payment is returned to the card issuer. Thus,
Sec. 226.52(b)(2)(i)(A) prohibits a card issuer from imposing a
returned payment fee that exceeds the amount of that required
minimum periodic payment. However, if a payment has been returned
and is submitted again for payment by the card issuer, there is no
additional dollar amount associated with a subsequent return of that
payment and Sec. 226.52(b)(2)(i)(B) prohibits the card issuer from
imposing an additional returned payment fee. For example:
i. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $15 is due on March 25. The card issuer receives a check
for $100 on March 23, which is returned to the card issuer for
insufficient funds on March 26. For purposes of Sec.
226.52(b)(2)(i), the dollar amount associated with the returned
payment is the amount of the required minimum periodic payment due
on March 25 ($15). Thus, Sec. 226.52(b)(2)(i)(A) prohibits the card
issuer from imposing a returned payment fee that exceeds $15 (even
if a higher fee would be permitted under Sec. 226.52(b)(1)).
Furthermore, Sec. 226.52(b)(2)(ii) prohibits the card issuer from
assessing both a late payment fee and a returned payment fee in
these circumstances. See comment 52(b)(2)(ii)-1.
ii. Same facts as above except that the card issuer receives the
$100 check on March 31 and the check is returned for insufficient
funds on April 2. The minimum payment due on April 25 is $30. For
purposes of Sec. 226.52(b)(2)(i), the dollar amount associated with
the returned payment is the amount of the required minimum periodic
payment due on March 25 ($15), rather than the amount of the
required minimum periodic payment due on April 25 ($30). Thus, Sec.
226.52(b)(2)(i)(A) prohibits the card issuer from imposing a
returned payment fee that exceeds $15 (even if a higher fee would be
permitted under Sec. 226.52(b)(1)). Furthermore, Sec.
226.52(b)(2)(ii) prohibits the card issuer from assessing both a
late payment fee and a returned payment fee in these circumstances.
See comment 52(b)(2)(ii)-1.
iii. Same facts as paragraph i. above except that, on March 28,
the card issuer presents the $100 check for payment a second time.
On April 1, the check is again returned for insufficient funds.
Section 226.52(b)(2)(i)(B) prohibits the card issuer from imposing a
returned payment fee based on the return of the payment on April 1.
iv. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $15 is due on August 25. The card issuer receives a check
for $15 on August 23, which is not returned. The card issuer
receives a check for $50 on September 5, which is returned to the
card issuer for insufficient funds on September 7. Section
226.52(b)(2)(i)(B) does not prohibit the card issuer from imposing a
returned payment fee in these circumstances. Instead, for purposes
of Sec. 226.52(b)(2)(i), the
[[Page 37589]]
dollar amount associated with the returned payment is the amount of
the required minimum periodic payment due on August 25 ($15). Thus,
Sec. 226.52(b)(2)(i)(A) prohibits the card issuer from imposing a
returned payment fee that exceeds $15 (even if a higher fee would be
permitted under Sec. 226.52(b)(1)).
3. Over-the-limit fees. For purposes of Sec. 226.52(b)(2)(i),
the dollar amount associated with extensions of credit in excess of
the credit limit for an account is the total amount of credit
extended by the card issuer in excess of the credit limit during the
billing cycle in which the over-the-limit fee is imposed. Thus,
Sec. 226.52(b)(2)(i)(A) prohibits a card issuer from imposing an
over-the-limit fee that exceeds that amount. Nothing in Sec.
226.52(b) permits a card issuer to impose an over-the-limit fee if
imposition of the fee is inconsistent with Sec. 226.56. The
following examples illustrate the application of Sec.
226.52(b)(2)(i)(A) to over-the-limit fees:
i. Assume that the billing cycles for a credit card account with
a credit limit of $5,000 begin on the first day of the month and end
on the last day of the month. Assume also that, consistent with
Sec. 226.56, the consumer has affirmatively consented to the
payment of transactions that exceed the credit limit. On March 1,
the account has a $4,950 balance. On March 6, a $60 transaction is
charged to the account, increasing the balance to $5,010. On March
25, a $5 transaction is charged to the account, increasing the
balance to $5,015. On the last day of the billing cycle (March 31),
the card issuer imposes an over-the-limit fee. For purposes of Sec.
