[Federal Register Volume 75, Number 49 (Monday, March 15, 2010)]
[Proposed Rules]
[Pages 12334-12375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4859]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
Federal Register / Vol. 75 , No. 49 / Monday, March 15, 2010 /
Proposed Rules
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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: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend 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 proposed rule would require that penalty
fees imposed by card issuers be reasonable and proportional to the
violation of the account terms. The proposed rule would also require
credit card issuers to reevaluate at least every six months annual
percentage rates increased on or after January 1, 2009.
DATES: Comments must be received on or before April 14, 2010. Comments
on the Paperwork Reduction Act analysis set forth in Section VII of
this Federal Register notice must be received on or before May 14,
2010.
ADDRESSES: You may submit comments, identified by Docket No. R-1384, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
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 proposed 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)) become 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 is implementing 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 January 12, 2010, the Board issued 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 become effective on February 22, 2010. See 75 FR 7658
(February 2010 Regulation Z Rule). This proposed rule implements the
provisions of the Credit Card Act that become effective on August 22,
2010.
II. Summary of Major Proposed 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 proposed rule permits
an issuer to charge a penalty fee for a particular type
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of violation (such as a 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
proposed 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 proposed 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 proposed 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). In order to ensure that penalty fees are based on
relatively current cost information, the proposed rule would require
card issuers to re-evaluate their costs at least annually.
Notably, the proposed rule 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.
Deterrence of violations. The Credit Card Act requires the Board to
consider the deterrence of violations by the cardholder. Accordingly,
as an alternative to basing penalty fees on costs, the proposed rule
permits a card issuer to charge a penalty fee for a particular type of
violation if it has determined that the amount of the fee is reasonably
necessary to deter that type of violation.
Because it would not be feasible to determine the specific amount
necessary to deter a particular consumer, the proposed rule requires
issuers that base their penalty fees on deterrence to use an
empirically derived, demonstrably and statistically sound model that
reasonably estimates the effect of the amount of the fee on the
frequency of violations. In order to support a determination that the
dollar amount of a fee is reasonably necessary to deter a particular
type of violation, a model must reasonably estimate that, independent
of other variables, the imposition of a lower fee amount would result
in a substantial increase in the frequency of that type of violation.
Consumer conduct. The Credit Card Act requires the Board to
consider the conduct of the cardholder. The proposed rule does not
require that each penalty fee be based on an assessment of the
individual consumer conduct associated with the violation. Instead, the
proposed rule takes consumer conduct into account in other ways.
The proposed rule contains provisions specifically based on
consumer conduct. First, the proposed rule prohibits issuers from
imposing penalty fees that exceed the dollar amount associated with the
violation. Thus, for example, a consumer who exceeds the credit limit
by $5 could not be charged an over-the-limit fee of more than $5.
Second, the proposed rule prohibits issuers from imposing multiple
penalty fees based on a single event or transaction.
Safe harbor. Consistent with the authority granted by the Credit
Card Act, the proposed rule contains a safe harbor that provides a
single penalty fee amount that will generally be sufficient to cover an
issuer's costs and to deter violations. Because the Board does not have
sufficient information to determine the appropriate safe harbor amount
at this time, the proposed rule does not provide a specific amount.
Instead, the proposed rule requests that credit card issuers and other
interested parties submit data regarding costs incurred as a result of
violations and the deterrent effect of different fee amounts on
violations.
Because violations involving large dollar amounts may impose
greater costs on the card issuer and require greater deterrence, the
proposed safe harbor would also permit an issuer to impose a penalty
fee that exceeds the specific safe harbor amount in certain
circumstances. Specifically, the proposed safe harbor would permit an
issuer to impose a penalty that does not exceed 5% of the dollar amount
associated with the violation (up to a specific dollar limit). Thus,
for example, if a $500 minimum payment was delinquent, the safe harbor
would permit the card issuer to impose a $25 late payment fee.
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. Creditors are
required to perform this review no less frequently than once every six
months, and must maintain reasonable methodologies for this evaluation.
The statute 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 proposed
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, the proposed rule requires card
issuers to review changes in such factors no less frequently than once
each six months and, if appropriate based on their review, reduce the
annual percentage rate applicable to the account. The requirement to
reevaluate rate increases applies both to increases in annual
percentage rates based on factors specific to a particular consumer,
such as changes in the consumer's creditworthiness, and to increases in
annual percentage rates imposed due to factors 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 proposed rule requires that the rate be reduced within 30 days
after completion of the evaluation.
Factors relevant to reevaluation of rate increases. The proposed
rule sets forth guidance on the factors that a credit card issuer must
consider when performing the reevaluation of a rate increase. Credit
card underwriting standards can change over time and for various
reasons. In some cases, the proposed rule would require card issuers to
review a consumer's account every six months for several years, and the
issuer's underwriting standards for its new and existing cardholders
may change significantly during that time. Accordingly, the proposed
rule would permit 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 its credit card accounts.
Termination of obligation to reevaluate rate increases. The
proposed 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. In some circumstances, the
proposed rule may require card issuers to reevaluate rate increases
each six months for an indefinite period. The proposal solicits comment
on whether the obligation to
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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, 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.
III. Statutory 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 proposal rule
direct the Board to issue implementing regulations. See Credit Card Act
Sec. 101(c) (new TILA Sec. 148) and Sec. 102(b) (new TILA Sec.
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.
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. Currently, 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
fee amounts unless the fee varies by state.
As discussed in detail below with respect to the proposed
amendments to Appendix G-18, disclosure of a maximum limit (or ``up
to'' amount) will generally be necessary to accurately describe penalty
fees that are consistent with the new substantive restrictions in
proposed 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 will generally be the only amount disclosed
for penalty fees--it is important to highlight that amount.
Accordingly, the Board is proposing to amend 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 would also make conforming amendments to
comment 5a(a)(2)-5.ii.
Section 226.7 Periodic Statement
Section 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. 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 proposed
amendments to Appendix G, an ``up to'' disclosure will generally be
necessary to accurately describe a late payment fee that is consistent
with the substantive restrictions in proposed Sec. 226.52(b).
Accordingly, the Board is proposing to amend 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, the Board notes that, consistent with Sec. 226.52(b), a
card issuer could disclose a range of late payment fees if, for
example, the issuer chose not to impose a fee when a required minimum
periodic payment below a certain amount is not received by the payment
due date. As discussed in detail below, proposed Sec. 226.52(b)(2)(i)
would prohibit a card issuer from imposing a late payment fee that
exceeds the amount of the delinquent minimum payment. A card issuer
could choose to comply with this prohibition by only charging a late
payment fee when the delinquent payment is above a certain amount. In
these circumstances, the card issuer could disclose the late payment
fee as a range. For example, if a card issuer chose not to impose a
late payment fee when a payment that is less than $5 is late, the
issuer could disclose its fee as a range from $5 to the maximum fee
amount under the safe harbor in proposed Sec. 226.52(b)(3).
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
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
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on which the annual percentage rate has been increased since January 1,
2009.\1\
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\1\ As discussed in the supplementary information to Sec.
226.59, the proposed rule would require 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 proposing to implement 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 proposes to implement 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 the contractual terms or the
exercise of a penalty pricing provision already in the contract;
therefore for ease of reference the proposed 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
proposed changes to Sec. 226.9(c)(2) and (g) would 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 would not be 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. The
Board is proposing to add a new Sec. 226.9(c)(2)(iv)(A)(8) that
requires 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) credit plan, listed in their order of importance, in
order to implement the notice requirements of new TILA Section 148.
Comment 9(c)(2)(iv)-11 would provide additional guidance on the
required disclosure. Specifically comment 9(c)(2)(iv)-11 states 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 reasons disclosed are
required to relate to and accurately describe the principal factors
actually considered by the credit card issuer. The Board does not
believe that it is appropriate to mandate disclosure of a minimum
number of reasons, because rate increases may occur in different
circumstances and the number of principal factors considered by the
issuer could vary. For example, the rate increase could be the result
of the consumer's behavior on the account, such as making a late
payment, and in that case there would be only one principal reason for
the rate increase. In contrast, a card issuer could base a rate
increase on several different reasons, for example, a decrease in the
consumer's credit score and changes in market conditions. In those
circumstances, the card issuer would be required to disclose both
principal reasons. However, as noted above, in order to avoid
information overload, the regulation would limit the number of
principal reasons to a maximum of four.
The comment further notes that a card issuer may 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 notes 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.'' The Board believes that this is
the appropriate level of detail for this disclosure, because it would
inform the consumer whether the rate increase is due to changes in the
consumer's 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 such detailed information would not outweigh the operational burden
associated with providing additional detail.
The disclosure requirements of new Sec. 226.9(c)(2)(iv)(A)(8) are
intended to be flexible, to reflect the Board's understanding that
different card issuers may consider different reasons, or may weigh
similar reasons differently, in determining whether to raise the rate
applicable to a consumer's account. Proposed comment 9(c)(2)(iv)-11
notes that in some circumstances, it may be appropriate for a card
issuer to combine the disclosure of several reasons in one statement.
For example, assume that the rate applicable to a consumer's account is
being increased because 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.
Similarly, the Board proposes to add a new Sec.
226.9(g)(3)(i)(A)(6) for 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). Proposed Sec. 226.9(g)(3)(i)(A)(6)
would require 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) credit plan. New
comment 9(g)-7 would cross-reference comment 9(c)(2)(iv)-11 for
guidance on disclosure of the reasons for a rate increase.
The Board proposes 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 proposed Sec. 226.9(c)(2)(iv)(A)(8) and
(g)(3)(i)(A)(6).
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
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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, many agreements
provide that a fee will be assessed if amounts are charged to the
account that exceed the account's credit limit.\2\ 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.\3\ The GAO also found
that, over the same period, the percentage of issuer revenue derived
from penalty fees increased to approximately 10%.\4\
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\2\ 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.
\3\ U.S. Gov't 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).
\4\ 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 $37 as of
May 2009, while the average over-the-limit fee has increased to
approximately $36.\5\ 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.\6\
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\5\ 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 remained at
that level through May 2009. 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 $32.
\6\ 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 many smaller credit card issuers 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 to $25. In
addition, the Board understands that many credit unions charge late-
payment and over-the-limit fees of $20 on average. 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.\7\
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\7\ 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 \8\ 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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\8\ 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 proposes to implement new TILA
Section 149 in proposed Sec. 226.52(b). In developing this proposal,
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 with one another. As a separate legal term, ``reasonable''
has been defined as ``fair, proper, or moderate.'' \9\ Congress often
uses a reasonableness standard to provide agencies or courts with broad
discretion in implementing or interpreting a statutory requirement.\10\
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.'' \11\ 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,
providing the Board with substantial discretion in implementing that
requirement.
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\9\ 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)).
\10\ 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.'').
\11\ 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
[[Page 12339]]
factors, the Board believes that they reflect 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.
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.
As discussed below, when the statutory factors in Section 149(c)
were in conflict, the Board found it necessary to give more weight to a
particular factor or factors. In addition, while the Board has
generally attempted to establish consistent relationships between the
dollar amounts of penalty fees and the violations for which they are
imposed, there are certain circumstances in which the Board believes
that a particular factor or factors may warrant modifications to those
relationships that could produce some degree of inconsistency. The
Board is making these determinations pursuant to the authority granted
by new TILA Section 149 and existing TILA Section 105(a). In
particular, as noted above, new TILA Section 149(d) provides that ``the
Board may establish different standards for different types of fees and
charges, as appropriate.''
