Proposed Rule2023-02393
Credit Card Penalty Fees (Regulation Z)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 29, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (Bureau) proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), to better ensure that the late fees charged on credit card accounts are "reasonable and proportional" to the late payment as required under TILA. The proposal would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; provide that the current provision that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount; and provide that late fee amounts must not exceed 25 percent of the required payment.
Full Text
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<title>Federal Register, Volume 88 Issue 60 (Wednesday, March 29, 2023)</title>
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[Federal Register Volume 88, Number 60 (Wednesday, March 29, 2023)]
[Proposed Rules]
[Pages 18906-18951]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-02393]
[[Page 18905]]
Vol. 88
Wednesday,
No. 60
March 29, 2023
Part V
Consumer Financial Protection Bureau
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12 CFR Part 1026
Credit Card Penalty Fees (Regulation Z); Proposed Rule
Federal Register / Vol. 88, No. 60 / Wednesday, March 29, 2023 /
Proposed Rules
[[Page 18906]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
[Docket No. CFPB-2023-0010]
RIN 3170-AB15
Credit Card Penalty Fees (Regulation Z)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Proposed rule with request for public comment.
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SUMMARY: The Consumer Financial Protection Bureau (Bureau) proposes to
amend Regulation Z, which implements the Truth in Lending Act (TILA),
to better ensure that the late fees charged on credit card accounts are
``reasonable and proportional'' to the late payment as required under
TILA. The proposal would adjust the safe harbor dollar amount for late
fees to $8 and eliminate a higher safe harbor dollar amount for late
fees for subsequent violations of the same type; provide that the
current provision that provides for annual inflation adjustments for
the safe harbor dollar amounts would not apply to the late fee safe
harbor amount; and provide that late fee amounts must not exceed 25
percent of the required payment.
DATES: Comments should be received on or before May 3, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0010 or RIN 3170-AB15, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#e7d5d7d5d4caa9b7b5aacaa49582838e93a4869583ab869382a1828294a784819785c9808891"><span class="__cf_email__" data-cfemail="c4f6f4f6f7e98a949689e987b6a1a0adb087a5b6a088a5b0a182a1a1b784a7a2b4a6eaa3abb2">[email protected]</span></a>. Include
Docket No. CFPB-2023-0010 or RIN 3170-AB15 in the subject line of the
message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--2023 NPRM
Credit Card Late Fees, c/o Legal Division Docket Manager, Consumer
Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, commenters are encouraged to submit comments
electronically.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking. In
general, comments received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>. All comments, including attachments and other
supporting materials, will become part of the public record and subject
to public disclosure. Proprietary information or sensitive personal
information, such as account numbers or Social Security numbers, or
names of other individuals, should not be included. Comments will not
be edited to remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Adrien Fernandez, Counsel, Krista
Ayoub and Steve Wrone, Senior Counsels, Office of Regulations, at 202-
435-7700. If you require this document in an alternative electronic
format, please contact <a href="/cdn-cgi/l/email-protection#0b484d5b49544a68686e787862696267627f724b686d7b69256c647d"><span class="__cf_email__" data-cfemail="6a292c3a28352b09090f191903080306031e132a090c1a08440d051c">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Bureau proposes to amend provisions in Sec. 1026.52(b) and its
accompanying commentary as they relate to credit card late fees.\1\
Currently, under Sec. 1026.52(b)(1), a card issuer must not impose a
fee for violating the terms or other requirements of a credit card
account under an open-end consumer credit plan, such as a late payment,
exceeding the credit limit, or returned payments, unless the issuer has
determined that the dollar amount of the fee represents a reasonable
proportion of the total costs incurred by the issuer for that type of
violation as set forth in Sec. 1026.52(b)(1)(i) or complies with the
safe harbor provisions set forth in Sec. 1026.52(b)(1)(ii). Section
1026.52(b)(1)(ii) currently sets forth a safe harbor of $30 generally
for penalty fees, except that it sets forth a safe harbor of $41 for
each subsequent violation of the same type that occurs during the same
billing cycle or in one of the next six billing cycles.\2\ The Bureau
is concerned that (1) the safe harbor dollar amounts for late fees
currently set forth in Sec. 1026.52(b)(1)(ii) are not reasonable and
proportional to the omission or violation to which the fee relates; (2)
the current higher safe harbor threshold for late fees for subsequent
violations of the same type in the same billing cycle or in one of the
next six billing cycles is higher than is justified based on consumer
conduct and to deter future violations and, indeed, a late fee that is
too high could interfere with the consumers' ability to make future
payments on the account; and (3) additional restrictions on late fees
may be needed to ensure that late fees are reasonable and proportional.
Because late fees are by far the most prevalent penalty fees charged by
card issuers and the Bureau's current data primarily relates to late
fees, the Bureau's proposed changes to the restrictions in Sec.
1026.52(b) are limited to late fees at this time, although the Bureau
seeks comments on whether the proposed amendments should apply to other
penalty fees.
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\1\ When amending commentary, the Office of the Federal Register
(OFR) requires reprinting of certain subsections being amended in
their entirety rather than providing more targeted amendatory
instructions. The sections of regulatory text and commentary
included in this document show the language of those sections if the
Bureau adopts its changes as proposed. In addition, the Bureau is
releasing an unofficial, informal redline to assist industry and
other stakeholders in reviewing the changes that it proposes to make
to the regulatory text and commentary of Regulation Z. This redline
can be found on the Bureau's website, <a href="https://files.consumerfinance.gov/f/documents/cfpb_2023-credit-card-late-fees-proposed-rule_unofficial-redline_2023-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_2023-credit-card-late-fees-proposed-rule_unofficial-redline_2023-01.pdf</a>. If any conflicts
exist between the redline and the text of Regulation Z, its
commentary, or this proposed rule, the documents published in the
Federal Register are the controlling documents.
\2\ Although the safe harbors discussed above apply to charge
card accounts, Sec. 1026.52(b)(1)(ii) provides an additional safe
harbor when a charge card account becomes seriously delinquent.
Specifically, Sec. 1026.52(b)(1)(ii)(C) provides that, when a card
issuer has not received the required payment for two or more
consecutive billing cycles on a charge card account that requires
payment of outstanding balances in full at the end of each billing
cycle, it may impose a late payment fee that does not exceed 3
percent of the delinquent balance.
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The proposal would amend Sec. 1026.52(b) and its accompanying
commentary to help ensure that late fees are reasonable and
proportional. First, the proposal would amend Sec. 1026.52(b)(1)(ii)
to lower the safe harbor dollar amount for late fees to $8 and to no
longer apply to late fees a higher safe harbor dollar amount for
subsequent violations of the same type that occur during the same
billing cycle or in one of the next six billing cycles.\3\ Second, the
proposal would provide that the current provision in Sec.
1026.52(b)(1)(ii)(D) that provides for annual inflation adjustments for
the safe harbor dollar amounts would not apply to the safe harbor
amount for late fees. Third, the proposal would amend Sec.
1026.52(b)(2)(i)(A) to provide that late fee amounts must not exceed 25
percent of the required payment; currently, late fee amounts must not
exceed 100 percent. The proposal also would amend comments 7(b)(11)-4,
52(a)(1)-1.i and iv, and 60(a)(2)-5.ii to revise current examples of
late fee amounts to be consistent with the proposed $8 safe harbor late
fee amount discussed above. The Bureau also solicits comment on whether
card issuers should be prohibited from imposing late fees on consumers
that make the required
[[Page 18907]]
payment within 15 calendar days following the due date. In addition,
the Bureau seeks comment on whether, as a condition of using the safe
harbor for late fees, it may be appropriate to require card issuers to
offer automatic payment options (such as for the minimum payment
amount), or to provide notification of the payment due date within a
certain number of days prior to the due date, or both.
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\3\ The proposal would not amend the safe harbor set forth in
Sec. 1026.52(b)(1)(ii)(C) applicable to charge card accounts.
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The Bureau proposes one clarification that would apply to penalty
fees generally. Specifically, the proposal would amend comment
52(b)(1)(i)-2.i to clarify that costs for purposes of the cost analysis
provisions in Sec. 1026.52(b)(1)(i) for determining penalty fee
amounts do not include any collection costs that are incurred after an
account is charged off pursuant to loan loss provisions. In addition,
the Bureau solicits comment on several issues related to penalty fees
generally. First, the Bureau solicits comment on whether the same or
similar changes described above should be applied to other penalty
fees, such as over-the-limit fees, returned-payment fees, and declined
access check fees, or in the alternative, whether the Bureau should
finalize the proposed safe harbor for late fees and eliminate the safe
harbors for other penalty fees. Second, the Bureau solicits comment on
whether instead of revising the safe harbor provisions set forth in
Sec. 1026.52(b)(1)(ii) as they apply to late fees as discussed above,
the Bureau should instead eliminate the safe harbor provisions in Sec.
1026.52(b)(1)(ii) for late fees or should instead eliminate the safe
harbor for all penalty fees, including late fees, over-the-limit fees,
returned-payment fees, and declined access check fees. If the safe
harbor provisions were eliminated, card issuers would need to use the
cost analysis provisions set forth in Sec. 1026.52(b)(1)(i) to
determine the amount of the penalty fees (subject to the limitations in
Sec. 1026.52(b)(2)). The Bureau also solicits comment on whether, in
that event, the cost analysis provisions would need to be amended and,
if so, how.