226.52(b)(2)(i), the dollar amount associated with the extensions of
credit in excess of the credit limit is the total amount of credit
extended by the card issuer in excess of the credit limit during the
March billing cycle ($15). Thus, Sec. 226.52(b)(2)(i)(A) prohibits
the card issuer from imposing an over-the-limit fee that exceeds $15
(even if a higher fee would be permitted under Sec. 226.52(b)(1)).
ii. Same facts as above except that, on March 26, the card
issuer receives a payment of $20, reducing the balance below the
credit limit to $4,995. Nevertheless, for purposes of Sec.
226.52(b)(2)(i), the dollar amount associated with the extensions of
credit in excess of the credit limit is the total amount of credit
extended by the card issuer in excess of the credit limit during the
March billing cycle ($15). Thus, consistent with Sec.
226.52(b)(2)(i)(A), the card issuer may impose an over-the-limit fee
of $15.
4. Declined access check fees. For purposes of Sec.
226.52(b)(2)(i), the dollar amount associated with declining payment
on a check that accesses a credit card account is the amount of the
check. Thus, when a check that accesses a credit card account is
declined, Sec. 226.52(b)(2)(i)(A) prohibits a card issuer from
imposing a fee that exceeds the amount of that check. For example,
assume that a check that accesses a credit card account is used as
payment for a $50 transaction, but payment on the check is declined
by the card issuer because the transaction would have exceeded the
credit limit for the account. For purposes of Sec. 226.52(b)(2)(i),
the dollar amount associated with the declined check is the amount
of the check ($50). Thus, Sec. 226.52(b)(2)(i)(A) prohibits the
card issuer from imposing a fee that exceeds $50. However, the
amount of this fee must also comply with Sec. 226.52(b)(1)(i) or
(b)(1)(ii).
5. Inactivity fees. Section 226.52(b)(2)(i)(B)(2) prohibits a
card issuer from imposing a fee based on account inactivity
(including the consumer's failure to use the account for a
particular number or dollar amount of transactions or a particular
type of transaction). For example, Sec. 226.52(b)(2)(i)(B)(2)
prohibits a card issuer from imposing a $50 fee when a consumer
fails to use the account for $2,000 in purchases over the course of
a year. Similarly, Sec. 226.52(b)(2)(i)(B)(2) prohibits a card
issuer from imposing a $50 annual fee on all accounts but waiving
the fee if the consumer uses the account for $2,000 in purchases
over the course of a year.
6. Closed account fees. Section 226.52(b)(2)(i)(B)(3) prohibits
a card issuer from imposing a fee based on the closure or
termination of an account. For example, 226.52(b)(2)(i)(B)(3)
prohibits a card issuer from:
i. Imposing a one-time fee to consumers who close their
accounts.
ii. Imposing a periodic fee (such as an annual fee, a monthly
maintenance fee, or a closed account fee) after an account is closed
or terminated if that fee was not imposed prior to closure or
termination. This prohibition applies even if the fee was disclosed
prior to closure or termination. See also comment 55(d)-1.
iii. Increasing a periodic fee (such as an annual fee or a
monthly maintenance fee) after an account is closed or terminated.
However, a card issuer is not prohibited from continuing to impose a
periodic fee that was imposed before the account was closed or
terminated.
52(b)(2)(ii) Multiple fees based on single event or transaction.