Cost Incurred as a Result of Violations
New TILA Section 149(c)(1) requires the Board to consider the cost
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 reasonable and proportional to a violation if it represents a
reasonable proportion of the total costs incurred by the issuer as a
result of that type of violation across all consumers. This
interpretation 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 ensuring that those costs are
spread evenly among consumers and that no individual consumer bears an
unreasonable or disproportionate share. As discussed below, the Board
also intends to adopt a safe harbor amount for penalty fees that the
Board believes would be generally sufficient to cover issuers' costs.
The Board notes that the proposed rule would 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 occurred 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, the proposed rule would require 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. The Board believes that a
penalty fee is reasonable and proportional to a violation under new
TILA Section 149(a) if the dollar amount of the fee is reasonably
necessary to deter that type of violation. The Board believes that this
interpretation is consistent with Congress' intent because it will
prevent consumers from being charged fees that unreasonably exceed--or
are out of proportion to--their deterrent effect. As discussed below,
the Board would also adopt a safe harbor amount for penalty fees that
the Board believes would be generally sufficient to deter violations.
The proposed rule does not require that penalty fees be calibrated
to deter individual consumers from engaging in specific violations. The
Board believes 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.
Accordingly, as discussed in more detail below, the proposed rule would
require that penalty fees be reasonably necessary to deter the type of
violation, rather than a specific violation or an individual
consumer.\12\
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\12\ The Board acknowledges that a penalty fee is unlikely to
have a deterrent effect in circumstances where consumers cannot
avoid the violation of the account terms. However, deterrence is a
required factor under new TILA Section 149(c), and 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) (finding that, based on a study of
four million credit card statements, 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) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1091623&download=yes).
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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, the proposed rule would not require card issuers to
examine the conduct of the individual consumer before imposing a
penalty fee. The Board believes that--to the extent certain consumer
conduct that violates the account terms or other requirements has the
effect of increasing the costs incurred by the card issuer--fees
imposed pursuant to the proposed rule would reflect that conduct
because the issuer would be permitted to recover the increased cost.
Similarly, the proposed rule takes consumer conduct into account by
permitting issuers to charge penalty fees that are reasonably necessary
to deter certain types of conduct that result in violations. Thus,
because consideration of individual consumer conduct is not feasible
and because general consumer conduct would be reflected in the cost and
deterrence analyses, the Board's general rule would not permit penalty
fees to be based exclusively on consumer conduct.
However, the Board considered consumer conduct when developing
other provisions of the proposed rule. These provisions reflect the
Board's belief that 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, the proposed rule would prohibit issuers from
imposing penalty fees that exceed the dollar amount associated with the
violation of the account terms or other requirements. Thus, a consumer
who exceeds the
[[Page 12340]]
credit limit by $5 could not be charged an over-the-limit fee of more
than $5.
The proposed rule would also establish a safe harbor permitting
higher penalty fees when a large dollar amount is associated with the
violation. Specifically, issuers would be permitted to impose penalty
fees that do not exceed 5% of the dollar amount associated with the
violation (up to a maximum amount). Thus, a consumer who exceeds the
credit limit by $500 could be charged an over-the-limit fee of $25.
Furthermore, the proposed rule would prohibit issuers from imposing
multiple penalty fees based on a single event or transaction. The Board
believes that imposing multiple fees in these circumstances could 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, the proposed rule would prohibit issuers from
charging a late payment fee and a returned payment fee based on a
single payment.
Finally, the Board solicits comment on whether there are additional
methods for regulating the amount of credit card penalty fees based on
the conduct of the consumer. In particular, the Board solicits comment
on whether the safe harbor in Sec. 226.52(b)(3) should permit issuers
to base penalty fees on consumer conduct by:
Tiering the dollar amount of penalty fees based on the
number of times a consumer engages in particular conduct during a
specified period. For example, card issuers could be permitted to
charge a fee for the second late payment during a 12-month period that
is higher than the fee charged for the first late payment.
Imposing penalty fees in increments based on the
consumer's conduct. For example, card issuers could be permitted to
charge a late payment fee of $5 each day after the payment due date
until the required minimum periodic payment is received. Thus, a
consumer who is only a day late would be charged $5 in late payment
fees, while a consumer who is five days late would be charged $25.
52(b)(1) General Rule
Proposed Sec. 226.52(b)(1) implements the general rule in new TILA
Section 149(a) by providing 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
card issuer has determined that either: (1) 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; or (2) the
dollar amount of the fee is reasonably necessary to deter that type of
violation.
Because a card issuer is in the best position to determine the
costs it incurs as a result of violations and the deterrent effect of
its penalty fees, the Board believes that, as a general matter, it is
appropriate to make card issuers responsible for determining that their
fees comply with new TILA Section 149(a) and Sec. 226.52(b)(1). As
discussed below, proposed Sec. 226.52(b)(3) contains a safe harbor
that is intended to reduce the burden of making these determinations.
The Board notes that a card issuer that chooses to base its penalty
fees on its own determinations (rather than on the safe harbor) must be
able to demonstrate to the regulator responsible for enforcing
compliance with TILA and Regulation Z that its determinations are
consistent with Sec. 226.52(b)(1).
As discussed above, it would be inefficient and overly burdensome
to require card issuers to make individualized determinations with
respect to the costs incurred as a result of each violation or the
amount necessary to deter 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. Although ``the conduct of the
cardholder'' is a relevant consideration under new TILA Section
149(c)(3), proposed Sec. 226.52(b)(1) would not require a card issuer
to examine the conduct of the individual consumer with respect to a
particular violation before imposing a penalty fee, nor would it permit
an issuer to base the amount of a penalty fee solely on a consumer's
conduct. Instead, the Board believes that this factor supports the
prohibitions in proposed Sec. 226.52(b)(2) on penalty fees that exceed
the dollar amount associated with the violation and the imposition of
multiple penalty fees based on a single event or transaction.
Proposed comment 52(b)-1 would clarify 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 provides 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; \13\ (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.\14\
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\13\ It appears that Congress intended new TILA Section 149 to
apply to all over-the-limit fees, even if the consumer has
affirmatively consented to the payment of over-the-limit
transactions pursuant to new TILA Section 127(k) and Sec. 226.56.
See new TILA Sec. 149(a) (listing over-the-limit fees as an example
of a penalty fee or charge). Furthermore, the Board has 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.
\14\ 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.
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Proposed comment 52(b)-1 would also provide 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 account terms or other requirements; (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.
In addition, proposed comment 52(b)-1 would clarify 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
account terms. Currently, many credit card issuers apply an increased
[[Page 12341]]
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.
Elsewhere in the Credit Card Act, Congress expressly referred to
increases in annual percentage rates when it intended to address
them.\15\ 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 Sec. 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
Sec. 171(b)(4)(B); Sec. 226.55(b)(4)(ii). With respect to new
transactions, new TILA Sec. 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 Sec. 127(i); Sec. 226.9(g).
Finally, 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 Sec. 148; proposed 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.\16\
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\15\ For example, revised TILA Section 171(a) and (b) and new
TILA Section 172 explicitly distinguish between annual percentage
rates, fees, and finance charges.
\16\ The Board also notes 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 Sec. 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).
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Proposed comment 52(b)-2 would clarify that a card issuer may round
any fee that complies with Sec. 226.52(b) to the nearest whole dollar.
For example, if the proposed rule 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 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.
Proposed comment 52(b)(1)-1 would clarify that the fact that a card
issuer's fees for violating the account terms are comparable to fees
assessed by other card issuers is not sufficient to satisfy the
requirements of Sec. 226.52(b)(1). 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 or are
reasonably necessary to deter violations.
A. Fees Based on Costs
Proposed comment 52(b)(1)(i)-1 would clarify that a card issuer is
not required to base its fees on the costs incurred as a result of a
specific violation of the account terms or other requirements. Instead,
for purposes of Sec. 226.52(b)(1)(i), a card issuer must have
determined that a fee for violating the account terms or other
requirements represents a reasonable proportion of the costs incurred
by the card issuer as a result of that type of violation. The factors
relevant to this determination include: (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, the card issuer may, at its
option, 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, a card issuer could satisfy Sec. 226.52(b)(1)(i) by
determining that its late payment fee represents 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). As
discussed below, proposed comments 52(b)(1)(i)-4 through -6 would
provide more detailed examples of the types of costs that a card issuer
may incur as a result of late payments, returned payments, and
transactions that exceed the credit limit as well as examples of fees
that would represent a reasonable proportion of those costs.
Proposed comment 52(b)(1)(i)-2 would clarify that, although higher
rates of loss may be associated with particular violations of the
account terms, 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. Although an account 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). Furthermore, it appears that most violations of the account
terms do not actually result in losses.\17\
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\17\ For example, 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.
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In addition, the Board understands that, as a general matter, card
issuers currently do not price for the risk of loss through penalty
fees; instead, issuers generally price for risk through upfront annual
percentage rates and penalty rate increases.\18\ However, the Credit
Card Act generally prohibits penalty rate increases during the first
year after account opening and with respect to existing balances.\19\
The Board imposed similar limitations in January 2009, reasoning 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.\20\ For these same reasons, the Board
is concerned that--if card issuers
[[Page 12342]]
were permitted to begin recovering losses and associated costs through
penalty fees rather than upfront rates--transparency in credit card
pricing would be reduced.\21\ Nevertheless, the Board solicits comment
on whether card issuers should be permitted to include losses and
associated costs in the Sec. 226.52(b)(1)(i) determination.
---------------------------------------------------------------------------
\18\ The Board recognizes that this is not necessarily the case
for charge card accounts, which 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 solicits comment on
whether a different approach should be taken with these types of
accounts.
\19\ See revised TILA Sec. 171; new TILA Sec. 172; see also
Sec. 226.55.
\20\ This 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 5521-5528.
\21\ The Board notes that this proposed 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 1, 19-22 (``[W]e fail to see how [losses]
can legitimately be said to have been caused in any legally relevant
sense by a particular default of the consumer given that * * * most
defaulters do not default again in any given year, let alone are
their accounts written off at a later stage.''); see also id. at 25
(``[I]t is preferable for credit card providers' costs to be covered
* * * by the overall interest rate charged for using the card. That
rate is most likely to be in the forefront of the minds of consumers
when entering contracts, and the figure is one which readily enables
the consumer to compare the advantages (or otherwise) of signing up
for one credit card rather than another. The transparency of core
terms such as the interest rate payable on the card enhances the
ability of consumers to compare and contrast the various credit
cards on offer in the market and is therefore likely to bring about
competitive downward pressure on the rates, and hence costs
involved. It is therefore preferable, from the point of view of
making markets work well that if credit card companies want to
recover costs associated with default from their customers, they
should do so by virtue of the overall interest rate payable for
credit on the card.'') (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. Regardless, this question does not affect
the Board's legal authority (and mandate) to regulate credit card
penalty fees under new TILA Section 149. Accordingly, while the
Board does not find the OFT Credit Card Statement to be dispositive
on any particular point, 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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Proposed comment 52(b)(1)(i)-3 would clarify that, as a general
matter, amounts charged to the card issuer by a third party as a result
of a violation of the account terms 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.
Proposed comment 52(b)(1)(i)-4 would clarify the application of
proposed Sec. 226.52(b)(1)(i) to late payment fees. In addition to
providing illustrative examples, the comment would state 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). The Board solicits comment on whether card issuers incur
other costs as a result of late payments.