II. Background
A. The CARD Act
The Credit Card Accountability Responsibility and Disclosure Act of
2009 (CARD Act) was signed into law on May 22, 2009.\4\ The CARD Act
primarily amended TILA \5\ and instituted new substantive and
disclosure requirements to establish fair and transparent practices for
open-end consumer credit plans. The CARD Act added TILA section 149,
which provides, among other things, that the amount of any penalty fee
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 or any other
penalty fee or charge, must be ``reasonable and proportional'' to such
omission or violation.\6\
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\4\ Public Law 111-24, 123 Stat. 1734 (2009).
\5\ 15 U.S.C. 1601 et seq.
\6\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).
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At the time of its passage, the CARD Act required the Board of
Governors of the Federal Reserve System (Board) to issue rules
establishing standards for assessing the reasonableness and
proportionality of such penalty fees.\7\ In issuing these rules, the
CARD Act required 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 deemed necessary or appropriate by the Board.\8\
The CARD Act authorized the Board to establish different standards for
different types of fees and charges, as appropriate.\9\ The CARD Act
also granted the Board discretion 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.\10\ As
discussed in more detail below, the authority to implement TILA,
including TILA section 149, transferred from the Board to the Bureau in
2011.
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\7\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).
\8\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(c)).
\9\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(d)).
\10\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(e)).
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B. The Board's Implementing Rule
On June 29, 2010, the Board issued a final rule implementing new
TILA section 149 in its Regulation Z, 12 CFR 226.52(b) (2010 Final
Rule).\11\ The Board's Regulation Z, Sec. 226.52(b) provided that a
card issuer must not impose a fee for violating the terms or other
requirements of a credit card account, such as a late payment,
exceeding the credit limit, or returned payments, unless the issuer has
determined that the dollar amount of the fee represents a reasonable
proportion of the total costs incurred by the issuer for that type of
violation as set forth in Sec. 226.52(b)(1)(i) or complies with the
safe harbor provisions set forth in Sec. 226.52(b)(1)(ii).\12\ The
Board set the safe harbor amounts in Sec. 226.52(b)(1)(ii) at $25
generally for penalty fees, except that it set forth a safe harbor of
$35 for each subsequent violation of the same type that occurs during
the same billing cycle or in one of the next six billing cycles.\13\
Although the safe harbors discussed above applied to charge card
accounts, the Board's Regulation Z, Sec. 226.52(b)(1)(ii) also
provided an additional safe harbor when a charge card account becomes
seriously delinquent. Specifically, Sec. 226.52(b)(1)(ii)(C) provided
that, when a card issuer has not received the required payment for two
or more consecutive billing cycles on a charge card account that
requires payment of outstanding balances in full at the end of each
billing cycle, it may impose a late payment fee that does not exceed 3
percent of the delinquent balance.\14\ The Board's Regulation Z, Sec.
226.52(b)(1)(ii)(D) provided that the safe harbor dollar amounts would
be adjusted annually to the extent that changes in the Consumer Price
Index (CPI) would result in an increase or decrease of $1.\15\
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\11\ 75 FR 37526 (June 29, 2010).
\12\ 12 CFR 226.52(b)(1).
\13\ 12 CFR 226.52(b)(1)(ii)(A) and (B).
\14\ 12 CFR 226.52(b)(1)(ii)(C).
\15\ 12 CFR 226.52(b)(1)(ii)(D).
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The Board's Regulation Z, Sec. 226.52(b)(2) also contained other
restrictions on card issuers for imposing penalty fees. Specifically,
Sec. 226.52(b)(2)(i) prohibited issuers from imposing penalty fees
that exceed the dollar amount associated with the violation.\16\ In
addition, Sec. 226.52(b)(2)(ii) prohibited issuers from imposing
multiple penalty fees based on a single event or transaction.\17\
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\16\ 12 CFR 226.52(b)(2)(i).
\17\ 12 CFR 226.52(b)(2)(ii).
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C. Transfer of Authority for TILA to the Bureau and the Bureau's Rule
The Board's 2010 Final Rule implementing TILA section 149 took
effect on August 22, 2010.\18\ Nearly one year later, on July 21, 2011,
the Board's rulemaking authority to implement the provisions of TILA,
including TILA section 149, transferred to the Bureau pursuant to
sections 1061 and 1100A of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act).\19\
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\18\ 75 FR 37526, 37526 (June 29, 2010).
\19\ Public Law 111-203, 124 Stat. 1376 (2010).
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On December 22, 2011, the Bureau issued an interim final rule
issuing its Regulation Z, 12 CFR part 1026, to reflect its assumption
of rulemaking
[[Page 18908]]
authority over TILA.\20\ As set forth in the interim final rule, the
Bureau's Regulation Z, Sec. 1026.52(b) contained the same restrictions
on penalty fees as set forth in the Board's Regulation Z, Sec.
226.52(b).\21\
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\20\ 76 FR 79768 (Dec. 22, 2011); see also 81 FR 25323 (Apr. 28,
2016).
\21\ 76 FR at 79822.
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Since then, consistent with Sec. 1026.52(b)(1)(ii)(D), the Bureau
has adjusted the dollar amounts of the safe harbor threshold amounts to
reflect changes in the CPI in effect as of June 1 of that year.\22\
Section 1026.52(b)(1)(ii) currently sets forth a safe harbor of $30
generally for penalty fees, except that it sets forth a safe harbor of
$41 for each subsequent violation of the same type that occur during
the same billing cycle or in one of the next six billing cycles.\23\
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\22\ Comment 52(b)(1)(ii)-2.
\23\ See supra note 2 for a description of an additional safe
harbor that applies to charge card accounts.
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D. A Decade of the Late Fee Safe Harbor
In the wake of the Board's and the Bureau's implementation of TILA
section 149, late fees represent almost all penalty fee volume on
credit cards, as overlimit fees are now practically nonexistent and
fees for returned payments account for a negligible share based on Y-
14+ data collected from a group of mass market and specialized
issuers.\24\
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\24\ Bureau of Consumer Fin. Prot., Credit Card Late Fees, at 13
(Mar. 2022) (Late Fee Report), <a href="https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf">https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf</a>. See part
III.C for a description of the Y-14+ data.
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Prior to the passage of the CARD Act in 2009, the average late fee
was $33 for issuers in the Bureau's Credit Card Database (CCDB) which
includes information on the full consumer and small business credit
card portfolios of large credit card lenders, covering approximately 85
percent of all credit card accounts in the U.S. between April 2008 and
April 2016.\25\ With the effective date of the safe harbor threshold
amounts in 2010, the average late fee in the CCDB declined by over $10
to $23 in the fourth quarter of 2010.\26\
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\25\ Bureau of Consumer Fin. Prot., Card Act Report, at 23 (Oct.
2013) (2013 Report), <a href="http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf">http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf</a>. From 2008 to 2015, the Bureau used
the CCDB to measure the amount of average late fees to include in
the CARD Act reports that the Bureau releases every two years. In
its 2017 report, the Bureau started using the Y-14 data to measure
the amount of average late fees to include in its CARD Act reports
and began using the Y-14+ data to calculate metrics including
average late fee beginning with its 2019 report. See part III.C for
a description of the Y-14 and Y-14+ data.
\26\ Id.
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However, from 2010 through the onset of the COVID-19 pandemic,
issuers had steadily been charging consumers more in credit card late
fees each year--peaking at over $14 billion in total late fee volume
for issuers contained in the Y-14+ data in 2019.\27\ At the end of
2012, the average late fee for major issuers in the CCDB reached about
$27.\28\ It remained at about that level until rising to $28 in 2018
for issuers in the Y-14+, consistent with the first safe harbor
adjustment for inflation in 2014.\29\ In 2019, the average late fee
charged by credit card issuers in the Y-14+ rose to $31, approaching
nominal pre-CARD Act levels.\30\ The total volume of late fees assessed
by issuers in the Y-14+ declined to about $12 billion in 2020 given
record-high payment rates and public and private relief efforts.\31\
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\27\ Late Fee Report, at 4.
\28\ 2013 Report, at 23.
\29\ Bureau of Consumer Fin. Prot., The Consumer Credit Card
Market, at 69 (Dec. 2019) (2019 Report), <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf</a>.
\30\ Late Fee Report, at 6.
\31\ Late Fee Report, at 5; Bureau of Consumer Fin. Prot., The
Consumer Credit Card Market, at 117 (Sept. 2021) (2021 Report),
<a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf</a>.
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E. Credit Card Issuers' Use of the Late Fee Safe Harbor
Currently, Sec. 1026.52(b)(1)(ii) sets forth a safe harbor of $30
generally for a late payment, except that it sets forth a safe harbor
of $41 for each subsequent late payment within the next six billing
cycles. A card issuer is not required to use the cost analysis
provisions in Sec. 1026.52(b)(1)(i) to determine the amount of late
fees if it complies with these safe harbor amounts.\32\
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\32\ See comment 52(b)(1)-1.i.A.