1. Single event or transaction. Section 226.52(b)(2)(ii)
prohibits a card issuer from imposing more than one fee for
violating the terms or other requirements of an account based on a
single event or transaction. The following examples illustrate the
application of Sec. 226.52(b)(2)(ii). Assume for purposes of these
examples that the billing cycles for a credit card account begin on
the first day of the month and end on the last day of the month and
that the payment due date for the account is the twenty-fifth day of
the month.
i. Assume that the required minimum periodic payment due on
March 25 is $20. On March 26, the card issuer has not received any
payment and imposes a late payment fee. Section 226.52(b)(2)(ii)
prohibits the card issuer from imposing an additional late payment
fee if the $20 minimum payment has not been received by a subsequent
date (such as March 31). However, Sec. 226.52(b)(2)(ii) does not
prohibit the card issuer from imposing an additional late payment
fee if the required minimum periodic payment due on April 25 (which
may include the $20 due on March 25) is not received on or before
that date.
ii. Assume that the required minimum periodic payment due on
March 25 is $30.
A. On March 25, the card issuer receives a check for $50, but
the check is returned for insufficient funds on March 27. Consistent
with Sec. Sec. 226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card
issuer may impose a late payment fee of $25 or a returned payment
fee of $25. However, Sec. 226.52(b)(2)(ii) prohibits the card
issuer from imposing both fees because those fees would be based on
a single event or transaction.
B. Same facts as paragraph ii.A. above except that that card
issuer receives the $50 check on March 27 and the check is returned
for insufficient funds on March 29. Consistent with Sec. Sec.
226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a
late payment fee of $25 or a returned payment fee of $25. However,
Sec. 226.52(b)(2)(ii) prohibits the card issuer from imposing both
fees because those fees would be based on a single event or
transaction. If no payment is received on or before the next payment
due date (April 25), Sec. 226.52(b)(2)(ii) does not prohibit the
card issuer from imposing a late payment fee.
iii. Assume that the required minimum periodic payment due on
July 25 is $30. On July 10, the card issuer receives a $50 payment,
which is not returned. On July 20, the card issuer receives a $100
payment, which is returned for insufficient funds on July 24.
Consistent with Sec. 226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card
issuer may impose a returned payment fee of $25. Nothing in Sec.
226.52(b)(2)(ii) prohibits the imposition of this fee.
iv. Assume that the credit limit for an account is $1,000 and
that, consistent with Sec. 226.56, the consumer has affirmatively
consented to the payment of transactions that exceed the credit
limit. On March 31, the balance on the account is $970 and the card
issuer has not received the $35 required minimum periodic payment
due on March 25. On that same date (March 31), a $70 transaction is
charged to the account, which increases the balance to $1,040.
Consistent with Sec. 226.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card
issuer may impose a late payment fee of $25 and an over-the-limit
fee of $25. Section 226.52(b)(2)(ii) does not prohibit the
imposition of both fees because those fees are based on different
events or transactions.
* * * * *
Section 226.56--Requirements for over-the-limit transactions.
* * * * *
56(e) Content.
1. Amount of over-the-limit fee. See Model Forms G-25(A) and G-
25(B) for guidance on how to disclose the amount of the over-the-
limit fee.
* * * * *
56(j) Prohibited practices.
* * * * *
6. Additional restrictions on over-the-limit fees. See Sec.
226.52(b).
* * * * *
Section 226.59-Reevaluation of Rate Increases.
59(a) General rule.
59(a)(1) Evaluation of increased rate.
1. Types of rate increases covered. Section 226.59(a) applies
both to increases in annual percentage rates imposed on a consumer's
account based on that consumer's credit risk or other circumstances
specific to that
[[Page 37590]]
consumer and to increases in annual percentage rates imposed based
on factors that are not specific to the consumer, such as changes in
market conditions or the issuer's cost of funds.
2. Rate increases actually imposed. Under Sec. 226.59(a), a
card issuer must review changes in factors only if the increased
rate is actually imposed on the consumer's account. For example, if
a card issuer increases the penalty rate for a credit card account
under an open-end (not home-secured) consumer credit plan and the
consumer's account has no balances that are currently subject to the
penalty rate, the card issuer is required to provide a notice
pursuant to Sec. 226.9(c) of the change in terms, but the
requirements of Sec. 226.59 do not apply. However, if the
consumer's account later becomes subject to the penalty rate, the
card issuer is required to provide a notice pursuant to Sec.