Proposed comment 52(b)(1)(i)-5 would clarify the application of
proposed Sec. 226.52(b)(1)(i) to returned-payment fees. The comment
would state 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 would also provide
illustrative examples. As above, the Board solicits comment on whether
card issuers incur other costs as a result of returned payments.
Proposed comment 52(b)(1)(i)-6 would clarify the application of
proposed Sec. 226.52(b)(1)(i) to over-the-limit fees. In addition to
providing illustrative examples, the comment would state 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. The Board solicits comment on whether card
issuers incur other costs as a result of over-the-limit transactions.
B. Fees Based on Deterrence
Proposed comment 52(b)(1)(ii)-1 would clarify that Sec.
226.52(b)(1)(ii) does not require a card issuer to determine that a fee
for violating the account terms or other requirements is necessary to
deter violations by a specific consumer or with respect to a specific
account. Instead, for purposes of Sec. 226.52(b)(1)(ii), a card issuer
must determine that a fee is reasonably necessary to deter the type of
violation for which the fee is imposed.
Because it would not be feasible to determine the specific amount
necessary to deter a particular consumer from violating the account
terms or other requirements, Sec. 226.52(b)(1)(ii) would require
issuers that base their penalty fees on deterrence to use an
empirically derived, demonstrably and statistically sound model that
reasonably estimates the effect of the amount of the fee on the
frequency of violations. Proposed comment 52(b)(1)(ii)-2 clarifies that
a model that reasonably estimates a statistical correlation between the
imposition of a fee and the frequency of a type of violation is not
sufficient to satisfy the requirements of Sec. 226.52(b)(1)(ii). The
Board acknowledges that, as a general matter, the imposition of a fee
for particular behavior (such as paying late) can reduce the frequency
of that behavior. However, the frequency of violations may also be
influenced by other factors (such as unemployment rates). In addition,
consistent with the intent of new TILA Section 149, proposed Sec.
226.52(b)(1)(ii) requires the issuer to determine that the dollar
amount of the fee is reasonably necessary to deter violations.
Thus, the proposed comment clarifies that, in order to support a
determination that the dollar amount of a fee is reasonably necessary
to deter a particular type of violation, a model must reasonably
estimate that, independent of other variables, the imposition of a
lower fee amount would result in a substantial increase in the
frequency of that type of violation. In addition, the parameterization
of the model must be sufficiently flexible to allow for the
identification of a lower fee level above which additional fee
increases have no marginal effect on the frequency of violations. In
other words, a card issuer that currently charges a $35 late payment
fee could not satisfy the requirements in Sec. 226.52(b)(1)(ii) by
developing a model that estimates that delinquencies will increase if
no late payment fee is charged. Instead, the issuer's model must be
able to reasonably estimate that delinquencies
[[Page 12343]]
will increase substantially if a late payment fee of less than $35 is
charged.
The Board understands that, in order to develop the empirically-
derived estimates required by Sec. 226.52(b)(1)(ii), card issuers must
have data regarding the effect of different fee amounts on the
frequency of violations. Specifically, in order to comply with Sec.
226.52(b)(1)(ii), it will be necessary for a card issuer to test the
effect of fee amounts that are lower and higher than the amount
ultimately found to be reasonably necessary to deter a type of
violation. For example, in the process of determining that a $20 fee is
reasonably necessary to deter a particular type of violation, a card
issuer may need to test the deterrent effect of an $15 fee and a $25
fee.
Some card issuers may be able to gather the necessary data by
testing the deterrent effect of different fee amounts prior to the
August 22, 2010 effective date for new TILA Section 149. Issuers that
cannot do so would be required to base their penalty fees on costs
consistent with Sec. 226.52(b)(1)(i) or to use the safe harbor in
Sec. 226.52(b)(3). However, the Board does not believe that these
issuers should be permanently foreclosed from gathering the data
necessary to base their penalty fees on deterrence. Furthermore, as
discussed below with respect to Sec. 226.52(b)(1)(iii), card issuers
that base their fees on deterrence will be required to reevaluate those
fees annually and will therefore need to gather updated data.
Accordingly, the Board solicits comment on whether it is
appropriate to permit card issuers to test the effect of penalty fee
amounts that exceed the amounts otherwise permitted by Sec.
226.52(b)(1). In addition, the Board solicits comment on whether
limitations are necessary to ensure that such testing is legitimate.
For example, testing of higher fee amounts could be limited to a
representative sample of accounts that is no larger than reasonably
necessary to make statistically-sound estimates regarding the effect of
the amount of the fee on the frequency of violations. Similarly,
testing could be limited to a period of time that is no longer than
reasonably necessary to make such estimates.
C. Reevaluation of Fees
Proposed Sec. 226.52(b)(1)(iii) provides that a card issuer must
reevaluate its determination under Sec. 226.52(b)(1)(i) or (b)(1)(ii)
at least once every twelve months. If as a result of the reevaluation
the card issuer determines that a lower fee is consistent with Sec.
226.52(b)(1)(i) or (b)(1)(ii), the card issuer must begin imposing the
lower fee within 30 days after completing the reevaluation. If the card
issuer instead determines that a higher fee is consistent with Sec.
226.52(b)(1)(i) or (b)(1)(ii), the card issuer may begin imposing the
higher fee after complying with the notice requirements in Sec. 226.9.
This provision is intended to ensure that card issuers impose penalty
fees based on relatively current cost or deterrence information.
However, the Board does not wish to encourage frequent changes in
penalty fees, which could reduce predictability for consumers.
Accordingly, the Board solicits comment on whether twelve months is an
appropriate interval for the reevaluation.
52(b)(2) Prohibited Fees
Section 226.52(b)(2) would prohibit 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.
A. Fees That Exceed Dollar Amount Associated With Violation
Section 226.52(b)(2)(i)(A) would prohibit fees based on violations
of the account terms that exceed the dollar amount associated with the
violation at the time the fee is imposed. The Board believes that this
prohibition is consistent with Congress' intent to prohibit penalty
fees that are not reasonable and proportional to the violation.
Specifically, 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 believes
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.
The Board recognizes the possibility that a card issuer could incur
costs as a result of a violation that exceed the dollar amount
associated with that violation. However, the Board does not believe
this will be the case in most circumstances. Furthermore, to the extent
an issuer cannot recover all of its costs from violations involving
small dollar amounts, proposed Sec. 226.52(b)(1) permits the issuer to
recover those costs by spreading them evenly among all other consumers
who engage in that type of violation. In addition, the proposed
limitation may encourage card issuers 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 and fees,
which will result in greater transparency for consumers regarding the
cost of using their credit card accounts.
An argument could be made that prohibiting penalty fees from
exceeding the dollar amount associated with the violation will result
in fees that are not sufficient to deter violations. However, the need
for deterrence may be less pronounced with respect to violations
involving small dollar amounts. Furthermore, the Board believes that
consumers may be unlikely to change their behavior in reliance on this
limitation. Penalty fees will still have a deterrent effect in these
circumstances because a card issuer would 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
proposed comment 52(b)(2)(i)-1 through -3.
Finally, the Board recognizes that proposed Sec.
226.52(b)(2)(i)(A) would require card issuers to charge individualized
penalty fees insofar as 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) would require a mathematical determination
that issuers should generally be able to program their systems to
perform automatically. Thus, it does not appear that compliance with
Sec. 226.52(b)(2)(i)(A) would be overly burdensome. Nevertheless, the
Board solicits comment on the compliance burden associated with this
provision.
As discussed below, the proposed commentary and Sec.
226.52(b)(2)(i)(B) provide guidance regarding the dollar amounts
associated with specific violations of the account terms or other
requirements. Consistent with the intent of proposed Sec.
226.52(b)(2)(i), the Board generally clarifies the dollar amount
associated with a violation in terms of the consumer conduct that
resulted in the violation. The Board requests comment on whether
additional guidance is needed regarding the dollar amounts associated
with other types of violations.
1. Dollar Amount Associated With Late Payments
Proposed comment 52(b)(2)(i)-1 would clarify 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, Sec. 226.52(b)(2)(i)(A) prohibits a
[[Page 12344]]
card issuer from imposing a late payment fee that exceeds the amount of
the required minimum periodic payment on which that fee is based. 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 $20 required minimum
periodic payment by the payment due date.
2. Dollar Amount Associated With Returned Payments
Proposed comment 52(b)(2)(i)-2 would clarify 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 cycle in 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.
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 23, which is returned to the card issuer for
insufficient funds on March 26. Section 226.52(b)(2)(i)(A) would
prohibit the card issuer from imposing a returned-payment fee that
exceeds $20. However, assume instead 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. Section
226.52(b)(2)(i)(A) would prohibit the card issuer from imposing a
returned-payment fee that exceeds $30.
The Board considered whether the dollar amount associated with the
required minimum periodic payment should be the amount of the returned
payment itself. However, 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, 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 believes 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.
As a general matter, a card issuer should be readily able to
determine the required minimum periodic payment due during the billing
cycle in which the payment is returned because that payment must be
disclosed on the periodic statement provided shortly after the start of
each cycle. However, it is possible that, in certain circumstances,
this approach could result in a short delay in the imposition of a
returned-payment fee. 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, that periodic statements are mailed on the third day of
the month, and that the required minimum periodic payment is due on the
twenty-fifth day of the month. If a payment is returned on March 1, the
card issuer may not yet have determined the required minimum periodic
payment due on March 25. However, the card issuer must determine the
amount of the payment prior to sending the periodic statement on March
3. Furthermore, regardless of whether the fee is imposed on March 1 or
March 3, it will be reflected on the periodic statement sent on April
3. Thus, in these circumstances, it does not appear that the short
delay in the imposition of the fee would be significantly detrimental
to the issuer or the consumer.
Proposed comment 52(b)(2)(i)-2 would also clarify 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, as discussed
below, Sec. 226.52(b)(2)(i)(B) prohibits a card issuer imposing an
additional returned-payment fee in these circumstances. It would be
inconsistent with the Board's understanding of 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.\22\
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\22\ 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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3. Dollar Amount Associated With Extensions of Credit In Excess of
Credit Limit
Proposed comment 52(b)(2)(i)-3 would clarify 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 would further clarify 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.\23\
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\23\ 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.
---------------------------------------------------------------------------
For example, 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. If the card
issuer chooses to impose an over-the-limit fee on March 6, Sec.
226.52(b)(2)(i)(A) would prohibit the card issuer from imposing an
over-the-limit fee that exceeds $10.
However, assume instead that the card issuer chooses not to impose
an over-the-limit fee on March 6. On March 25, a $5 transaction is
charged to the account, increasing the balance to $5,015. If the card
issuer chooses to impose an over-the-limit fee on March 25, Sec.
226.52(b)(2)(i)(A) would prohibit the card issuer from imposing an
over-the-limit fee that exceeds $15.
4. Dollar Amounts Associated With Other Types of Violations
Section 226.52(b)(2)(i)(B) would prohibit the imposition of penalty
fees in circumstances where there is no dollar amount associated with
the violation. In particular, Sec. 226.52(b)(2)(i)(B) would
specifically prohibit a card issuer from imposing a fee based on a
transaction that the issuer declines to authorize. Although the
imposition of fees based on declined transactions does not appear to be
[[Page 12345]]
widespread at present, the Board believes that 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. See proposed comment 52(b)(1)(i)-6.