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An analysis of credit card agreements found no evidence of any
issuers using the cost analysis provisions to charge an amount higher
than the safe harbor.\33\ Most large issuers have taken advantage of
the increased safe harbors as adjusted for inflation by increasing
their fee amounts.\34\ Eighteen of the top 20 issuers by outstanding
balances contracted a maximum late fee at or near the higher safe
harbor amount of $40 in 2020 based on analysis of the maximum late fee
disclosed by an institution in agreements submitted to the Bureau's
Credit Card Agreement Database in the fourth quarter of that year.\35\
Yet, the most common maximum late fee disclosed in agreements submitted
to the Bureau was $25, as driven by the practices of smaller banks and
credit unions not in the top 20 issuers by asset size.\36\ Finally, a
small but growing number of issuers offer credit card products with no
late fees.\37\
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\33\ Late Fee Report, at 14.
\34\ Id.
\35\ Id. The Credit Card Agreement Database is available at
<a href="http://www.consumerfinance.gov/credit-cards/agreements">http://www.consumerfinance.gov/credit-cards/agreements</a>.
\36\ Late Fee Report, at 14.
\37\ Id. at 15.
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Some card issuers, however, may be disincentivized to lower late
fee amounts below the safe harbor, given that the industry as a whole
continues to rely on late fees as a source of revenue and many
consumers may not shop for credit cards based on the amount of the late
fee. For banks in the Y-14+ data, late fees represented 10 percent of
charges to consumers in 2020, but individual card issuers' revenue from
late fees varied.\38\ The share of late fees for individual issuers in
the Y-14+ data ranged from a minimum of four percent to a maximum of 31
percent of total consumer charges in 2019. Among issuers there is a
strong correlation between reliance on late fees and concentration of
subprime accounts. Yet, the industry as a whole continues to rely on
late fees as a source of revenue.\39\ Given the amount of revenue that
late fees generate, card issuers may not have an incentive to charge
late fees lower than the safe harbor amount.
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\38\ Id. at 13.
\39\ Id. at 14.
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In addition, many consumers may not shop for credit cards based on
the amount of late fees, which also may lessen card issuers incentive
to charge late fees lower than the safe harbor amount. Survey data
suggest that other factors, such as rewards, annual fees, and annual
percentage rate(s) (APR), drive credit card usage.\40\ In addition,
recent academic work \41\ directly observed that credit card offers
highlight rewards, annual fees, and APRs more than late fees based on
the position of the information and the size of the font. Only 6.06
percent of the 611,797 card offers in their data spanning from 1999 to
2007 mentioned late fees on the front page, with an average font size
of 9.56. In contrast, (1) rewards were displayed on the front page
93.68 to 100 percent of the time (depending on the type of rewards)
with an average font size of 12.12 to 16.56; (2) the annual fee was
disclosed on the front page 78.02 percent of the time with an average
font size of 13.39; and (3) APRs were displayed on the front page 27.95
[[Page 18909]]
percent of the time with an average font size of 13.02. The Bureau
notes that the authors of the study explained that they excluded the
post-2007 data ``to abstract from the impact of the 2008 financial
crisis and the [CARD Act] in 2009.'' \42\ However, the authors also
stated that ``the main results are qualitatively and quantitatively
very similar if we include data until 2016.'' \43\
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\40\ Karen Augustine, U.S. Consumers and Credit: Rising Usage,
Mercator Advisory Group, at 40 (2018).
\41\ Hong Ru & Antoinette Schoar, Do Credit Card Companies
Screen for Behavioural Biases? (Feb. 12, 2020), BIS Working Paper
No. 842, <a href="https://ssrn.com/abstract=3549532">https://ssrn.com/abstract=3549532</a>.
\42\ Id. at 12.
\43\ Id.
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F. Consumer Impact of Late Fees
Late fees represent over one-tenth of the $120 billion issuers
charge to consumers in interest and fees, totaling over $14 billion in
2019.\44\ A small share of accounts in low credit score tiers incur a
high proportion of late fees.\45\ Overall, the average deep subprime
account in the Y-14 data (discussed in part III.C) was charged $138 in
late fees in 2019, compared with $11 for the average superprime
account.\46\ The higher incidence of late fees for accounts in lower
tiers, combined with higher average charges for repeat late fees within
six billing cycles of the initial late fee, drives this disparity.\47\
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\44\ Late Fee Report, at 4.
\45\ Id. at 7.
\46\ Id. at 8.
\47\ Id.
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Credit card accounts in the Y-14 data held by cardholders living in
the U.S.' poorest neighborhoods paid twice as much on average in total
late fees than those in the richest areas.\48\ Cardholders in majority-
Black areas paid more in late fees for each card they held with major
credit card issuers in 2019 than majority white areas.\49\ And people
in areas with the lowest rates of economic mobility paid nearly $10
more in late fee charges per account compared to people in areas with
the highest rates of economic mobility.\50\
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\48\ Id. at 9.
\49\ Id. at 10.
\50\ Id. at 11.
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G. Other Consequences to Consumers of Late Payment
When a consumer does not make at least the minimum payment by the
periodic statement due date, a late fee may not be the only
consequence. However, the effect of a missed payment depends on
cardholder conduct both prior to and after the due date.
For cardholders who typically pay their balance in full every month
(so-called transactors), a late payment generally means both a late fee
and new interest incurred for carrying or revolving a balance. For the
cardholders who do not roll over a balance in the month before or after
a late fee is assessed, the loss of a grace period \51\ and coinciding
interest charges may pose a similar or even greater burden than the
late fee itself. For cardholders who regularly revolve a balance from
one month to the next, a late fee is the main financial consequence of
a missed payment if the payment is made prior to the next statement due
date, as the additional interest charges on the unpaid minimum amount
due for a limited number of days will likely be minimal.
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\51\ A grace period is a period within which credit extended may
be repaid without incurring a finance charge due to a periodic
interest rate. See, e.g., Sec. 1026.6(b)(2)(v) and comments
5(b)(2)(ii)-3.i and 54(a)(1)-2.
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However, if a consumer does not make at least the minimum payment
due for more than one billing cycle, non-payment may carry more severe
consequences. After approximately 30 days, consumers' credit scores may
decline after issuers report the delinquency to credit bureaus. A card
issuer also may take actions to reprice new transactions on the account
according to a penalty rate, if permitted under Sec.
1026.55(b)(3).\52\ After 60 days, issuers may take action to reprice
the entire outstanding balance on the account according to a penalty
rate, if permitted under Sec. 1026.55(b)(4). At any point as an
account becomes more delinquent, an issuer may take steps to reduce a
cardholder's credit line or suspend use of the card, limit their
earning or redemption of rewards, or increase outreach to collect the
outstanding debt. After 180 days of delinquency, an issuer will
typically close and charge off the credit card account which may carry
a large and long-term financial penalty for a consumer.
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\52\ If a consumer does not make the required payment by the due
date, Sec. 1026.55(b)(3) permits a card issuer to take actions to
reprice new transactions on the account according to a penalty rate
in certain circumstances. The Bureau understands, however, that most
card issuers do not take actions to reprice new transactions to the
penalty rate until the consumer is more than 60 days late. 2021
Report, at 51.
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III. Summary of Rulemaking Process
A. Advance Notice of Proposed Rulemaking
On June 22, 2022, the Bureau issued an advance notice of proposed
rulemaking (ANPR) seeking information from credit card issuers,
consumer groups, and the public regarding credit card late fees and
late payments, and card issuers' revenue and expenses.\53\ Areas of
inquiry included: (1) factors used by card issuers to set late fee
amounts; (2) card issuers' costs and losses associated with late
payments; (3) the deterrent effects of late fees; (4) cardholders' late
payment behavior; (5) methods that card issuers use to facilitate or
encourage timely payments, including automatic payment and
notifications; (6) card issuers' use of the late fee safe harbor
provisions in Regulation Z; and (7) card issuers' revenue and expenses
related to their domestic consumer credit card operations. The Bureau
received 43 comments in response to the ANPR.
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\53\ 87 FR 38679 (June 29, 2022).
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Consumer group commenters generally recommended that the Bureau:
(1) more closely tailor late fees to the amount of the debt owed by the
cardholder, such as by establishing a sliding scale for the safe harbor
amount so that late fees are proportional to the account balance and by
capping the amount of late fees that can be imposed for an account
during the year; (2) require a mandatory waiting period of several days
before a late fee can be assessed; (3) decline to incorporate
deterrence as a factor in setting late fee rules and safe harbor
amounts; (4) consider the savings to issuers of providing online-only
statements in determining the costs of collecting late payments, (5)
require a postal mail notification before a late fee can be imposed for
an online-only account; and (6) exclude the costs of being a furnisher
of information to consumer reporting agencies from the costs of
collecting late payments.
Card issuers and their trade groups that commented on the ANPR
generally opposed revisions to Regulation Z's safe harbor provisions
related to late fees, including lowering the safe harbor amounts.
Several industry trade groups asserted that although the current safe
harbor amounts do not cover all the costs associated with late payments
and are not as effective a deterrent as higher fees would be, they
cover a significant portion of issuer costs, deter late payments, and
provide legal certainty to card issuers. Card issuers and trade group
commenters, however, did not provide detailed information on the type
of costs, and the dollar amount of the costs, they incur to collect
late payments. Card issuers and their trade groups commenters also
generally opposed eliminating the safe harbor provisions and requiring
card issuers to use the cost analysis provisions in Sec.