226.9(g) and the requirements of Sec. 226.59 begin to apply upon
imposition of the penalty rate. Similarly, if a card issuer raises
the cash advance rate applicable to a consumer's account but the
consumer engages in no cash advance transactions to which that
increased rate is applied, the card issuer is required to provide a
notice pursuant to Sec. 226.9(c) of the change in terms, but the
requirements of Sec. 226.59 do not apply. If the consumer
subsequently engages in a cash advance transaction, the requirements
of Sec. 226.59 begin to apply at that time.
3. Rate increases prior to effective date of rule. For increases
in annual percentage rates made on or after January 1, 2009 and
prior to August 22, 2010, Sec. 226.59(a) requires the card issuer
to review the factors described in Sec. 226.59(d) and reduce the
rate, as appropriate, if the rate increase is of a type for which 45
days' advance notice would currently be required under Sec.
226.9(c)(2) or (g). For example, 45 days' notice is not required
under Sec. 226.9(c)(2) if the rate increase results from the
increase in the index by which a properly-disclosed variable rate is
determined in accordance with Sec. 226.9(c)(2)(v)(C) or if the
increase occurs upon expiration of a specified period of time and
disclosures complying with Sec. 226.9(c)(2)(v)(B) have been
provided. The requirements of Sec. 226.59 do not apply to such rate
increases.
4. Amount of rate decrease. Even in circumstances where a rate
reduction is required, Sec. 226.59 does not require that a card
issuer decrease the rate that applies to a credit card account to
the rate that was in effect prior to the rate increase subject to
Sec. 226.59(a). The amount of the rate decrease that is required
must be determined based upon the card issuer's reasonable policies
and procedures under Sec. 226.59(b) for consideration of factors
described in Sec. 226.59(a) and (d). For example, assume a
consumer's rate on new purchases is increased from a variable rate
of 15.99% to a variable rate of 23.99% based on the consumer's
making a required minimum periodic payment five days late. The
consumer makes all of the payments required on the account on time
for the six months following the rate increase. Assume that the card
issuer evaluates the account by reviewing the factors on which the
increase in an annual percentage rate was originally based, in
accordance with Sec. 226.59(d)(1)(i). The card issuer is not
required to decrease the consumer's rate to the 15.99% that applied
prior to the rate increase. However, the card issuer's policies and
procedures for performing the review required by Sec. 226.59(a)
must be reasonable, as required by Sec. 226.59(b), and must take
into account any reduction in the consumer's credit risk based upon
the consumer's timely payments.
59(a)(2) Rate reductions.
59(a)(2)(ii) Applicability of rate reduction.
1. Applicability of reduced rate to new transactions. Section
226.59(a)(2)(ii) requires, in part, that any reduction in rate
required pursuant to Sec. 226.59(a)(1) must apply to new
transactions that occur after the effective date of the rate
reduction, if those transactions would otherwise have been subject
to the increased rate described in Sec. 226.59(a)(1). A credit card
account may have multiple types of balances, for example, purchases,
cash advances, and balance transfers, to which different rates
apply. For example, assume a new credit card account opened on
January 1 of year one has a rate applicable to purchases of 15% and
a rate applicable to cash advances and balance transfers of 20%.
Effective March 1 of year two, consistent with the limitations in
Sec. 226.55 and upon giving notice required by Sec. 226.9(c)(2),
the card issuer raises the rate applicable to new purchases to 18%
based on market conditions. The only transaction in which the
consumer engages in year two is a $1,000 purchase made on July 1.
The rate for cash advances and balance transfers remains at 20%.
Based on a subsequent review required by Sec. 226.59(a)(1), the
card issuer determines that the rate on purchases must be reduced to
16%. Section 226.59(a)(2)(ii) requires that the 16% rate be applied
to the $1,000 purchase made on July 1 and to all new purchases. The
rate for new cash advances and balance transfers may remain at 20%,
because there was no rate increase applicable to those types of
transactions and, therefore, the requirements of Sec. 226.59(a) do
not apply.
59(c) Timing.