However, the Board solicits comment on whether a prohibition on penalty
fees in these circumstances is appropriate.
In addition, proposed Sec. 226.52(b)(2)(i)(B) specifically
prohibits a card issuer from imposing a penalty fee based on account
inactivity or the closure or termination of an account. The Board
believes that this prohibition is warranted because there does not
appear to be any dollar amount associated with this consumer conduct.
The Board understands that card issuers may receive less revenue from
accounts that are not used for a significant number of transactions or
are inactive or closed. The Board also understands that card issuers
incur costs associated with the administration of such accounts (such
as providing periodic statements or 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. As above, however, the Board
solicits comment on whether it is appropriate to prohibit penalty fees
in these circumstances.
B. Multiple Fees Based On a Single Event or Transaction
Section 226.52(b)(2)(ii) would prohibit card issuers from imposing
more than one penalty fee based on a single event or transaction,
although issuers would be permitted to comply with this requirement by
imposing no more than one penalty fee during a billing cycle. As
discussed above, 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 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 that caused the violations.
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) would
prohibit the issuer from recovering the costs incurred as a result of
the returned payment by also charging a returned-payment fee. However,
in these circumstances, Sec. 226.52(b)(1)(i) permits the issuer to
recover those costs by spreading them evenly among all other consumers
whose payments are returned.
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 instance, assume that the credit limit for an account is $1,000. On
March 31, the balance on the account is $975 and the card issuer has
not received the $20 required minimum periodic payment due on March 25.
On that same date (March 31), a $50 transaction is charged to the
account, which increases the balance to $1,025. Section
226.52(b)(2)(i)(A) would permit the card issuer to impose a late
payment fee of $20 and an over-the-limit fee of $25 (assuming that
these amounts comply with the requirements of Sec. 226.52(b)(1) or the
safe harbor in Sec. 226.52(b)(3)). Section 226.52(b)(2)(ii) would not
prohibit the imposition of both fees because those fees are based on
different events or transactions (payment not being received on or
before the payment due date and the $25 extension of credit in excess
of the credit limit).
Notwithstanding this guidance, the Board understands that
determining whether multiple violations are caused by a single event or
transaction will be operationally difficult for card issuers.
Accordingly, in order to facilitate compliance, Sec. 226.52(b)(2)(ii)
permits a card issuer to avoid the burden associated with making such
determinations by charging no more than one penalty fee per billing
cycle. The Board believes that this approach will generally provide 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.
52(b)(3) Safe Harbor
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 be entirely consistent with 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 a generally applicable safe harbor
will facilitate compliance by issuers and increase consistency and
predictability for consumers.
Accordingly, Sec. 226.52(b)(3) would provide a safe harbor that
may be used to comply with the requirement in Sec. 226.52(b)(1) that a
card issuer determine that its penalty fees either represent a
reasonable proportion of the total costs incurred by the card issuer as
a result of violations or are reasonably necessary to deter violations.
However, the Board does not have sufficient information to determine
the appropriate amount at this time. Accordingly, rather than proposing
a specific dollar amount, the Board is requesting comment regarding an
amount that is generally consistent with the requirements in Sec.
226.52(b)(1).
A. Information Considered by the Board
As discussed below, in developing the proposed safe harbor
approach, the Board considered a variety of relevant information.
First, the Board considered the dollar amounts of penalty fees
[[Page 12346]]
currently charged by card issuers. Although credit card penalty fees
appear to be approximately $32 to $37 on average, many smaller card
issuers (such as community banks and credit unions) charge penalty fees
of approximately $20. The Board understands that--rather than basing
penalty fees solely on costs and deterrence--card issuers currently
consider a number of additional factors, including the need to maintain
or increase overall revenue. Nevertheless, the discrepancy between the
fees charged by large and small issuers suggests that--although
violations of the account terms or other requirements 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.
Second, the Board 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 also
indicates that lower credit card penalty fees may adequately reflect
the cost of violations and deter future violations. For example,
according to a recent report by the GAO, the average overdraft and
insufficient funds fee charged by depository institutions was just over
$26 per item in 2007.\24\ 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.\25\
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).
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.
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\24\ 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).
\25\ 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).
---------------------------------------------------------------------------
Third, the Board 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.\26\ 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.\27\ 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.\28\ 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.\29\ 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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\26\ See Cal. Fin. Code Sec. 4001(a)(1)-(2).
\27\ See id. Sec. 4001(a)(3).
\28\ See Mass. Ann. Laws ch. 140 Sec. 114B.
\29\ 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).
---------------------------------------------------------------------------
Fourth, the Board 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.'' \30\ 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.'' \31\ 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.'' \32\ 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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\30\ OFT Credit Card Statement at 1.
\31\ OFT Credit Card Statement at 27-28.
\32\ OFT Credit Card Statement at 29.
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The Board requests that commenters submit additional relevant
information that will assist the Board in establishing a safe harbor
amount or amounts for credit card penalty fees. In particular, to the
extent possible, commenters are asked 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 are asked to
provide, if known, the dollar amounts reasonably necessary to deter
violations and the methods used to determine those amounts.
B. Proposed Safe Harbor
If a card issuer imposes a penalty fee pursuant to the safe harbor
in proposed Sec. 226.52(b)(3), that fee would be limited to the
greater of: (1) A specific dollar amount; or (2) 5% of the dollar
amount associated with the violation of the account terms or other
requirements (up to a specific dollar amount). This approach is
generally consistent with state laws that permit penalty fees to be the
greater of a dollar amount or a percentage of the amount past due.
Proposed Sec. 226.52(b)(3) is intended to provide a single penalty
fee amount that is generally consistent with the requirements of Sec.
226.52(b)(1) and would be imposed for most violations. Card issuers
would be permitted to use the 5% safe harbor to impose a higher fee
when the dollar amount associated
[[Page 12347]]
with the violation is large, although that fee could not exceed a
specified upper limit. For example, if the specific safe harbor amount
were $20, the safe harbor would not permit a card issuer to impose a
fee that exceeds $20 unless the dollar amount associated with the
violation was more than $400. In addition, if the upper limit were $40,
a card issuer could not impose a fee that exceeds $40 under the safe
harbor even if the dollar amount associated with the violation was more
than $800.\33\
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\33\ Proposed comments 52(b)(2)-1 and 52(b)(3)-1 would clarify
that the safe harbor in Sec. 226.52(b)(3) would not permit a card
issuer to impose a fee that is prohibited by 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 card issuer could
not use the safe harbor in Sec. 226.52(b)(3) to impose a higher
fee.
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Section 226.52(b)(3)(i) would provide that a card issuer generally
complies with the requirements of Sec. 226.52(b)(1) if the amount of
the fee does not exceed a specific amount. As noted above, the Board is
requesting comment on the appropriate amount. This amount would be
adjusted annually by the Board to reflect changes in the Consumer Price
Index. Proposed comment 52(b)(3)-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.
In contrast, 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.\34\
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\34\ The approach set forth in this proposed 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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Section 226.52(b)(3)(ii) would generally permit a card issuer to
impose a penalty fee that does not exceed 5% of the dollar amount
associated with the violation.\35\ Because violations involving
substantial dollar amounts may impose greater costs on card issuers,
require greater deterrence, and involve more serious conduct by the
consumer, Sec. 226.52(b)(3)(ii) would generally permit a card issuer
to impose a penalty fee in excess of the specific safe harbor amount in
Sec. 226.52(b)(3)(i), so long as that fee does not exceed 5% of the
dollar amount associated with the violation.
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\35\ Consistent with proposed Sec. 226.52(b)(2)(i), proposed
comment 52(b)(3)-3 clarifies the meaning of ``dollar amount
associated with the violation'' with respect to late payments,
returned payments, and extensions of credit in excess of the credit
limit. As above, the Board requests comment on whether guidance is
needed regarding the dollar amount associated with other type of
violations.
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However, the Board is concerned that--even when a substantial
dollar amount is associated with a violation--a penalty fee over a
certain dollar amount could generally be inconsistent with the factors
in new TILA Section 149(c) because the fee could substantially exceed
the costs incurred by the card issuer as a result of that type of
violation and the amount reasonably necessary to deter such violations.
Furthermore, the Board does not believe that Congress intended new TILA
Section 149 to authorize the imposition of penalty fees that are
significantly higher than those currently charged by credit card
issuers. Accordingly, a fee imposed pursuant to Sec. 226.52(b)(3)(ii)
could not exceed a specific dollar amount. The Board requests comment
on the appropriate upper limit.\36\
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\36\ As discussed in proposed comment 52(b)(3)-2, this upper
limit would also be adjusted annually based on changes in the
Consumer Price Index.
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The Board solicits comment on the general safe harbor approach in
proposed Sec. 226.52(b)(3). The Board also solicits comment on the
appropriate dollar amounts for proposed Sec. 226.52(b)(3)(i) and the
upper limit in proposed Sec. 226.52(b)(3)(ii). Finally, the Board
solicits comment on whether 5% is the appropriate percentage for
proposed Sec. 226.52(b)(3)(ii). As noted above, the Board encourages
commenters to provide data supporting their submissions.
Application of Proposed Sec. 226.52(b) to Charge Card Accounts
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 when the periodic statement is received. See
Sec. 226.5a(b)(7). The Board understands that--unlike conventional
credit card accounts--issuers do not use upfront annual percentage
rates to manage risk on charge card accounts. Charge card accounts
typically require payment of an annual fee, although it is unclear
whether these fees are based on the risk.
The Board solicits comment on the methods used by issuers to manage
risk with respect to charge card accounts. The Board also solicits
comment on whether any adjustments to proposed Sec. 226.52(b) are
necessary to permit charge card issuers to manage risk.
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
proposes to amend 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 proposed Sec. 226.52(b) would impose
additional substantive limitations on over-the-limit fees, the Board
proposes to add a cross-reference to Sec. 226.52(b) in new comment
56(j)-6.
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
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
[[Page 12348]]
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 proposing to implement the substantive requirements of new
TILA Section 148 in new Sec. 226.59.
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 proposes to implement 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.
Proposed Sec. 226.59 would apply 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. Therefore, home-equity lines of credit accessed by credit
cards and overdraft lines of credit accessed by a debit card would not
be subject to the new substantive requirements regarding reevaluation
of rate increases.
59(a) General Rule
Proposed Sec. 226.59(a) sets forth the general rule regarding the
reevaluation of rate increases. Proposed Sec. 226.59(a)(1) generally
mirrors the statutory language of TILA Section 148 and states 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. Proposed Sec.
226.59(a)(1) would limit this obligation to rate increases for which 45
days' advance notice is required under Sec. 226.9(c)(2) or (g). The
Board believes that this limitation is appropriate and necessary for
consistency 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. 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 believes that coverage of such rate
increases by Sec. 226.59 would be inconsistent with the purposes of
new TILA Section 148. Accordingly, the Board is proposing this
limitation to the scope of Sec. 226.59(a) using its 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).
Proposed comment 59(a)-1 would clarify 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 believes
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 believes
that Congress intended for new TILA Section 148 to apply broadly to
most types of rate increases, and is not limited to those rate
increases based on an individual consumer's conduct on the account or
creditworthiness. The Board notes that as discussed below in the
supplementary information to Sec. 226.59(d), a card issuer is not
required under Sec. 226.59(a) to evaluate the same factors it
considered in connection with the rate increase, but may evaluate those
factors that it currently uses in determining the annual percentage
rates applicable to its accounts. For example, if a card issuer raised
a rate based on market conditions, the card issuer may review all
relevant factors, including the credit risk of the consumer, current
market conditions, the card issuer's cost of funds, and other factors,
in determining whether a rate reduction is required for the account.