1026.52(b)(1)(i) to determine the amount of late fees a card issuer is
permitted to charge. Several industry trade group commenters asserted
that reducing or eliminating the safe harbor would reduce credit access
and increase the cost of credit. One trade group commenter asserted
that smaller
[[Page 18910]]
creditors and community banks, particularly those that extend credit to
consumers who are trying to build or repair their credit, have
proportionately higher compliance costs and would face the most risk if
the safe harbor was reduced or eliminated, limiting their ability to
continue to offer credit products at the same terms. Several industry
trade group commenters also asserted that because lowering the safe
harbor would have a significant impact on small financial institutions,
the Bureau must comply with the Small Business Regulatory Enforcement
Fairness Act (SBREFA) by convening a SBREFA panel in any late fee
rulemaking. Several industry trade group commenters also indicated that
if the safe harbor were eliminated, the Bureau would need to provide
significantly more detail and clarity around the costs included in the
late fee amount calculation under Sec. 1026.52(b)(1)(i).
B. CARD Act Consultation With Certain Federal Agencies
Consistent with the CARD Act, the Bureau consulted with the
following agencies regarding rules that implement TILA section 149: (1)
the Comptroller of the Currency; (2) the Board of Directors of the
Federal Deposit Insurance Corporation; and (3) the National Credit
Union Administration Board.\54\ The Bureau also consulted with the
Board and several other federal agencies, as discussed in part VII.
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\54\ 15 U.S.C. 1665d(b) and 1665d(e).
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C. Y-14 Data Considered for This Proposal
As discussed in more detail in the section-by-section analysis in
part V, the Bureau has considered data in developing this proposal that
the Board collects as part of its Y-14M (Y-14) data. Since June 2012,
the Board has collected these data monthly from bank holding companies
with total consolidated assets exceeding $50 billion. For this
collection, surveyed financial institutions report comprehensive data
on their assets on the last business day of each calendar month. These
data are used to support the Board's supervisory stress test models and
provide one source of data for the Bureau's biennial report to Congress
on the consumer credit card market.\55\ These data contain reported
information on the following four metrics used in developing this
proposal:
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\55\ See Bd. of Governors. of the Fed. Rsrv. Sys., Report Forms
FR Y-14M, <a href="https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV">https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV</a> (for more
information on the Y-14M collection). The Bureau is one of several
government agencies with whom the Board shares the data. Information
in the Y-14 data do not include any personal identifiers.
Additionally, accounts associated with the same consumer are not
linked across or within issuers. The Y-14 data also does not include
transaction-level data pertaining to consumer purchases.
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Late Fee Income: Reported net fee income assessed for late or
nonpayment accounts in a given domestic credit card portfolio by card
type (e.g., general purpose or private label). This is late fee income
for the Bureau's purposes, as discussed in the section-by-section
analysis of Sec. 1026.52(b)(1)(ii).
Collection Costs: Reported costs incurred to collect problem
credits that include the total collection cost of delinquent, recovery,
and bankrupt accounts. Issuers report these aggregate costs monthly for
their domestic credit card portfolios and separately by credit card
type.\56\ These reported costs do not include losses and associated
costs.\57\
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\56\ Types include General Purpose, Private Label, Business, and
Corporate cards.
\57\ Issuers report projected losses, the dollar amount of
charge-offs and any associated recoveries, interest expense, and
loan loss provisions separately.
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Late Fee Amount: Reported amount of the late fee charged on a
particular account in a particular month.
Total Required Payments: Reported total payment amount on a
particular account in a particular month, including any missed payments
or fees that were required to be paid in a particular billing cycle.
This typically includes the minimum payment due, past due payments, and
any amount reported as over the credit limit.
The Y-14 data received by the Bureau cover the period from the
middle of 2012 through September 2022 and are provided by issuers that
accounted for just under 70 percent of outstanding balances on U.S.
consumer credit cards as of year-end 2020. For the purposes of the
analysis using these data as described in part V, the Bureau only
considered account- and portfolio-level data for issuers in a given
month for consumer general purpose and private label credit cards for
which there existed data on late fee income, collection costs, late fee
amounts, and total required payments in the Y-14 data. With respect to
credit card data, the Bureau receives the complete portfolio data
(including late fee income and collection costs) for all the card
issuers included in the data collection. The Bureau receives only a
random 40 percent subsample of account information (including late fee
amounts and total required payments) reported by card issuers included
in the data collection.
Collection costs in the Y-14 data include both pre-charge-off and
post-charge-off collection costs. As discussed in the section-by-
section analysis of Sec. 1026.52(b)(1)(i), the Bureau proposes to
amend comment 52(b)(1)(i)-2.i to clarify that costs for purposes of the
cost analysis provisions in Sec. 1026.52(b)(1)(i) for determining
penalty fee amounts do not include any collection costs that are
incurred after an account is charged off pursuant to loan loss
provisions.
Consistent with that proposed clarification, the Bureau estimated
the percentage of collection costs that may occur after charge-off so
that they could be excluded from the collection costs in the Y-14 data.
The Bureau notes that the most significant post-charge-off collection
costs are likely to be commissions paid to third-party debt collectors
for charged-off accounts. The Bureau understands that such commission
payments, made to third-party debt collection companies, would be made
almost exclusively in connection with accounts that have been charged
off, and represent a conservative estimate of post-charge-off
collection costs, as there may be other costs associated with
collections post-charge-off beyond such commission payments.
The Bureau estimated from debt collection reports the commission
expenses that six major card issuers paid in 2019 and 2020,
representing 91 percent of balances and 93 percent of collection costs
among portfolios with positive collection expenses reported in the Y-14
data in the twelve months leading up to August 2022.\58\ The
methodology for estimating post-charge-off commissions considered the
amount of charged-off balances and then estimated the commission on the
volume of recovered balances by using the recovery and commission
rates.\59\
[[Page 18911]]
Based on these commission expenses that these six major card issuers
paid in 2019 and 2020 to third-party debt collectors for charged-off
accounts, the Bureau estimated that these post-charge-off costs are
around 25 percent of total collection costs for these issuers; the
average ratio was 27 percent in 2019 and 21 percent in 2020. In 2019,
the median ratio of estimated post-charge-off commission costs to
annual collection costs in the Y-14 for individual issuers was 28
percent; in 2020, it was 23 percent. Based on this data, the Bureau
estimated that pre-charge-off collection costs were equal to 75 percent
of the collection costs included in the Y-14 data for purposes of its
analysis related to the proposed changes to the safe harbor thresholds
for late fees in Sec. 1026.52(b)(1)(ii).
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\58\ As part of its review of the practices of credit card
issuers for its biennial review of the consumer credit card market,
the Bureau surveys several large issuers to better understand
practices and trends in credit card debt collection. These data
provided in response to data filing orders served as the basis of
this calculation. For more information on these data, see 2021
Report, at 17.
\59\ For example, if an issuer had a total of $1 million in
newly charged-off balances in a given year, a cumulative recovery
rate for that year of five percent, and a post-charge-off commission
rate of 20 percent, the Bureau would estimate the post-charge-off
commission costs to be $10,000. To calculate the post-charge-off
collection costs as a share of total cost of collections, the Bureau
then divided the estimated post-charge-off commission costs by the
total collection costs the bank reported in the Y-14 data. For
issuers who sell debt, the cost of collections calculation uses
charge-off balances net of asset sales. The commission rate for each
issuer is an average weighted by the share of post-charge-off
balances in each tier placement (e.g., primary, secondary, and
tertiary placements).
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As discussed in more detail in the section-by-section analysis in
part V, the Bureau also considered Y-14+ data in developing this
proposal. The Y-14+ data includes information from the Board's Y-14
data and a diverse group of specialized issuers.
IV. Legal Authority
A. Section 1022 of the Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions thereof.''
\60\ Among other statutes, title X of the Dodd-Frank Act and TILA are
Federal consumer financial laws.\61\ Accordingly, in issuing this
proposed rule, the Bureau proposes to exercise its authority under
Dodd-Frank Act section 1022(b)(1) to prescribe rules under TILA and
title X that carry out the purposes and objectives and prevent evasion
of those laws.
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\60\ 12 U.S.C. 5512(b)(1).
\61\ Dodd-Frank Act section 1002(14); codified at 12 U.S.C.
5481(14) (defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12); codified at 12
U.S.C. 5481(12) (defining ``enumerated consumer laws'' to include
TILA).
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B. The Truth in Lending Act
As amended by the Dodd-Frank Act, TILA section 105(a) \62\ directs
the Bureau to prescribe regulations to carry out the purposes of TILA,
and provides that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, that, in the judgment of the Bureau, are necessary or
proper to effectuate the purposes of TILA, to prevent circumvention or
evasion thereof, or to facilitate compliance. Pursuant to TILA section
102(a), a purpose of TILA is to assure a meaningful disclosure of
credit terms to enable the consumer to avoid the uninformed use of
credit and compare more readily the various credit terms available to
the consumer. This stated purpose is tied to Congress's finding that
economic stabilization would be enhanced and competition among the
various financial institutions and other firms engaged in the extension
of consumer credit would be strengthened by the informed use of
credit.\63\ Thus, strengthened competition among financial institutions
is a goal of TILA, achieved through the effectuation of TILA's
purposes.
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\62\ 15 U.S.C. 1604(a).
\63\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
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As described above, the CARD Act was signed into law on May 22,
2009,\64\ and the Act amended TILA \65\ by adding section 149, which
provides, among other things, that the amount of any penalty fee 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 or any other
penalty fee or charge, must be ``reasonable and proportional'' to such
omission or violation.\66\
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\64\ Public Law 111-24, 123 Stat. 1734 (2009).