1. In general. The issuer may review all of its accounts subject
to Sec. 226.59(a) at the same time once every six months, may
review each account once each six months on a rolling basis based on
the date on which the rate was increased for that account, or may
otherwise review each account not less frequently than once every
six months.
2. Example. A card issuer increases the rates applicable to one
half of its credit card accounts on June 1, 2011. The card issuer
increases the rates applicable to the other half of its credit card
accounts on September 1, 2011. The card issuer may review the rate
increases for all of its credit card accounts on or before December
1, 2011, and at least every six months thereafter. In the
alternative, the card issuer may first review the rate increases for
the accounts that were repriced on June 1, 2011 on or before
December 1, 2011, and may first review the rate increases for the
accounts that were repriced on September 1, 2011 on or before March
1, 2012.
3. Rate increases prior to effective date of rule. For increases
in annual percentage rates applicable to a credit card account under
an open-end (not home-secured) consumer credit plan on or after
January 1, 2009 and prior to August 22, 2010, Sec. 226.59(c)
requires that the first review for such rate increases be conducted
prior to February 22, 2011.
59(d) Factors.
1. Change in factors. A creditor that complies with Sec.
226.59(a) by reviewing the factors it currently considers in
determining the annual percentage rates applicable to similar new
credit card accounts may change those factors from time to time.
When a creditor changes the factors it considers in determining the
annual percentage rates applicable to similar new credit card
accounts from time to time, it may comply with Sec. 226.59(a) by
reviewing the set of factors it considered immediately prior to the
change in factors for a brief transition period, or may consider the
new factors. For example, a creditor changes the factors it uses to
determine the rates applicable to similar new credit card accounts
on January 1, 2012. The creditor reviews the rates applicable to its
existing accounts that have been subject to a rate increase pursuant
to Sec. 226.59(a) on January 25, 2012. The creditor complies with
Sec. 226.59(a) by reviewing, at its option, either the factors that
it considered on December 31, 2011 when determining the rates
applicable to similar new credit card accounts or the factors that
it considers as of January 25, 2012. For purposes of compliance with
Sec. 226.59(d), a transition period of 60 days from the change of
factors constitutes a brief transition period.
2. Comparison of existing account to factors used for similar
new accounts. Under Sec. 226.59(a), if a creditor evaluates an
existing account using the same factors that it considers in
determining the rates applicable to similar new accounts, the review
of factors need not result in existing accounts being subject to
exactly the same rates and rate structure as a creditor imposes on
similar new accounts. For example, a creditor may offer variable
rates on similar new accounts that are computed by adding a margin
that depends on various factors to the value of the LIBOR index. The
account that the creditor is required to review pursuant to Sec.
226.59(a) may have variable rates that were determined by adding a
different margin, depending on different factors, to a published
prime rate. In performing the review required by Sec. 226.59(a),
the creditor may review the factors it uses to determine the rates
applicable to similar new accounts. If a rate reduction is required,
however, the creditor need not base the variable rate for the
existing account on the LIBOR index but may continue to use the
published prime rate. Section 226.59(a) requires, however, that the
rate on the existing account after the reduction, as determined by
adding the published prime rate and margin, be comparable to the
rate, as determined by adding the margin and LIBOR, charged on a new
account for which the factors are comparable.
3. Similar new credit card accounts. A card issuer complying
with Sec. 226.59(d)(1)(ii) is required to consider the factors that
the card issuer currently considers when determining the annual
percentage rates applicable to
[[Page 37591]]
similar new credit card accounts under an open-end (not home-
secured) consumer credit plan. For example, a card issuer may review
different factors in determining the annual percentage rate that
applies to credit card plans for which the consumer pays an annual
fee and receives rewards points than it reviews in determining the
rates for credit card plans with no annual fee and no rewards
points. Similarly, a card issuer may review different factors in
determining the annual percentage rate that applies to private label
credit cards than it reviews in determining the rates applicable to
credit cards that can be used at a wider variety of merchants. In
addition, a card issuer may review different factors in determining
the annual percentage rate that applies to private label credit
cards usable only at Merchant A than it may review for private label
credit cards usable only at Merchant B. However, Sec.