Proposed comment 59(a)-2 clarifies 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, 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 determine whether a rate reduction is appropriate
under Sec. 226.59. The Board believes that this approach is
appropriate because until an increased rate is imposed on the
consumer's account, the consumer incurs no costs associated with that
increased rate. For example, requiring a review of a consumer's account
if the penalty rate was increased but the consumer's account has no
balance subject to the penalty rate would have no benefit to the
consumer but would place a continuing burden on the card issuer. 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.
Proposed Sec. 226.59(a)(2) states 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 described in Sec.
226.59(a)(1). The Board believes that the intent of new TILA Section
148 is to ensure that the rates on consumers' accounts be reduced
promptly when the card issuer's review of factors indicates that a rate
reduction is appropriate. The Board solicits 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.
Proposed comment 59(a)-3 clarifies 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
[[Page 12349]]
occurred between January 1, 2009 and August 21, 2010. Proposed comment
59(a)-3 states 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
would be 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.
Comment 59(a)-3 would further illustrate 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 understands that the requirement to review changes in
factors in connection with rate increases that occurred prior to the
effective date of this rule may impose a substantial burden on card
issuers that raised interest rates applicable to consumers' accounts
prior to the enactment of the Credit Card Act or prior to the effective
date of this rule. However, the Board believes that this requirement is
necessary to effectuate the intent of new TILA Section 148, which
expressly requires a review of rate increases imposed on or after
January 1, 2009. As discussed further in this supplementary
information, the Board's proposal would permit a card issuer to review
either the factors that it used in increasing the rate applicable to
the consumer's account or the factors that the card issuer currently
uses in determining the annual percentage rates applicable to its
credit card accounts. The Board solicits comment on appropriate
transition guidance for card issuers in conducting reviews of rate
increases imposed prior to August 22, 2010.
59(b) Policies and Procedures
Proposed Sec. 226.59(b) provides, consistent with new TILA Section
148, that a card issuer must have reasonable policies and procedures in
place to review the factors described in Sec. 226.59. Section
226.59(b) would further require that these policies and procedures be
written. The Board is not proposing to prescribe specific policies and
procedures that issuers must use in order to conduct this analysis. The
Board believes that a requirement that such policies and procedures be
reasonable will ensure that issuers undertake due consideration of
these factors in order to determine whether a rate reduction is
required on a consumer's account. The Board believes that a more
prescriptive rule could unduly burden creditors and raise safety and
soundness concerns for financial institutions. In addition, the
particular factors that are the most predictive of the credit risk of a
particular consumer or portfolio of consumers, and the appropriate
manner in which to weigh those factors, may change over time. Moreover,
the factors can vary greatly among institutions. For example,
underwriting standards for private label or retail credit cards will
differ from the standards used for general purpose credit card
accounts. The Board solicits comment on whether more guidance is
necessary regarding whether a card issuer's policies and procedures are
``reasonable.''
Proposed comment 59(b)-1 notes, 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 notes 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 sets 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
comment notes 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 notes that the requirements of proposed Sec. 226.59 are
different from, and operate in addition to, the requirements of Sec.
226.55(b)(4). Section 226.55(b)(4) 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, when the
rate increase is the result of a delinquency of more than 60 days. The
Board notes 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).
The Board believes 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's 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 for 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 in circumstances other than
delinquencies of more than 60 days.
59(c) Timing
Proposed Sec. 226.59(c) clarifies the timing requirements for the
reevaluation of rate increases pursuant to Sec. 226.59(a). Consistent
with new TILA Section 148(b)(2), a card issuer that is subject to Sec.
226.59(a) must 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, comment 59(c)-1 would provide
that an issuer may review all of its accounts at the same time every
six months, may review each account once each six months on a rolling
basis based
[[Page 12350]]
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 Board believes 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, it is appropriate to provide flexibility to card
issuers to decide upon a schedule for reviewing their accounts.
Proposed comment 59(c)-2 sets forth an example of the timing
requirements in Sec. 226.59(c). The example assumes 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 card issuer may
review the rate increases for all of its 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.
Proposed comment 59(c)-3 clarifies 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 states that Sec. 226.59(c) requires that the first review for
such rate increases be conducted prior to February 22, 2011. The Board
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. The Board
believes, therefore, 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) provides clarification on the factors that a
credit card issuer must consider when performing the consideration of a
consumer's account under Sec. 226.59(a). The Board is aware that
credit card underwriting standards can change over time and for a
number of reasons. Under some circumstances, a card issuer may be
required to continue to review a consumer's account each six months for
several years, and the issuer's underwriting standards for its new and
existing cardholders may change significantly during that time. As a
result, proposed Sec. 226.59(d) would provide 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. A card issuer would be
permitted 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 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 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 believes 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 comment 59(d)-1 clarifies 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. The proposed comment notes 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 comment clarifies 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.
For example, 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 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 may consider the factors that it considers as
of January 25, 2011. The Board notes 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. Accordingly,
the Board solicits comment on whether the rule should establish an
express safe harbor for what constitutes a brief transition period
following a change in factors, for example, 30 days or 60 days.
The Board is not proposing a list of particular factors that card
issuers must consider. Similarly, the Board is not proposing to
prohibit the consideration of other factors. The Board believes 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. The Board believes
that the requirement that a card issuer consider either the factors it
currently uses in determining the annual percentage rate to apply to
its credit card accounts or the factors that it originally used to
increase the annual percentage rate will ensure that the factors
considered in connection with the reduction of rates will parallel the
factors an issuer considers when determining whether to increase a
rate.
Proposed comment 59(d)-2 clarifies 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 comment notes 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 the 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 its 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 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.
Proposed comment 59(d)-3 provides additional clarification on how
an issuer should identify the factors to consider
[[Page 12351]]
when evaluating whether a rate reduction is required. Comment 59(d)-3
states 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 specific type of
credit card plan. The Board believes that this clarification is
appropriate to ensure that a credit card issuer considers only those
factors that are relevant to the consumer's specific type of credit
card account rather than factors for a different product that may be
underwritten based on different information. Proposed comment 59(d)-3
sets forth several examples to illustrate what constitute ``types'' of
credit card plans. 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. However, 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.
59(e) Rate Increases Subject to Sec. 226.55(b)(4)
Proposed Sec. 226.59(e) sets 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. The Board believes that new TILA Section 171(b)(4)(B), as
implemented in Sec. 226.55(b)(4)(ii), provides the appropriate
mechanism for lenders to use in determining whether to reduce the rate
on an account that has become more than 60 days delinquent, during the
period immediately following the effective date of the increase. The
Board understands that consumers whose accounts are more than 60 days
delinquent pose a significantly greater risk of nonpayment than
consumers who make timely payments or payments that are, for example,
one day late. The statute therefore sets forth one clear method that
establishes consumers' rights for a rate increase caused by the
consumer's failure to make a minimum payment within 60 days of the due
date for that payment. The Board believes that in light of the
statutory cure mechanism, as implemented in Sec. 226.55(b)(4)(ii), the
requirement to review an account under Sec. 226.59(a) should not apply
during the first six billing periods following a rate increase based on
a delinquency of more than 60 days. The Board notes that the cure
mechanism implemented in Sec. 226.55(b)(4)(ii) is a stronger right
than the requirement that card issuers review consumers' accounts
pursuant to Sec. 226.59. Section 226.55(b)(4)(ii) requires that the
rate be reduced to the rate that was in effect prior to the rate
increase, if the consumer makes the next six required minimum periodic
payments on time. In contrast, new TILA Section 148 and proposed Sec.
226.59 do not require in all circumstances that the rate be reduced to
the rate that was in effect prior to the rate increase.
Accordingly, Sec. 226.59(e) would provide 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, the issuer would be required to begin performing a
review of factors for subsequent six-month periods. The Board believes
that it is appropriate that a creditor review a consumer's account
after the cure right expires under Sec. 226.59(a) if the consumer's
rate has not been reduced, because a consumer's credit risk or other
factors might change after the cure period expires, warranting a rate
reduction at that time.
59(f) Termination of Obligation to Review Factors
TILA Section 148 does not expressly state when the obligation to
review changes in factors and determine whether to reduce the annual
percentage rate applicable to a consumer's credit card account
terminates. The Board believes that the intent of TILA Section 148 is
not to impose a permanent requirement on card issuers to review changes
in factors for a consumer's account even after the annual percentage
rate applicable to the account has been reduced to the original rate.
The statutory requirement applies once the card issuer has increased an
annual percentage rate applicable to a consumer's account but does not
apply to accounts on which an annual percentage rate has not been
increased. The Board believes that if Congress had intended for all
card issuers to review the annual percentage rates applicable to all of
their accounts indefinitely, this would be expressly provided for in
TILA Section 148. Therefore, proposed Sec. 226.59(f) would state 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.
The Board is aware 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 is concerned that
an obligation to continue to review the rate applicable to a consumer's
account many years after the rate increase occurred would impose
significant burden on issuers, and might not have a significant benefit
to consumers. For example, a card issuer might increase the rate
applicable to a consumer's account based on market conditions in year
one. If those market conditions do not change and the review of factors
each six months pursuant to Sec. 226.59(a) does not otherwise require
that the consumer's rate be decreased, an issuer could be required to
continue reviewing the consumer's account ten or even twenty years
after the initial increase. The Board solicits 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 solicits comment
on whether there is significant benefit to consumers from requiring
card issuers to continue reviewing factors under
[[Page 12352]]
Sec. 226.59 even after an extended period of time.
59(g) Acquired Accounts
Proposed Sec. 226.59(g) addresses existing credit card accounts
acquired by a card issuer. Section 226.59(g)(1) sets 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), a card
issuer may review either the factors that the original issuer
considered when imposing the rate increase, or may review the factors
that the acquiring card issuer currently considers in determining the
annual percentage rates applicable to its credit card accounts. The
Board notes 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, a card issuer complying with Sec. 226.59(g)(1)
may choose 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) sets forth an alternate means for
compliance with Sec. 226.59 for accounts acquired by a card issuer.
The Board is proposing Sec. 226.59(g)(2) using its 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). Proposed Sec. 226.59(g)(2) applies 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) provides that the card issuer generally is required to
review changes in factors for those acquired accounts in accordance
with Sec. 226.59(a) only for rate increases that are imposed as a
result of that review. Similarly, Sec. 226.59(g)(2)(ii) provides 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.
The Board believes that this alternative means of compliance is
important because, as noted above, card issuers may not have full
information regarding rate increases imposed by the prior issuer, when
it acquires a new portfolio of accounts. If a card issuer does not know
the rate that initially applied to the accounts it acquires, it would
be required to continue to review its accounts indefinitely, without
the opportunity to cease reviewing those accounts under Sec. 226.59(f)
once the rate is reduced to the rate that initially applied. The Board
is proposing an alternative means of compliance rather than an
exception for acquired accounts, because it believes that coverage of
these accounts is consistent with the purposes of new TILA Section 148.
However, the Board believes that 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 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 (except for any promotional rates).