\65\ 15 U.S.C. 1601 et seq.
\66\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).
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At the time of its passage, the CARD Act required the Board to
issue rules establishing standards for assessing the reasonableness and
proportionality of such penalty fees, with a statutory deadline of
February 22, 2010 for issuing this required rule.\67\ The Act also
authorized the Board to establish different standards for different
types of fees and charges, as appropriate.\68\ The CARD Act also
allowed, but did not require, the Board to issue rules to provide for a
safe harbor amount for any such penalty fee that is presumed to be
reasonable and proportional to such omissions or violations.\69\ This
grant of discretionary authority did not include a deadline. The Board
issued a rule on June 29, 2010, completing the required rulemaking (now
contained in the Bureau's Regulation Z, 12 CFR 1026.52(b)(1)(i)) and
adding a discretionary portion (now contained in the Bureau's
Regulation Z, 12 CFR 1026.52(b)(1)(ii)) with safe harbors.
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\67\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).
\68\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(d)).
\69\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(e)).
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On July 21, 2011, the Board's rulemaking authority to implement the
provisions of TILA, including TILA section 149, transferred to the
Bureau pursuant to sections 1061 and 1100A of the Dodd-Frank Act.\70\
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\70\ Public Law 111-203, 124 Stat. 1376 (2010).
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For the reasons discussed in this proposal, the Bureau proposes to
amend certain provisions in Regulation Z that impact the amount of late
fees that card issuers can charge to carry out TILA's purposes and
proposes such additional requirements, adjustments, and exceptions as,
in the Bureau's judgment, may be necessary and proper to carry out the
purposes of TILA, prevent circumvention or evasion thereof, or to
facilitate compliance. In developing these aspects of this proposal
pursuant to its authority under TILA section 105(a), the Bureau has
considered the purposes of TILA, including ensuring meaningful
disclosures, facilitating consumers' ability to compare credit terms,
and helping consumers avoid the uninformed use of credit, and the
findings of TILA, including strengthening competition among financial
institutions and promoting economic stabilization.
The Bureau also has analyzed whether the current safe harbor
threshold amounts for late fees are reasonable and proportional to a
cardholder's omission or violation. In considering the appropriate
amount, the Bureau is guided by factors including (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 deemed necessary or appropriate.
V. Section-by-Section Analysis
Section 1026.7 Periodic Statement
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
7(b)(11) Due Date; Late Payment Costs
Section 1026.7(b) sets forth the disclosure requirements for
periodic statements that apply to open-end (not home-secured) plans.
Section 1026.7(b)(11) generally requires that for a credit card account
under an open-end (not home-secured) consumer credit plan, a card
issuer must provide on each periodic statement: (1) the due date for a
payment and the due date must be the same day of the month for each
billing cycle; and (2) the amount of any late
[[Page 18912]]
payment fee and any increased periodic rate(s) (expressed as APRs) that
may be imposed on the account as a result of a late payment.
Currently, comment 7(b)(11)-4 provides that for purposes of
disclosing the amount of any late payment fee and any increased APR
that may be imposed on the account as a result of a late payment under
Sec. 1026.7(b)(11), a card issuer that imposes a range of late payment
fees or rates on a credit card account under an open-end (not home-
secured) consumer credit plan may state the highest fee or rate along
with an indication lower fees or rates could be imposed. Comment
7(b)(11)-4 also provides an example to illustrate how a card issuer may
meet the standard set forth above, stating that a phrase indicating the
late payment fee could be ``up to $29'' complies with this standard.
The proposed rule would amend comment 7(b)(11)-4 to read ``up to $8''
so that the late fee amount in the example would be consistent with the
proposed $8 late fee safe harbor amount set forth in proposed Sec.
1026.52(b)(1)(ii).
Section 1026.52 Limitations on Fees
52(a) Limitations During First Year After Account Opening
52(a)(1) General Rule
Section 1026.52(a)(1) generally provides that the total amount of
fees a consumer is required to pay with respect to a credit card
account under an open-end (not home-secured) consumer credit plan
during the first year after account opening must not exceed 25 percent
of the credit limit in effect when the account is opened. Section
1026.52(a)(2) provides that late payment fees, over-the-limit fees, and
returned-payment fees; or other fees that the consumer is not required
to pay with respect to the account are excluded from the fee limitation
set forth in Sec. 1026.52(a)(1).
Comment 52(a)(1)-1 provides that the 25 percent limit in Sec.
1026.52(a)(1) applies to fees that the card issuer charges to the
account as well as to fees that the card issuer requires the consumer
to pay with respect to the account through other means (such as through
a payment from the consumer's asset account to the card issuer or from
another credit account provided by the card issuer). Comment 52(a)(1)-1
also provides four examples to illustrate the provision set forth
above. The two examples in comment 52(a)(1)-1.i and iv contain late fee
amounts of $15. The proposed rule would amend the two examples in
comment 52(a)(1)-1.i and iv to use a late fee amount of $8, so that the
late fee amounts in the examples are consistent with the proposed $8
late fee safe harbor amount set forth in proposed Sec.
1026.52(b)(1)(ii).
52(b) Limitations on Penalty Fees
52(b)(1) General Rule
Section 1026.52(b) provides that a card issuer must not impose a
fee for violating the terms or other requirements of a credit card
account under an open-end (not home-secured) consumer credit plan
unless the issuer has determined that the dollar amount of the fee
represents a reasonable proportion of the total costs incurred by the
issuer for that type of violation as set forth in Sec.
1026.52(b)(1)(i) (referred to herein as the cost analysis provisions)
or complies with the safe harbor provisions set forth in Sec.
1026.52(b)(1)(ii). It further provides that a card issuer must not
impose such a fee unless the fee is consistent with certain
prohibitions set forth in Sec. 1026.52(b)(2), including a prohibition
in Sec. 1026.52(b)(2)(i)(A) on imposing a penalty fee that exceeds the
dollar amount associated with the violation, which currently prohibits
late fees that exceed 100 percent of the required minimum payment.\71\
The commentary to Sec. 1026.52(b) explains that penalty fees subject
to its provisions include late fees, returned-payment fees, and fees
for over-the-limit transactions, among others.\72\
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\71\ See comment 52(b)(2)(i)-1.
\72\ See comment 52(b)(1)-1.
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As discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii) below, the Bureau proposes to amend Sec.
1026.52(b)(1)(ii) to lower the safe harbor dollar amount for late fees
to $8 (currently set at $30) and to provide that the higher safe harbor
dollar amount for subsequent violations of the same type that occur
during the same billing cycle or in one of the next six billing cycles
(currently set at $41) does not apply to late fees.\73\
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\73\ As discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii)(C) below, the Bureau is not proposing to lower or
otherwise change the safe harbor amount of a late fee that card
issuers may impose when a charge card account becomes seriously
delinquent.
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In addition, as discussed in more detail below, the Bureau proposes
to provide that the current provision in Sec. 1026.52(b)(1)(ii)(D)
that provides for annual inflation adjustments for the safe harbor
dollar amounts would not apply to the safe harbor amount for late fees.
Also, as discussed in the section-by-section analysis of Sec.
1026.52(b)(2)(i) below, the Bureau proposes to amend Sec.
1026.52(b)(2)(i)(A) to provide that late fee amounts may not exceed 25
percent of the required minimum payment.
The Bureau also proposes one clarification that would apply to
penalty fees generally. Specifically, the Bureau proposes to amend
comment 52(b)(1)(i)-2.i to clarify that costs for purposes of the cost
analysis provisions in Sec. 1026.52(b)(1)(i) for determining penalty
fee amounts do not include any collection costs that are incurred after
an account is charged off pursuant to loan loss provisions.
The Bureau is not proposing to amend the lead-in text of Sec.
1026.52(b)(1). However, for consistency with the proposed amendments to
other provisions in Sec. 1026.52(b) and for clarity, the Bureau
proposes certain amendments to the commentary to Sec. 1026.52(b) and
(b)(1). Specifically, the Bureau proposes to amend comment 52(b)-1.i.A
to clarify that a late payment fee or late fee is any fee imposed for a
late payment and to include a cross-reference to Sec. 1026.60(b)(9)
and accompanying commentary for further guidance. The Bureau also
proposes to amend comment 52(b)-2, which provides an illustrative
example of how to round a penalty fee to the nearest whole dollar in
compliance with the rule. The proposed amendments would reduce the
dollar amounts of late fees in the example to reflect amounts that
would be permissible under the Bureau's proposals to lower the late fee
safe harbor amount to $8 and to cap late fees at 25 percent of the
required minimum payment. In addition, the Bureau proposes to add new
comment 52(b)-5 to clarify that any dollar amount examples in the
commentary to Sec. 1026.52(b) relating to the safe harbors in Sec.
1026.52(b)(1) are based on the original historical safe-harbor
thresholds of $25 and $35 for penalty fees other than late fees, and on
the proposed threshold of $8 for late fees. This proposed clarification
would help explain why the dollar amounts for penalty fees other than
late fees are different from the ones set forth in the regulatory text
in Sec. 1026.52(b)(1)(ii)(A) and (B).
The Bureau also proposes to amend comments 52(b)(1)-1.i.B and C,
which illustrate the relationship between the cost analysis provisions
in Sec. 1026.52(b)(1)(i) and the safe harbor provisions in Sec.