226.59(d)(1)(ii) requires a card issuer to review the factors it
considers when determining the rates for new credit card accounts
with similar features that are offered for similar purposes.
4. No similar new credit card accounts. In some circumstances, a
card issuer that complies with Sec. 226.59(a) by reviewing the
factors that it currently considers in determining the annual
percentage rates applicable to similar new accounts may not be able
to identify a class of new accounts that are similar to the existing
accounts on which a rate increase has been imposed. For example,
consumers may have existing credit card accounts under an open-end
(not home-secured) consumer credit plan but the card issuer may no
longer offer a product to new consumers with similar
characteristics, such as the availability of rewards, size of credit
line, or other features. Similarly, some consumers' accounts may
have been closed and therefore cannot be used for new transactions,
while all new accounts can be used for new transactions. In those
circumstances, Sec. 226.59 requires that the card issuer
nonetheless perform a review of the rate increase on the existing
customers' accounts. A card issuer does not comply with Sec. 226.59
by maintaining an increased rate without performing such an
evaluation. In such circumstances, Sec. 226.59(d)(1)(ii) requires
that the card issuer compare the existing accounts to the most
closely comparable new accounts that it offers.
5. Consideration of consumer's conduct on existing account. A
card issuer that complies with Sec. 226.59(a) by reviewing the
factors that it currently considers in determining the annual
percentage rates applicable to similar new accounts may consider the
consumer's payment or other account behavior on the existing account
only to the same extent and in the same manner that the issuer
considers such information when one of its current cardholders
applies for a new account with the card issuer. For example, a card
issuer might obtain consumer reports for all of its applicants. The
consumer reports contain certain information regarding the
applicant's past performance on existing credit card accounts.
However, the card issuer may have additional information about an
existing cardholder's payment history or account usage that does not
appear in the consumer report and that, accordingly, it would not
generally have for all new applicants. For example, a consumer may
have made a payment that is five days late on his or her account
with the card issuer, but this information does not appear on the
consumer report. The card issuer may consider this additional
information in performing its review under Sec. 226.59(a), but only
to the extent and in the manner that it considers such information
if a current cardholder applies for a new account with the issuer.
59(f) Termination of obligation to review factors.
1. Revocation of temporary rates. i. In general. If an annual
percentage rate is increased due to revocation of a temporary rate,
Sec. 226.59(a) requires that the card issuer periodically review
the increased rate. In contrast, if the rate increase results from
the expiration of a temporary rate previously disclosed in
accordance with Sec. 226.9(c)(2)(v)(B), the review requirements in
Sec. 226.59(a) do not apply. If a temporary rate is revoked such
that the requirements of Sec. 226.59(a) apply, Sec. 226.59(f)
permits an issuer to terminate the review of the rate increase if
and when the applicable rate is the same as the rate that would have
applied if the increase had not occurred.
ii. Examples. Assume that on January 1, 2011, a consumer opens a
new credit card account under an open-end (not home-secured)
consumer credit plan. The annual percentage rate applicable to
purchases is 15%. The card issuer offers the consumer a 10% rate on
purchases made between February 1, 2012 and August 1, 2013 and
discloses pursuant to Sec. 226.9(c)(2)(v)(B) that on August 1, 2013
the rate on purchases will revert to the original 15% rate. The
consumer makes a payment that is five days late in July 2012.
A. Upon providing 45 days' advance notice and to the extent
permitted under Sec. 226.55, the card issuer increases the rate
applicable to new purchases to 15%, effective on September 1, 2012.
The card issuer must review that rate increase under Sec. 226.59(a)
at least once each six months during the period from September 1,
2012 to August 1, 2013, unless and until the card issuer reduces the
rate to 10%. The card issuer performs reviews of the rate increase
on January 1, 2013 and July 1, 2013. Based on those reviews, the
rate applicable to purchases remains at 15%. Beginning on August 1,
2013, the card issuer is not required to continue periodically
reviewing the rate increase, because if the temporary rate had
expired in accordance with its previously disclosed terms, the 15%
rate would have applied to purchase balances as of August 1, 2013
even if the rate increase had not occurred on September 1, 2012.