The Board believes that this will promote fair pricing of consumers'
accounts when they are acquired by a new card issuer. 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
solicits comment on whether Sec. 226.59(g) appropriately addresses
acquired accounts and on any alternatives that would balance the burden
on card issuers against consumer benefit. The Board also solicits
comment on whether additional guidance is necessary regarding the
requirement that the review of acquired accounts occur ``as soon as
reasonably practicable'' after the acquisition of those accounts.
Comment 59(g)(2)-1 sets forth an example of the alternative means
of compliance in Sec. 226.59(g)(2). The example assumes that a card
issuer acquires a portfolio of accounts that currently are subject to
annual percentage rates of 12%, 15%, and 18%. As soon as reasonably
practicable 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 its 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%. Proposed Sec. 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, unless and until the card issuer makes a subsequent rate
increase applicable to those accounts.
In addition to the general rule in Sec. 226.59(g)(2)(i) and
(g)(2)(ii), the Board is proposing Sec. 226.59(g)(2)(iii), which
provides 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 is aware 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. The Board believes that the requirements to
review accounts under Sec. 226.59(a) should apply if a card issuer
imposes, or continues to impose, a penalty rate on an acquired account.
The Board believes that this treatment is consistent with the purposes
of new TILA Section 148, which specifically mentions the credit risk of
the consumer as a factor giving rise to the obligation to review the
rate on an account.
Comment 59(g)(2)-2 sets forth an example of the requirements of
proposed Sec. 226.59(g)(2)(iii) for acquired accounts. 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%. As soon as reasonably
practicable 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 its 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.
[[Page 12353]]
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. Proposed Sec. 226.59(g)(2)
contains an express cross-reference to those sections.
59(h) Exceptions
The Board is proposing two exceptions to the requirements of Sec.
226.59, using its authority under TILA Section 105(a), which are set
forth in Sec. 226.59(h). The first exception applies 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).\37\
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\37\ 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 Board believes that it is not appropriate to require a card
issuer to perform an ongoing review of the rates on an account, when
the rate increase is a reinstatement of a prior rate that was
temporarily reduced to comply with the SCRA. Proposed Sec.
226.59(h)(1) provides 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.
The second proposed exception applies to charged off accounts.
Proposed Sec. 226.59(h)(2) provides 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. The Board understands that 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 due immediately. The Board understands,
therefore, that there should be no further activity on these accounts,
and therefore believes that the requirement to review the rate every
six months should not apply.
Appendix G--Open-End Model Forms and Clauses
For consistency with the substantive limitations in proposed Sec.
226.52(b), the Board is proposing to amend 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))
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) and G-10(C) and 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.
As discussed above, proposed Sec. 226.52(b) would establish new
substantive restrictions on the amount of credit card penalty fees,
including late payment fees, over-the-limit fees, and returned-payment
fees. If adopted, these restrictions would change the way penalty fees
are disclosed. Accordingly, for consistency with Sec. 226.52(b), the
Board is proposing to amend the model language in Samples G-10(B) and
G-10(C) and G-17(B) and G-17(C) to disclose late payment fees, over-
the-limit fees, and returned-payment fees as ``up to $XX.'' In this
model language, $XX represents the maximum fee under the safe harbor in
proposed Sec. 226.52(b)(3)(ii).
The Board recognizes that, because the maximum safe harbor fee only
applies when a large dollar amount is associated with the violation,
this disclosure will generally overstate the amount of the penalty fee.
For example, if the maximum fee were $40, the card issuer would
disclose the amount of its penalty fees as ``up to $40.'' However,
Sec. 226.52(b)(3)(ii) would not actually permit the issuer to impose a
$40 penalty fee unless 5% of the dollar amount associated with the
violation was greater than or equal to $40--in other words, the dollar
amount associated with the violation would have to be $800 or more.
Nevertheless, a consumer who incorrectly assumes that a $40 penalty fee
will be imposed for all violations of the account terms or other
requirements 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 harbor in Sec. 226.52(b)(3) may
deter consumers from violating the account terms or other requirements,
which would be consistent with the intent of new TILA Section 149 (as
stated in Section 149(c)(2)).
The Board is also concerned that providing additional detail could
increase consumer confusion and would not substantially improve the
accuracy of the model disclosure. In particular, the Board considered
whether the method used in Samples G-10(B) and G-10(C) and G-17(B) and
G-17(C) for disclosing cash advance and balance transfer fees should be
applied to penalty fees. For example, Sample G-10(C) discloses the
balance transfer fee as ``[e]ither $5 or 3% of the amount of each
transfer, whichever is greater (maximum fee: $100).'' Similarly, using
as examples a safe harbor amount of $20 and a maximum safe harbor fee
of $40, late payment fees could be disclosed as ``either $20 or 5% of
the minimum payment, which is greater (maximum fee: $40).'' However,
although this disclosure would provide more detail than a disclosure of
``up to $40,'' it would not inform consumers that, consistent with $
226.52(b)(2)(i), a $20 late payment fee could not be imposed if the
delinquent minimum payment is $15. Thus, a more detailed disclosure
could create an appearance of accuracy that is not justified.\38\
Nevertheless, the Board solicits comment on the proposed model language
as well as alternative methods for disclosing penalty fees.
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\38\ The Board also considered combining the ``up to''
disclosure with the method currently used for disclosing cash
advance and balance transfer fees. For example, late payment fees
would be disclosed as ``either up to $20 or 5% of the minimum
payment, whichever is greater (maximum fee: $40).'' However, the
Board is concerned that this disclosure would be too complex to
provide consumers with useful information about the amount of
penalty fees.
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[[Page 12354]]
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 cards 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. 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 proposed amendments to Samples G-10(B), G-
10(C), G-17(B), and G-17(C), the Board is proposing to amend 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 $XX and your
APRs may be increased up to the Penalty APR of 28.99%.''
Sample G-21--Change-in-Terms Sample (Increase in Fees) (Sec.
226.9(c)(2))
The Board proposes to amend the model language in Sample G-21
disclosing a change in a late payment fee for consistency with the
proposed 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 proposed Sec. 226.52(b) and the proposed
amendments to Samples G-10(B), G-10(C), G-17(B), and G-17 (C) discussed
above, the Board proposes to revise Model Forms G-25(A) and G-25(B) to
disclose the amount of the over-the-limit fee as ``up to $XX.''
V. Comment Period
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 Board must issue the final rule
implementing those provisions sufficiently in advance of August 22 to
permit card issuers to make the necessary changes to bring their
systems and practices into compliance. Thus, in order to ensure that
the Board has adequate time to analyze the comments received on the
proposed rule, the Board is requiring that those comments be submitted
no later than 30 days after publication of the proposal in the Federal
Register. Because the proposal is limited to the implementation of two
statutory provisions, the Board believes that interested parties will
have sufficient time to review the proposed rule and prepare their
comments.
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.
Based on its analysis and for the reasons stated below, the Board
believes that this proposed rule would have a significant economic
impact on a substantial number of small entities. Accordingly, the
Board has prepared the following initial regulatory flexibility
analysis pursuant to section 604 of the RFA. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period.
1. Statement of the need for, and objectives of, the proposed rule.
The proposed rule would implement 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 proposed rule.
2. Small entities affected by the proposed rule. All creditors that
offer credit card accounts under open-end (not home-secured) consumer
credit plans are subject to the proposed 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 proposed 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. The
Board invites comment on the effect of the proposed rule on small
entities.
3. Recordkeeping, reporting, and compliance requirements. The
proposed rule does not impose any new recordkeeping or reporting
requirements. The proposed rule would, however, impose new compliance
requirements. The compliance requirements of this proposed 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 proposed rule and the costs of updating their
systems to comply with the rule are difficult to predict. These costs
would 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. The Board seeks information and comment on any costs,
compliance requirements, or changes in operating procedures arising
from the application of the proposed rule to small entities.
Proposed Amendments
This subsection summarizes several of the proposed amendments to
Regulation Z and their likely impact on small entities that offer open-
end credit. More information regarding these and other proposed changes
can be found in IV. Section-by-Section Analysis.
Proposed Sec. Sec. 226.5a(a)(2)(iv) and 226.6(b)(1)(i) would
generally require 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.
Proposed Sec. 226.7(b)(11)(i)(B) would generally require card
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. In addition, proposed Sec.
226.7(b)(11)(i)(B) would permit the use of the term ``up to'' to
disclose the highest fee if a range of late payment fees may be
assessed. However, Sec. 226.7(b)(11)(i)(B) already requires card
issuers to disclose late payment fee information so the Board does not
anticipate any significant additional burden on small entities. The
Board also seeks to reduce the burden
[[Page 12355]]
on small entities by proposing model forms which can be used to ease
compliance with the proposed rule.
Proposed Sec. Sec. 226.9(c)(2)(iv)(A)(8) and 226.9(g)(3)(i)(A)(6)
would generally require card 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, proposed 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 would depend on the size of the
institution and the composition of its portfolio.
Proposed Sec. 226.52(b) would generally limit the dollar amount of
penalty fees imposed by card issuers that are small entities.
Specifically, credit card penalty fees must be based on certain
permitted determinations or on a proposed safe harbor. In addition,
proposed Sec. 226.52(b) prohibits penalty fees that exceed the dollar
amount associated with the violation and certain types of penalty fees.
As discussed in IV. Section-by-Section Analysis, in 2006 the GAO found
that the percentage of issuer revenue derived from penalty fees had
increased to approximately 10%.\39\ Compliance with this provision may
reduce revenue that some entities derive from fees. Compliance with
proposed Sec. 226.52(b) would also require card issuers that are small
entities to conform certain penalty fee disclosures already required
under Sec. Sec. 226.5a, 226.6, 226.7, and 226.56.
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\39\ See GAO Credit Card Report at 72-73.
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Proposed Sec. 226.59 would generally require small entities that
are card issuers to reevaluate an increased annual percentage rates no
less than every six months. In addition, proposed Sec. 226.59 would
require small entities that are card issuers to reduce the annual
percentage rate, if appropriate, based on such reevaluation. Proposed
Sec. 226.59 would require some small entities to establish processes
and alter their systems in order to comply with the provision. The cost
of such change would depend on the size of the institution and the
composition of its portfolio. In addition, this provision may reduce
revenue that some small entities derive from finance charges.
Accordingly, the Board believes that, in the aggregate, the
provisions of its proposed rule would have a significant economic
impact on a substantial number of small entities.
4. Other Federal rules. The Board has not identified any Federal
rules that duplicate, overlap, or conflict with the proposed revisions
to Regulation Z.
5. Significant alternatives to the proposed revisions. The
provisions of the proposed rule would implement the statutory
requirements of the Credit Card Act that go into effect on August 22,
2010. The Board has sought to avoid imposing additional burden, while
effectuating the statute in a manner that is beneficial to consumers.
The Board welcomes comment on any significant alternatives, consistent
with the Credit Card Act, which would minimize impact of the proposed
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
proposed 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 proposed 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.\40\
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\40\ 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, small businesses, and
institutions of higher education. 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 to, among other
things, 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. For closed-end loans, such
as mortgage and installment loans, cost disclosures are required to be
provided prior to consummation. Special disclosures are required in
connection with certain products, such as reverse mortgages, certain
variable-rate loans, and certain mortgages with rates and fees above
specified thresholds. 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.
Under proposed Sec. Sec. 226.5a(a)(2)(iv) and 226.6(b)(1)(i), the
use of bold text would be required when disclosing maximum limits on
fees in the application and solicitation table and the account-opening
table, respectively. The Board anticipates that creditors would
incorporate, with little change, the proposed formatting change with
the disclosure already required under Sec. Sec. 226.5a(a)(2)(iv) and
226.6(b)(1)(i).