1026.52(b)(1)(ii). The Bureau proposes to amend the illustrative
example in comment 52(b)(1)-1.i.B to reflect a late fee amount
consistent with the proposal. In addition, because the Bureau proposes
to substantially amend the safe harbor provisions for late fees, the
Bureau proposes to remove references to late fees from the illustrative
examples in comment 52(b)(1)-1.i.C and replace
[[Page 18913]]
them with references to over-the-limit fees.
In addition, the Bureau proposes to amend comment 52(b)(1)-1.ii,
which illustrates the relationship between the penalty fee limitations
in Sec. 1026.52(b)(1) and the prohibitions in Sec. 1026.52(b)(2). The
proposed amendments would reduce the dollar amount of a late fee in the
example to reflect an amount that would be consistent with the Bureau's
proposal to lower the late fee safe harbor amount.
The Bureau solicits comment on all aspects of these proposed
amendments to the commentary to Sec. 1026.52(b) and (b)(1), including
comment on what additional amendments may be needed to help ensure
clarity and compliance certainty.
52(b)(1)(i) Fees Based on Costs
As noted above, under the cost analysis provisions in Sec.
1026.52(b)(1)(i), a card issuer may impose a fee for violating the
terms or other requirements of an account consistent with the general
rule in Sec. 1026.52(b)(1) 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. Section 1026.52(b)(1)(i) further provides that a card issuer
must reevaluate that determination at least once every 12 months and
sets forth certain other requirements and conditions that apply if, as
a result of the reevaluation, the card issuer determines that either a
lower or higher fee represents a reasonable proportion of the total
costs incurred by the card issuer as a result of that type of
violation.
The Bureau is not proposing to amend the text of Sec.
1026.52(b)(1)(i). However, for purposes of clarity and compliance
certainty, the Bureau proposes to revise comment 52(b)(1)(i)-2.i to
clarify that the costs that card issuers can consider for purposes of
determining the amount of a penalty fee under the cost analysis
provisions in Sec. 1026.52(b)(1)(i) do not include collection costs
that are incurred after an account is charged off in accordance with
loan-loss provisions.
Comment 52(b)(1)(i)-1 currently provides that card issuers may
include in the costs for determining the amount of a penalty fee ``the
costs incurred . . . as a result of [the] violation.'' Comment
52(b)(1)(i)-2 addresses amounts not considered costs incurred by a card
issuer as a result of violations of the terms or other requirements of
an account for purposes of Sec. 1026.52(b)(1)(i). Comment 52(b)(1)(i)-
2.i provides that one such amount that cannot be considered as costs
incurred for purposes of Sec. 1026.52(b)(1)(i) are losses and
associated costs (including the cost of holding reserves against
potential losses and the cost of funding delinquent accounts).
The Bureau proposes to amend comment 52(b)(1)(i)-2.i to clarify the
``losses and associated costs'' that card issuers may not consider as
costs incurred for purposes of Sec. 1026.52(b)(1)(i) include any
collection costs that are incurred after an account is charged off in
accordance with loan-loss provisions. The Bureau's proposal, therefore,
would make it explicit that for any collection costs that a card issuer
incurs after an account has been charged off are not considered costs
incurred for purposes of Sec. 1026.52(b)(1)(i). The Bureau understands
that when an account has been charged off, the card issuer has written
the account off as a loss; therefore, any cost in collecting amounts
owed to a card issuer that are incurred post-charge-off is related to
mitigating a loss as opposed to the cost of a violation of the account
terms. As the Board noted in its 2010 Final Rule ``it would be
inconsistent with the purpose of the [CARD Act] to permit card issuers
to begin recovering losses and associated costs through penalty fees
rather than through upfront rates.'' \74\
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\74\ 75 FR 37526, 37538 (June 29, 2010).
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The Bureau received two comments to the ANPR that indicated there
may be a need to clarify that costs of collecting amounts owed to a
card issuer incurred after an account is charged off are costs related
to a loss and, therefore, cannot be considered as costs incurred for a
violation of account terms for purposes of Sec. 1026.52(b)(1)(i). For
instance, one industry trade group commenter noted that, for example,
late fees are meant to cover, among other things, the charge-off costs
associated with late payments. Another industry credit union commenter
similarly explained that late fees help offset the charge-off on
accounts not paid by consumers. Given the two comments suggesting
potential confusion, the Bureau proposes to clarify that such costs
cannot be considered for purposes of Sec. 1026.52(b)(1)(i).
The Bureau solicits comment on this proposed clarification of the
commentary to Sec. 1026.52(b)(1)(i), including comment on whether any
additional clarification may be needed. The Bureau also solicits
comment on whether there are other specific clarifications that should
be made to the provisions of the commentary providing guidance on how
to perform a cost analysis under the rule.
52(b)(1)(ii) Safe Harbors
Overview of Proposed Amendments to Late Fee Safe Harbor Provisions
As noted in part I, the Bureau is concerned that (1) the safe
harbor dollar amounts for late fees currently set forth in Sec.
1026.52(b)(1)(ii) are not reasonable and proportional to the omission
or violation to which the fee relates; (2) the current higher safe
harbor threshold for late fees for subsequent violations of the same
type in the same billing cycle or in one of the next six billing cycles
is higher than is justified based on consumer conduct and to deter
future violations and, indeed, a late fee that is too high could
interfere with the consumers' ability to make future payments on the
account; and (3) additional restrictions on late fees may be needed to
ensure that late fees are reasonable and proportional. To address these
concerns, the Bureau proposes to amend Sec. 1026.52(b)(1)(ii) to lower
the safe harbor amounts for late fees--currently set at $30 and $41 for
a first and subsequent violation, respectively--to a late fee amount of
$8 for the first and subsequent violations.\75\ The Bureau's proposal
would eliminate the higher safe harbor amount for subsequent late
payment violations. As discussed below, based on analysis of available
evidence and consideration of the relevant factors, the Bureau
preliminarily determines that a late fee amount of $8 for the first and
subsequent violations is presumed to be reasonable and proportional to
the late payment violation to which the fee relates. In addition, for
the reasons discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii)(D), the Bureau proposes to no longer apply to the
late fee safe harbor amount current Sec. 1026.52(b)(1)(ii)(D) that
provides for annual inflation adjustments for the safe harbor dollar
amounts.
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\75\ As discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii)(C) below, the Bureau is not proposing to lower or
otherwise change the safe harbor amount of a late fee that card
issuers may impose when a charge card account becomes seriously
delinquent.
---------------------------------------------------------------------------
The Bureau is not proposing at this time to similarly amend the
safe harbor provisions in Sec. 1026.52(b)(1)(ii) as they apply to
other types of penalty fees, including returned-payment fees, fees for
over-the-limit transactions, and declined access check fees. The Bureau
is limiting the proposed amendments to late fees because the $14
billion in late fees charged in 2019 account for nearly 99 percent of
all penalty fees imposed by major card issuers in the Y-14+
[[Page 18914]]
data \76\ and, as such, pose far greater consumer protection concerns
than do other penalty fees totaling less than $0.2 billion that year.
Moreover, as a result of their prevalence, late fees have produced a
substantial amount of data and other evidence that prompts and forms
the basis of this proposal. Further, the Bureau has determined that
proposing to lower the safe harbor amounts only for late fees is
consistent with its authority under TILA section 149(d), which
authorizes the Bureau, in issuing rules to implement the CARD Act's
penalty fee provisions, to establish ``different standards for
different types of fees and charges, as appropriate.'' \77\
Nonetheless, as discussed below, the Bureau solicits comment on several
issues related to penalty fees generally, including whether the safe
harbor dollar amount in Sec. 1026.52(b)(1)(ii)(A) should be similarly
lowered for all penalty fees, and the higher safe harbor amount
provision in Sec. 1026.52(b)(1)(ii)(B) should be similarly eliminated
for all penalty fees.
---------------------------------------------------------------------------
\76\ Late Fee Report, at 13.
\77\ 15 U.S.C. 1665d(c).
---------------------------------------------------------------------------
The Board's Implementing Rule and Findings
In the 2010 Final Rule implementing TILA section 149, the Board
established penalty fee safe harbor amounts of $25 for the first
violation and $35 for any additional violations of the same type that
occur during the same billing cycle or in one of the next six billing
cycles. In doing so, the Board indicated that it ``believes that these
amounts are generally consistent with the statutory factors of cost,
deterrence, and consumer conduct.'' \78\ In interpreting TILA section
149(a), the Board found that ``it appears that Congress intended the
words `reasonable and proportional' . . . to require that there be a
reasonable and generally consistent relationship between the dollar
amounts of credit card penalty fees and the violations for which those
fees are imposed, while providing the Board with substantial discretion
in implementing that requirement.'' \79\
---------------------------------------------------------------------------
\78\ 75 FR 37526, 37527 (June 29, 2010).
\79\ Id. at 37532.
---------------------------------------------------------------------------
The Board's Consideration of Costs. The cost-related data on which
the Board relied was limited. Although the Board received more than
22,000 comments on its proposed rule, the Board noted that ``relatively
few provided any data'' supporting a particular safe harbor amount.\80\
While one commenter suggested the average cost of collecting late
payments for credit card accounts issued by the largest issuers was
$28, the Board noted the comment ``significantly overstates the fee
amounts necessary to cover the costs incurred by large issuers as a
result of violations,'' as it included costs not incurred as a result
of violations, such as the cost of funding balances that would have
been charged off regardless of fees.\81\
---------------------------------------------------------------------------
\80\ Id. at 37541.