B. Same facts as above except that the review conducted on July
1, 2013 indicates that a reduction to the original temporary rate of
10% is appropriate. Section 226.59(a)(2)(i) requires that the rate
be reduced no later than 45 days after completion of the review, or
no later than August 15, 2013. Because the temporary rate would have
expired prior to the date on which the rate decrease is required to
take effect, the card issuer may, at its option, reduce the rate to
10% for any portion of the period from July 1, 2013 to August 1,
2013, or may continue to impose the 15% rate for that entire period.
The card issuer is not required to conduct further reviews of the
15% rate on purchases.
C. Same facts as above except that on September 1, 2012 the card
issuer increases the rate applicable to new purchases to the penalty
rate on the consumer's account, which is 25%. The card issuer
conducts reviews of the increased rate in accordance with Sec.
226.59 on January 1, 2013 and July 1, 2013. Based on those reviews,
the rate applicable to purchases remains at 25%. The card issuer's
obligation to review the rate increase continues to apply after
August 1, 2013, because the 25% penalty rate exceeds the 15% rate
that would have applied if the temporary rate expired in accordance
with its previously disclosed terms. The card issuer's obligation to
review the rate terminates if and when the annual percentage rate
applicable to purchases is reduced to the 15% rate.
59(g) Acquired accounts.
59(g)(1) General.
1. Relationship to Sec. 226.59(d)(2) for rate increases imposed
between January 1, 2009 and February 21, 2010. Section 226.59(d)(2)
applies to acquired accounts. Accordingly, if a card issuer acquires
accounts on which a rate increase was imposed between January 1,
2009 and February 21, 2010 that was not based solely upon consumer-
specific factors, that acquiring card issuer must consider the
factors that it currently considers when determining the annual
percentage rates applicable to similar new credit card accounts, if
it conducts either or both of the first two reviews of such accounts
that are required after August 22, 2010 under Sec. 226.59(a).
59(g)(2) Review of acquired portfolio.
1. Example--general. A card issuer acquires a portfolio of
accounts that currently are subject to annual percentage rates of
12%, 15%, and 18%. Not later than six months after the acquisition
of such accounts, the card issuer reviews all of these accounts in
accordance with the factors that it currently uses in determining
the rates applicable to similar new credit card accounts. As a
result of that review, the card issuer decreases the rate on the
accounts that are currently subject to a 12% annual percentage rate
to 10%, leaves the rate applicable to the accounts currently subject
to a 15% annual percentage rate at 15%, and increases the rate
applicable to the accounts currently subject to a rate of 18% to
20%. Section 226.59(g)(2) requires the card issuer to review, no
less frequently than once every six months, the accounts for which
the rate has been increased to 20%. The card issuer is not required
to review the accounts subject to 10% and 15% rates pursuant to
Sec. 226.59(a), unless and until the card issuer makes a subsequent
rate increase applicable to those accounts.
2. Example--penalty rates. A card issuer acquires a portfolio of
accounts that currently are subject to standard annual percentage
rates of 12% and 15%. In addition, several acquired accounts are
subject to a penalty rate of 24%. Not later than six months after
the acquisition of such accounts, the card issuer reviews all of
these accounts in accordance with the factors that it currently
[[Page 37592]]
uses in determining the rates applicable to similar new credit card
accounts. As a result of that review, the card issuer leaves the
standard rates applicable to the accounts at 12% and 15%,
respectively. The card issuer decreases the rate applicable to the
accounts currently at 24% to its penalty rate of 23%. Section
226.59(g)(2) requires the card issuer to review, no less frequently
than once every six months, the accounts that are subject to a
penalty rate of 23%. The card issuer is not required to review the
accounts subject to 12% and 15% rates pursuant to Sec. 226.59(a),
unless and until the card issuer makes a subsequent rate increase
applicable to those accounts.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, June 14, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-14717 Filed 6-28-10; 8:45 am]
BILLING CODE 6210-01-P