Under proposed Sec. 226.7(b)(11)(i)(B), a card issuer would be
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. In addition, proposed Sec. 226.7(b)(11)(i)(B) would permit
the use of the term ``up to'' to disclose the highest fee if a range of
late payment fees may be assessed. The Board anticipates that card
issuers, with little additional burden, would incorporate the proposed
disclosure requirement with the disclosures already required under
Sec. 226.7(b)(11)(i)(B). In an effort to reduce burden the Board is
amending Appendix G-18 to provide guidance on an ``up to'' disclosure.
Under proposed Sec. Sec. 226.9(c)(2)(iv)(A)(8) and
[[Page 12356]]
226.9(g)(3)(i)(A)(6), a card issuer would be 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,
would incorporate the proposed disclosure requirement with the
disclosure already required under Sec. 226.9(c) and Sec. 226.9(g).
Proposed Sec. 226.52(b) would generally limit the dollar amount of
penalty fees imposed by card issuers. Specifically, credit card penalty
fees must be based on certain permitted determinations or on a proposed
safe harbor. In addition, proposed Sec. 226.52(b) prohibits penalty
fees that exceed the dollar amount associated with the violation and
certain types of penalty fees. Compliance with proposed Sec. 226.52(b)
would require card issuers to conform certain penalty fee disclosures
already required under Sec. Sec. 226.5a, 226.6, 226.7, and 226.56. As
mentioned in IV. Section-by-Section Analysis, in an effort to reduce
burden the Board is proposing to amend guidance in Appendix G to
provide model language for the disclosure of late-payment fees, over-
the-limit fees, and returned-payment fees.
The Board anticipates that creditors would incorporate the proposed
disclosure requirement with the disclosures already required under
Sec. Sec. 226.5a(a)(2)(iv), 226.6(b)(1)(i), 226.7(b)(11)(i)(B),
226.9(c)(2)(iv)(A)(8), 226.9(g)(3)(i)(A)(6), and 226.52(b). The Board
estimates that the proposed rule would impose a one-time increase in
the total annual burden under Regulation Z. The 1,138 respondents would
take, on average, 40 hours to update their systems to comply with the
disclosure requirements addressed in this proposed rule. The total
annual burden is estimated to increase by 45,520 hours, from 1,654,814
to 1,700,334 hours.\41\
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\41\ The burden estimate for this rulemaking does not include
the burden addressing changes to implement provisions of Closed-End
Mortgages (Docket No. R-1366), the Home-Equity Lines of Credit
(Docket No. R-1367), or Notification of Sale or transfer of Mortgage
Loans (Docket No. R-1378), as announced in separate proposed
rulemakings. See 74 FR 43232, 74 FR 43428, and 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 each of the
proposed changes 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
17,200 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
would be approximately 13,706,325 hours. The proposed rule would impose
a one-time increase in the estimated annual burden for such
institutions by 688,000 hours to 14,394,325 hours. The above estimates
represent an average across all respondents; the Board expects
variations between institutions based on their size, complexity, and
practices.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
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 Interim Final Revisions
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
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.
* * * * *
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.
* * * * *
3. Section 226.7(b)(11)(i)(B) is revised to read as follows:
[[Page 12357]]
Sec. 226.7 Periodic statement.
(11) Due date; late payment costs.
(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.
* * * * *
4. Section 226.9(c)(2) and (g) are revised 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 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, 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;
[[Page 12358]]
(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, 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 also contain the following information:
(1) A statement of the reason for the increase; and
(2) 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.
(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
[[Page 12359]]
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 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 contain the following
information:
(1) A statement of the reason for the increase; and
(2) 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.
* * * * *
5. Section 226.52(b) is added to read as follows:
Sec. 226.52 Limitations on fees.
* * * * *
(b) Limitations on penalty fees. (1) General rule. A card issuer
must not
[[Page 12360]]
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 based on one of the
determinations set forth in this paragraph.
(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.
(ii) Fees based on deterrence. 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 is reasonably
necessary to deter that type of violation using an empirically derived,
demonstrably and statistically sound model that reasonably estimates
the effect of the amount of the fee on the frequency of violations.
(iii) Reevaluation of determinations. A card issuer must reevaluate
a determination made under paragraph (b)(1)(i) or (b)(1)(ii) of this
section at least once every twelve months. If as a result of the
reevaluation the card issuer determines that a lower fee is consistent
with paragraph (b)(1)(i) or (b)(1)(ii) of this section, the card issuer
must begin imposing the lower fee within 30 days after completing the
reevaluation. If as a result of the reevaluation the card issuer
determines that a higher fee is consistent with paragraph (b)(1)(i) or
(b)(1)(ii) of this section, the card issuer may begin imposing the
higher fee after complying with the notice requirements in Sec. 226.9.
(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 at the time the fee is
imposed.
(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 account
terms or other requirements during a billing cycle.
(3) Safe harbor. Except as provided in paragraph (b)(2) of this
section, a card issuer complies with paragraph (b)(1) of this section
if the dollar amount of a fee for violating the terms or other
requirements of a credit card account under an open-end (not home-
secured) consumer credit plan does not exceed the greater of:
(i) $[XX.XX], adjusted annually by the Board to reflect changes in
the Consumer Price Index; or
(ii) Five percent of the dollar amount associated with the
violation, provided that the dollar amount of the fee does not exceed
$[XX.XX], adjusted annually by the Board to reflect changes in the
Consumer Price Index.
6. Section 226.59 is added to read as follows:
Sec. 226.59 Reevaluation of rate increases.
(a) General rule. (1) Reevaluation of rate increases. 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 whether such factors have changed; 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--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 30 days
after completion of the evaluation described in paragraph (a)(1).
(b) Policies and procedures. A card issuer must have reasonable
written policies and procedures in place to review the factors
described in paragraphs (a) and (d) of this section.
(c) Timing. A card issuer that is subject to paragraph (a) of this
section must review changes in factors in accordance with paragraphs
(a) and (d) of this section not less frequently than once every six
months after the initial rate increase.
(d) Factors. A card issuer is not required to base its review under
paragraph (a) of this section on the same factors on which an increase
in an annual percentage rate was based. The card issuer may, at its
option, review the factors on which the rate increase was originally
based, or may review the factors that it currently considers when
determining the annual percentage rates applicable to its credit card
accounts under an open-end (not home-secured) consumer credit plan.
(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 review factors pursuant to 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 review factors in accordance
with paragraph (a) of this section 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 if:
(1) 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 prior to the
increase; or
(2) 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, the obligation to review changes in factors in
paragraph (a) of this section applies to credit card accounts that have
been acquired by the card issuer from another card issuer. A card
issuer may review either the factors that the card issuer from which it
acquired the accounts considered in connection with the rate increase,
or
[[Page 12361]]
may review the factors that it currently considers in determining the
annual percentage rates applicable to its credit card accounts.
(2) Review of acquired portfolio. 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:
(i) Except as provided in paragraph (g)(2)(iii), the card issuer is
required to review changes in factors in accordance with paragraph (a)
of this section only for rate increases that are imposed as a result of
that review. 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 review changes in factors 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 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.
7. Appendix G to part 226 is amended by revising Forms G-10(B), G-
10(C), 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
[[Page 12362]]
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[[Page 12363]]
[GRAPHIC] [TIFF OMITTED] TP15MR10.002
* * * * *
[[Page 12364]]
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* * * * *
[GRAPHIC] [TIFF OMITTED] TP15MR10.004
[[Page 12365]]
[GRAPHIC] [TIFF OMITTED] TP15MR10.005
* * * * *
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 $XX and
your APRs may be increased up to the Penalty APR of 28.99%.
* * * * *
[[Page 12366]]
[GRAPHIC] [TIFF OMITTED] TP15MR10.006
* * * * *
[[Page 12367]]
[GRAPHIC] [TIFF OMITTED] TP15MR10.007
[[Page 12368]]
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[[Page 12369]]
[GRAPHIC] [TIFF OMITTED] TP15MR10.009
* * * * *
[GRAPHIC] [TIFF OMITTED] TP15MR10.010
[GRAPHIC] [TIFF OMITTED] TP15MR10.011
[GRAPHIC] [TIFF OMITTED] TP15MR10.012
BILLING CODE 6210-01-C
[[Page 12370]]
* * * * *
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 $XX. 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 $XX. [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 $XX. 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]:------------------------------------------------------
8. In Supplement I to Part 226:
A. Under Section 226.5a--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.
B. Under Section 226.9--Subsequent Disclosure Requirements:
(i) Under 9(c) Change in terms, under 9(c)(2)(iv) Disclosure
requirements, paragraphs 1. through 11. are revised; and
(ii) Under 9(g) Increase in rates due to delinquency or default or
as a penalty, paragraphs 1. through 7. are revised.
C. Under Section 226.52--Limitations on Fees, 52(b) Limitations on
penalty fees is added.
D. Under Section 226.56--Requirements for over-the-limit
transactions:
(i) Under 56(e) Content, paragraph 1. is revised; and
(ii) Under 56(j) Prohibited practices, paragraph 6. is added.
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)(3),
a card issuer's late payment fee will not exceed $XX.XX. The maximum
limit of $XX.XX 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.
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
[[Page 12371]]
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 (i) the late payment fee on a credit card
account is being increased in accordance with a formula that depends
on the outstanding balance on the account, and (ii) 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. 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. For 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.
* * * * *
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(a) Limitations during first year after account opening.
* * * * *
52(b) Limitations on penalty fees.
1. Fees for violating the account terms or other requirements.
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. Accordingly, 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 account terms.
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 or charge for a transaction that the card issuer
declines to authorize. See Sec. 226.52(b)(2)(i)(B).
E. 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) or 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.
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.
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. Amounts charged by other card issuers. The fact that a card
issuer's fees for violating the account terms or other requirements
are comparable to fees assessed by other card issuers does not
satisfy the requirements of Sec. 226.52(b)(1).
52(b)(1)(i) Fees based on costs.
1. Costs incurred as a result of violations of the account
terms. 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 account terms or other requirements. Instead, for purposes of
Sec. 226.52(b)(1)(i), a card issuer must have determined that a fee
for violating the account terms or other requirements represents a
reasonable proportion of the costs incurred by the card issuer as a
result of that type of violation. The factors relevant to this
determination include:
A. The number of violations of a particular type experienced by
the card issuer during a prior period;
B. The costs incurred by the card issuer during that period as a
result of those violations; and
C. At the card issuer's option, reasonable estimates of changes
in the number of violations of that type and the resulting costs
during an upcoming period. See illustrative examples in comments
52(b)(1)(i)-4 through-6.
[[Page 12372]]
2. Losses and associated costs. Losses and associated costs
(including the cost of holding reserves against potential losses)
are not costs incurred by a card issuer as a result of violations of
the account terms or other requirements 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
account terms or other requirements 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. 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 $23 million in costs as a result of those
delinquencies. For purposes of Sec. 226.52(b)(1)(i), a $23 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 reasonable estimate of future changes.
Same facts as 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 1%
decrease in delinquencies during year two (in other words, 10,000
fewer delinquencies for a total of 990,000). 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 3% increase in costs during
year two (in other words, $690,000 in additional costs for a total
of $23.69 million). For purposes of Sec. 226.52(b)(1)(i), a $24
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.