\81\ Id.
---------------------------------------------------------------------------
Given these limitations, instead of relying on data related to the
costs of collecting late payments in setting the safe harbor dollar
amounts in its Regulation Z, Sec. 226.52(b)(1)(ii)(A) and (B), the
Board primarily considered the following information in setting the
safe harbor dollar amounts: (1) the dollar amounts of late fees
currently charged by credit card issuers; (2) the dollar amounts of
late fees charged with respect to deposit accounts and consumer credit
accounts other than credit cards; (3) State and local laws regulating
late fees; (4) the safe harbor threshold for credit card default
charges established by the United Kingdom's Office of Fair Trading
(OFT) in 2006; (5) data related to deterrence that provides evidence on
whether the experience of incurring a late payment fee makes consumers
less likely to pay late for a period of time; and (6) data submitted by
a large credit card issuer that indicated that consumers who pay late
multiple times over a six-month period generally present a
significantly greater credit risk to issuers than consumers who pay
late a single time.
In establishing the safe harbor amounts, the Board concluded that
``it is not possible based on the available information to set safe
harbor amounts that precisely reflect the costs incurred by a widely
diverse group of card issuers and that deter the optimal number of
consumers from future violations,'' \82\ and stated its belief that the
safe harbor amounts established in the rule were ``generally sufficient
to cover issuers' costs and to deter future violations.'' \83\ The
Board further concluded that, based on the comments received in
response to its proposal, the $25 safe harbor in Sec.
226.52(b)(1)(ii)(A) for the first violation was sufficient to cover the
costs incurred by most small issuers as a result of violations.\84\
---------------------------------------------------------------------------
\82\ Id. at 37544.
\83\ Id.
\84\ Id. at 37542.
---------------------------------------------------------------------------
With respect to late payments, the Board stated its belief that
large issuers generally incur fewer collection and other costs on
accounts that experience a single late payment and then pay on time for
the next six billing cycles than on accounts that experience multiple
late payments during that period.\85\ The Board further reasoned that
even if $25 is not sufficient to offset all of the costs incurred by
some large issuers as a result of a single late payment, those issuers
will be able to recoup any unrecovered costs through upfront APRs and
other pricing strategies.\86\
---------------------------------------------------------------------------
\85\ Id.
\86\ Id.
---------------------------------------------------------------------------
With respect to the higher safe harbor amount in Sec.
226.52(b)(1)(ii)(B), the Board explained its belief that when an
account experiences additional violations that occur during the same
billing cycle or in one of the six billing cycles following the initial
violation, $35 would generally be sufficient to cover any increase in
the costs incurred by the card issuer.\87\ As discussed in more detail
below, the Board also explained its belief that the $35 safe harbor
amount would have a reasonable deterrent effect on additional
violations \88\ and was consistent with the consumer's conduct in
engaging in multiple violations of the same type within six billing
cycles.\89\
---------------------------------------------------------------------------
\87\ Id.
\88\ Id.
\89\ Id. at 37543.
---------------------------------------------------------------------------
The Board's Consideration of Deterrence. The Board did not
expressly discuss how it took deterrence into account in setting the
initial $25 penalty fee amount; instead, the Board limited its
discussion of that factor to the role it played in the Board's decision
to set a higher safe harbor amount for any additional violation of the
same type that occurred during the same billing cycle or in one of the
next six billing cycles. While the Board noted that it considered
deterrence in setting a higher amount generally, the Board did not have
specific data justifying the $35 amount. The Board noted that one
commenter on the proposal submitted the results of applying two
deterrence modeling methods to data gathered from all leading credit
card issuers in the U.S. According to the commenter, these models
estimated that fees of $28 or less have relatively little deterrent
effect on late payments but that higher fees are a statistically
significant contributor to sustaining lower levels of delinquent
behavior. While the Board questioned the assumptions used to arrive at
the results in these modeling methods, the Board did accept that
increases in the amount of penalty fees can affect the frequency of
violations.\90\
---------------------------------------------------------------------------
\90\ Id. at 37541.
---------------------------------------------------------------------------
With respect to the higher $35 fee for repeat penalty fees that
occur during the same billing cycle or in one of the next
[[Page 18915]]
six billing cycles, the Board explained its belief that a higher
penalty fee amount is consistent with the deterrence factor set forth
in TILA 149(c)(2) insofar as--after a violation has occurred--the
amount of the fee increases to deter additional violations of the same
type that occur during the same billing cycle or in one of the next six
billing cycles.\91\ The Board also explained its belief that although
upfront disclosure of a penalty fee may be sufficient to deter some
consumers from engaging in certain conduct, other consumers may be
deterred by the imposition of the fee itself. For these consumers, the
Board explained its belief ``that imposition of a higher fee when
multiple violations occur will have a significant deterrent effect on
future violations.'' \92\ The Board specifically pointed to one study
of four million credit card statements, which found that a consumer who
incurs a late payment fee is 40 percent less likely to incur a late
payment fee during the next month compared to a consumer who was not
late, although this effect depreciates approximately 10 percent each
month.\93\ Although this study indicated that the imposition of a
penalty fee may cease to have a deterrent effect on future violations
after four months, the Board concluded that imposing an increased fee
for additional violations of the same type that occur during the same
billing cycle or in one of the next six billing cycles is consistent
with the intent of the CARD Act. The Board pointed to this study as
evidence indicating that, as a general matter, penalty fees may deter
future violations of the account terms.\94\
---------------------------------------------------------------------------
\91\ Id. at 37533.
\92\ Id.
\93\ Sumit Agarwal et al., Learning in the Credit Card Market
(April 24, 2013), <a href="https://ssrn.com/abstract=1091623">https://ssrn.com/abstract=1091623</a> or <a href="http://dx.doi.org/10.2139/ssrn.1091623">http://dx.doi.org/10.2139/ssrn.1091623</a>. The Board reviewed a 2008 version
of the paper.
\94\ 75 FR 37526, 37533 n.24 (June 29, 2010).
---------------------------------------------------------------------------
The Board's Consideration of Consumer Conduct. The Board also took
consumer conduct into account in adopting the higher $35 fee for repeat
penalty fees that occur during the same billing cycle or in one of the
next six billing cycles.\95\ The Board explained its belief that
``multiple violations during a relatively short period can be
associated with increased costs and credit risk and reflect a more
serious form of consumer conduct than a single violation.'' \96\ The
Board noted that, based on data submitted by a large credit card
issuer, consumers who pay late multiple times over a six-month period
generally present a significantly greater credit risk than consumers
who pay late a single time. The Board acknowledged that this data also
indicates that consumers who pay late two or more times over longer
periods (such as 12 or 24 months) are significantly riskier than
consumers who pay late a single time. However, the Board did not
explain how adding additional costs to these consumers would make them
less of a credit risk or consider whether adding costs to consumers who
are unable to pay could increase that risk.
---------------------------------------------------------------------------
\95\ The Board did not refer to consumer conduct in setting the
$25 safe harbor amount. See id. at 37527.
\96\ Id.
---------------------------------------------------------------------------
The Board stated its belief that, when evaluating the conduct of
consumers who have violated the terms or other requirements of an
account, it is consistent with other provisions of the CARD Act to
distinguish between those who repeat that conduct during the same
billing cycle or in one of the next six billing cycles and those who do
not.\97\ Specifically, the Board noted that (1) TILA section 171(b)(4)
provides that, if the APR that applies to a consumer's existing balance
is increased because the account is more than 60 days delinquent, the
increase must be terminated if the consumer makes the next six payments
on time; and (2) TILA section 148 provides that, when an APR is
increased based on the credit risk of the consumer or other factors,
the card issuer must review the account at least once every six months
to assess whether those factors have changed (including whether the
consumer's credit risk has declined).\98\ The Board did not, however,
explain why this is relevant to the question of penalty fees.
---------------------------------------------------------------------------
\97\ Id. at 37534.
\98\ Id.
---------------------------------------------------------------------------
The Bureau's Proposed Amendments to the Late Fee Safe Harbor Amounts
The safe harbor provisions in Sec. 1026.52(b)(1)(ii) currently
provide that a card issuer may impose a fee for violating the terms or
other requirements of an account if the dollar amount of the fee does
not exceed $30, as set forth in Sec. 1026.52(b)(1)(ii)(A), or $41 for
a violation of the same type that occurs during the same billing cycle
or one of the next six billing cycles, as set forth in Sec.
1026.52(b)(1)(ii)(B). In addition, Sec. 1026.52(b)(1)(ii)(C) provides
a special safe harbor that applies when a charge card account becomes
seriously delinquent. Under that provision, when a card issuer has not
received the required payment for two or more consecutive billing
cycles on a charge card account that requires payment of outstanding
balances in full at the end of each billing cycle, the issuer may
impose a late payment fee that does not exceed 3 percent of the
delinquent balance.
The Bureau proposes to amend Sec. 1026.52(b)(1)(ii) to provide
that a card issuer may impose a fee for a late payment on an account
under the safe harbor if the dollar amount of the fee does not exceed
$8.\99\ The Bureau is further proposing to amend Sec.