5. 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; and
B. 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 reasonable estimate of future changes.
Same facts as 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--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 3% decrease in costs during year two (in other words, a
$93,000 reduction in costs for a total of $3.007 million). For
purposes of Sec. 226.52(b)(1)(i), a $20 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.
6. 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. 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 reasonable estimate of future changes.
Same facts as 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--based on past changes in
costs incurred as a result of over-the-limit transactions and other
factors 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 $21 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.
52(b)(1)(ii) Fees based on deterrence.
1. Deterrence of violations. Section 226.52(b)(1)(ii) does not
require a card issuer to determine that a fee for violating the
account terms or other requirements is reasonably necessary to deter
violations by a specific consumer or with respect to a specific
account. Instead, for purposes of Sec. 226.52(b)(1)(ii), a card
issuer must have determined that the dollar amount of a fee for
violating the account terms or other requirements is reasonably
necessary to deter the type of violation for which the fee is
imposed.
2. Use of models. Section 226.52(b)(2)(ii) provides that, in
order to determine that the dollar amount of a fee for violating the
account terms or other requirements is reasonably necessary to deter
that type of violation, the card issuer must use an empirically
derived, demonstrably and statistically sound model that reasonably
estimates the effect of the dollar amount of the fee on the
frequency of the type of violation. A model that reasonably
estimates a statistical correlation between the imposition of a fee
and the frequency of a type of violation is not sufficient to
satisfy the requirements of Sec. 226.52(b)(1)(ii). Instead, in
order to support a determination that the dollar amount of a fee is
reasonably necessary to deter a particular type of violation, a
model must reasonably estimate that, independent of other variables,
the imposition of a lower fee amount would result in a substantial
increase in the frequency of that type of violation. The
parameterization of the model used for this purpose must be
sufficiently flexible to allow for the identification of a lower fee
level above which additional fee increases have no marginal effect
on the frequency of violations.
52(b)(2) Prohibited fees
1. Relationship to Sec. 226.52(b)(1) and (b)(3). A card issuer
does not comply with Sec. 226.52(b)(1) if it imposes a fee that is
inconsistent with the prohibitions in Sec. 226.52(b)(2). Similarly,
the prohibitions in Sec. 226.52(b)(2) apply even if a fee is
consistent with the safe harbor in Sec. 226.52(b)(3). For example,
even if a card issuer has determined for purposes of Sec.
226.52(b)(1) that a $25 fee represents a reasonable proportion of
the total costs incurred by the card as a result of a particular
type of violation or that a $25 fee
[[Page 12373]]
is reasonably necessary to deter that 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 $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 that was not received on or before
the payment due date. Thus, Sec. 226.52(b)(2)(i)(A) prohibits a
card issuer from imposing a late payment fee that exceeds the amount
of the required minimum periodic payment on which that fee is based.
For example, assume that an account has a balance of $1,000. If the
card issuer does not receive the $20 required minimum periodic
payment on or before the payment due date, Sec. 226.52(b)(2)(i)(A)
prohibits the card issuer from imposing a late payment fee that
exceeds $20 (even if a higher fee would be permitted under Sec.
226.52(b)(1) or (b)(3)).
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 during the billing
cycle in 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. The following examples
illustrate the application of Sec. 226.52(b)(2)(i) to returned-
payment fees:
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 $20 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. Section 226.52(b)(2)(i)(A) prohibits
the card issuer from imposing a returned-payment fee that exceeds
$20 (even if a higher fee would be permitted under Sec.
226.52(b)(1) or (b)(3)). 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.
Section 226.52(b)(2)(i)(A) prohibits the card issuer from imposing a
returned-payment fee that exceeds $30 (even if a higher fee would be
permitted under Sec. 226.52(b)(1) or (b)(3)).
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.
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 as of the
date on 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. 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 so long as the dollar amount of the fee does not exceed the
total amount of credit extended in excess of the limit as of that
date. 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. If the
card issuer chooses to impose an over-the-limit fee on March 6,
Sec. 226.52(b)(2)(i)(A) prohibits the card issuer from imposing an
over-the-limit fee that exceeds $10 (even if a higher fee would be
permitted under Sec. 226.52(b)(1) or (b)(3)).
ii. Same facts as above, except that the card issuer chooses not
to impose an over-the-limit fee on March 6. On March 25, a $5
transaction is charged to the account, increasing the balance to
$5,015. If the card issuer chooses to impose an over-the-limit fee
on March 25, 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) or (b)(3)).
iii. Same facts as in paragraph ii. above, except that the card
issuer chooses not to impose an over-the-limit fee on March 25. On
March 26, the card issuer receives a payment of $20, reducing the
balance below the credit limit to $4,995. In these circumstances,
Sec. 226.52(b)(2)(i)(A) prohibits the card issuer from imposing an
over-the-limit fee (even if a fee would be permitted under Sec.
226.52(b)(1) or (b)(3)). Furthermore, Sec. 226.52(b)(2)(i)(A) does
not permit the card issuer to impose a fee at the end of the billing
cycle (March 31) based on the total amount of credit extended in
excess of the credit limit on an earlier date (such as March 6 or
25).
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 account terms or other requirements 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 $20.
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. 226.52(b)(2)(i)(A), the card issuer may impose a late
payment fee of $20 or a returned-payment fee of $20 (assuming that
these amounts comply with Sec. 226.52(b)(1) or (b)(3)). 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.
226.52(b)(2)(i)(A), the card issuer may impose a late payment fee of
$20 or a returned-payment fee of $20 (assuming that these amounts
comply with Sec. 226.52(b)(1) or (b)(3)). 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.
iii. Assume that the credit limit for an account is $1,000. On
March 31, the balance on the account is $975 and the card issuer has
not received the $20 required minimum periodic payment due on March
25. On that same date (March 31), a $50 transaction is charged to
the account, which increases the balance to $1,025. Consistent with
Sec. 226.52(b)(2)(i)(A), the card issuer may impose a late payment
fee of $20 and an over-the-limit fee of $25 (assuming that these
amounts comply with Sec. 226.52(b)(1) or (b)(3)). Section
226.52(b)(2)(ii) does not prohibit the imposition of both fees
because those fees are based on different events or transactions.
52(b)(3) Safe harbor.
1. Relationship to Sec. 226.52(b)(1) and (b)(2). A fee that
complies with the safe harbor in Sec. 226.52(b)(3) complies with
the requirements of Sec. 226.52(b)(1). However, the safe harbor in
Sec. 226.52(b)(3) 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)(3)
does not permit the card issuer to impose a higher late payment fee.
2. Adjustments based on Consumer Price Index. For purposes of
Sec. 226.52(b)(3)(i) and (b)(3)(ii), the Board shall calculate each
year
[[Page 12374]]
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)(3)(i) and
(b)(3)(ii) has risen by a whole dollar, those amounts will be
increased by $1.00. In contrast, 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)(3)(i) and
(b)(3)(ii) 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)(3)(i) and (b)(3)(ii).
3. Fees as percentages of dollar amount associated with
transaction.
i. Late payment fee. For purposes of Sec. 226.52(b)(3)(ii), 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, Sec. 226.52(b)(3)(ii) generally permits
a card issuer to impose a late payment fee that does not exceed 5%
of the required minimum periodic payment on which that fee is based.
For example, assume that, under the terms of a credit card account,
the card issuer must receive a minimum payment of $450 on or before
June 15. If the card issuer does not receive the $450 payment on or
before June 15, Sec. 226.52(b)(3)(ii) permits the card issuer to
impose a late payment fee of $23 (which equals 5% of the $450
required minimum periodic payment, rounded to the nearest whole
dollar).
ii. Returned-payment fee. For purposes of Sec.
226.52(b)(3)(ii), the dollar amount associated with a returned
payment is the amount of the required minimum periodic payment due
during the billing cycle in which the payment is returned to the
card issuer. See comment 52(b)(2)(i)-2. Thus, Sec. 226.52(b)(3)(ii)
generally permits a card issuer to impose a returned-payment fee
that does not exceed 5% of the amount of that required minimum
periodic payment. For example:
A. Assume that a $500 required minimum periodic payment is due
on March 25. On that date, the card issuer receives a check for
$700, but the check is returned to the card issuer for insufficient
funds on March 27. Section 226.52(b)(3)(ii) permits the card issuer
to impose a returned-payment fee of $25 (which equals 5% of $500
required minimum periodic payment), provided this amount does exceed
the limitation in Sec. 226.52(b)(3)(ii).
B. Same facts as above except that the card issuer receives the
$700 check on March 31 and the check is returned for insufficient
funds on April 2. The minimum payment due on April 25 is $800.
Section 226.52(b)(3)(ii) permits the card issuer to impose a
returned-payment fee of $40 (which equals 5% of $800 required
minimum periodic payment), provided this amount does exceed the
limitation in Sec. 226.52(b)(3)(ii).
iii. Over-the-limit fee. For purposes of Sec. 226.52(b)(3)(ii),
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 as of the
date on which the over-the-limit fee is imposed. Thus, Sec.
226.52(b)(3)(ii) generally permits a card issuer to impose an over-
the-limit fee that does not exceed 5% of that amount. Although Sec.
226.56(j)(1)(i) prohibits a card issuer from imposing more than one
over-the-limit fee per billing cycle, a card issuer may choose the
date during the billing cycle on which to impose an over-the-limit
fee. For example, 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 September 1, the account has a balance of $4,900. On
September 15, a $500 transaction is charged to the account,
increasing the balance to $5,400. The card issuer chooses not to
impose an over-the-limit fee at this time. On September 20, a $200
transaction is charged to the account, increasing the balance to
$5,600. If the card issuer chooses to impose an over-the-limit fee
on September 20, Sec. 226.52(b)(3)(ii) permits the issuer to impose
a fee of $30 (which equals 5% of the $600 extensions of credit in
excess of the $5,000 credit limit), provided this amount does exceed
the limitation in Sec. 226.52(b)(3)(ii).
* * * * *
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
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 consumer 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.
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) 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 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(a)
requires the 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). 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.
59(b) Consideration of Factors
1. 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 for consideration of factors described in Sec.
226.59(a) and (d). For example, 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. 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
and should take into account any reduction in the consumer's credit
risk based upon the consumer's timely payments.
59(c) Timing
1. In general. The issuer may review all of its accounts subject
to paragraph (a) of this
[[Page 12375]]
section 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, 2010. The card issuer
increases the rates applicable to the other half of its credit card
accounts on September 1, 2010. The card issuer may review the rate
increases for all of its 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.
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 its 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 its 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 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 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 may consider the factors that it considers
as of January 25, 2011.
2. Comparison of existing account to factors used for new
accounts. Under Sec. 226.59(a), if a creditor evaluates its
existing accounts using the same factors that it uses in determining
the rates applicable to new accounts, 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. For example, 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 the 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 its 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 prime rate. Section 226.59(a) requires, however,
that the rate on the existing account after the reduction, as
determined by adding the prime rate and margin, 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.
3. Multiple product lines. If a card issuer uses different
factors in determining the applicable annual percentage rates for
different types of credit card plans, Sec. 226.59(d) requires the
card issuer to review those factors that it uses in determining the
annual percentage rates for the consumer's specific type of credit
card 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. However, 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.
59(g) Acquired Accounts
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%. As soon as reasonably practicable 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 its 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%. As soon as reasonably practicable
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 its 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, March 3, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-4859 Filed 3-12-10; 8:45 am]
BILL CODE 6210-01-P