1026.52(b)(1)(ii) to provide that other than a fee for a late payment,
a card issuer may impose a fee for violating the terms or other
requirements of an account if the dollar amount of the fee does not
exceed the safe harbor amounts in Sec. 1026.52(b)(1)(ii)(A), or (B),
as applicable. As such, the proposed $8 safe harbor amount for late
fees would be a single fee amount; it would apply regardless of whether
the fee is imposed for a first or subsequent violation. However, for
all other penalty fees, card issuers could still charge amounts not
exceeding the amounts in Sec. 1026.52(b)(1)(ii)(A) and (B).
---------------------------------------------------------------------------
\99\ As discussed in more detail below, there is one proposed
exception related to charge card accounts as described in current
Sec. 1026.52(b)(1)(ii)(C).
---------------------------------------------------------------------------
In addition, under the proposal, charge card issuers could still
impose a fee pursuant to Sec. 1026.52(b)(1)(ii)(C) when a charge card
account becomes seriously delinquent as defined in the rule. The Bureau
recognizes that the fee described in Sec. 1026.52(b)(1)(ii)(C) is a
form of late fee but, for the reasons discussed below, is not proposing
to lower the safe harbor amount under this special provision for charge
cards. However, as discussed in the section-by-section analysis of
Sec. 1026.52(b)(1)(ii)(C) below, the Bureau proposes to revise this
provision for clarity to provide that a card issuer may impose a fee
not exceeding 3 percent of the delinquent balance on a charge card
account that requires payment of outstanding balances in full at the
end of each billing cycle if the card issuer has not received the
required payment for two or more consecutive billing cycles,
notwithstanding the safe harbor late fee amount in proposed Sec.
1026.52(b)(1)(ii). The Bureau emphasizes that the proposed $8 safe
harbor late fee amount in proposed Sec. 1026.52(b)(1)(ii) would still
apply to fees imposed on a charge card account for late payments not
meeting the description in Sec. 1026.52(b)(1)(ii)(C).
After analyzing available evidence and considering the applicable
statutory factors, the Bureau preliminarily determines that a late fee
amount of $8 for the first and subsequent late payments is presumed to
be reasonable
[[Page 18916]]
and proportional to the late payment violation to which the fee
relates.
The Bureau's Analysis of Data and Consideration of Statutory Factors
Costs. The Bureau has analyzed the Y-14 data and other information
in considering the factor of the costs of a late payment violation to
the card issuer. Based on that analysis, the Bureau has preliminarily
determined that a late fee safe harbor amount of $8 for the first and
subsequent violations would cover most issuers' costs from late
payments while providing card issuers with compliance certainty and
administrative simplicity and, therefore, reduce their compliance costs
and burden. The Bureau requests comments on this preliminary
determination, data used, or any alternatives to either.
In considering the costs of late payments to card issuers, the
Bureau has taken into account only those (estimated) costs that card
issuers are permitted to take into account for purposes of determining
the amount of a late fee under the cost analysis provisions in Sec.
1026.52(b)(1)(i) and related commentary, including the proposed
clarification to comment 52(b)(1)(i)-2.i. As provided in the commentary
to Sec. 1026.52(b)(1)(i), such costs for late fees (1) 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); and (2) exclude losses and associated
costs (including the cost of holding reserves against potential losses
and the cost of funding delinquent accounts). As discussed in the
section-by-section analysis of Sec. 1026.52(b)(1)(i), the Bureau
proposes to clarify that costs for purposes of the cost analysis
provisions in Sec. 1026.52(b)(1)(i) for determining penalty fee
amounts do not include any collection costs that are incurred after an
account is charged off pursuant to loan loss provisions. The Bureau
preliminarily finds that considering pre-charge-off collection costs as
the ``costs'' of a late payment is consistent with Congress' intent to:
(1) allow card issuers generally to use late fees to pass on to
consumers the costs issuers incur to collect late payments or missed
payments; (2) ensure that those costs are spread among consumers and
that no individual consumer bears an unreasonable or disproportionate
share; and (3) prevent card issuers from recovering losses and
associated costs through late fees rather than through upfront rates.
As discussed in part III.C, the reported collection costs in the Y-
14 data (1) include costs incurred to collect problem credits that
includes the total collection cost of delinquent, recovery, and
bankrupt accounts, and (2) do not include losses and associated costs.
The Bureau concludes that the collection costs data in the Y-14 are
consistent with the costs included for the cost analysis provisions in
Sec. 1026.52(b)(1)(i) except that the collection costs in the Y-14
data include post-charge-off collection costs. As discussed in part
III.C, the Bureau has estimated that approximately 75 percent of
collection costs incurred by card issuers are incurred pre-charge-off.
Thus, as discussed in part III.C, the Bureau's estimate of pre-charge-
off collection costs is based on only 75 percent of the collection
costs in the Y-14 data for purposes of its analysis related to the
proposed changes to the safe harbor thresholds in Sec.
1026.52(b)(1)(ii), as discussed in more detail below.
In developing the proposed late fee safe harbor amount, the Bureau
carefully considered several sources of data and other information to
determine the amount that would cover a reasonable and proportional
amount of card issuers' pre-charge-off collection costs. As discussed
in part III.C, and described in detail below, the Bureau reviewed and
analyzed major issuers' late fee income, collection costs, late fee
amounts, and required payment information contained in the Y-14 data, a
source that was not available when the Board set the initial safe
harbor amounts in 2010. That analysis indicates that late fees
generally generate revenue that is multiple times higher than issuers'
collection costs. The Bureau also reviewed issuers' stated late fee
amounts in card agreements that issuers are required by the CARD Act to
submit quarterly to the Bureau. Based on this data, the Bureau expects
that even if late fees were reduced to one-fifth of current levels
(implying late fees of $8 or less), most issuers would recover pre-
charge-off collection costs.
To estimate the fee income to collection cost ratio, the Bureau
used the late fee income data and 75 percent of the collection costs
contained in the Y-14 data (referred to below as ``estimated pre-
charge-off collection costs'').\100\ Using the Y-14 data, the Bureau
analyzed monthly late fee income and estimated pre-charge-off
collection costs for the consumer segments of major issuers' credit
card portfolios, namely the consumer general purpose and private label
portfolios. For the 16 consumer portfolios with continuous cost data
for the first three quarters of 2022 (adding up to about 73 percent of
total consumer credit card balances at the end of September 2022),
total late fee income in the first three quarters added up to $4.46
billion, while total collection costs added up to $1.19 billion with
pre-charge-off collection costs estimated to be $896 million.
---------------------------------------------------------------------------
\100\ For additional information and data related to this late
fee income to collection cost ratio, see Bureau of Consumer Fin.
Prot., Credit Card Late Fees: Revenue and Collection Costs at Large
Bank Holding Companies, (Jan. 2023) (Revenue-Cost Report), <a href="https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-and-collection-costs-at-large-bank-holding-companies_2023-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-and-collection-costs-at-large-bank-holding-companies_2023-01.pdf</a>.
---------------------------------------------------------------------------
In reviewing the monthly data, the Bureau observed that late
payments exhibit seasonal patterns. The Bureau also considered that
there may be a delay between when a late fee was assessed and when the
issuer incurs substantial collection costs associated with the account.
For these reasons, the Bureau compared each month's late fee income for
a particular portfolio to the portfolio's average estimated pre-charge-
off collection costs for that month, where that estimate was based on
estimated pre-charge-off collection costs that occurred two through six
months later.\101\ The Bureau developed monthly estimates of this late
fee income-to-cost ratio for each year from 2013 up to early 2022. The
analysis showed that an average of this ratio across issuers and market
segments, weighted by the number of accounts reported in the Y-14 data,
has been fairly stable since early 2019 (and was higher before 2019).
As shown in Figure 1 below, late fee income has always been higher than
three times subsequent estimated pre-charge-off collection costs, and
more than four times as high in all but five pandemic months (May 2020
and February-May 2021, coinciding with pandemic stimulus payments, when
there was a reduction in late fee income without a corresponding
decline in average collection costs in subsequent months). Since August
2021, late fee
[[Page 18917]]
income has exceeded the relevant estimated pre-charge-off costs more
than fivefold, which resembles the period before the pandemic.
---------------------------------------------------------------------------
\101\ For example, if an issuer were to report late fee income
of $15 million in January for a portfolio and total collection costs
for that portfolio of $20 million in March through July, the Bureau
estimated $15 million in pre-charge-off collection costs in March
through July and calculated an average monthly collection cost of $3
million for purposes of this analysis--resulting in a ratio of late
fee income of $15 million to collection cost of $3 million for this
portfolio for the month of January. The Bureau found that its
preliminary findings based on the weighted average of this ratio
across issuers and market segments as discussed in the analysis
below are robust to shifting, expanding, or shortening the time
period of delay in collection costs as they relate to late fee
income.
[GRAPHIC] [TIFF OMITTED] TP29MR23.067
Based on this analysis, the Bureau expects that the average issuer
would recover pre-charge-off collection costs even if late fees were
reduced to one-fifth of their current level. All but one issuer among
those in the Y-14 data (representing the majority of balances in the
credit card market) disclosed late fees ``up to'' $40 or $41 (the
current maximum safe harbor amount) in their most recent card
agreements submitted to the Bureau. Given the finding that, in the most
recent data, late fee income is greater than five times estimated pre-
charge-off costs, the Bureau expects that an $8 late fee would still
recover the average issuer's pre-charge-off collection costs, as that
fee represents one-fifth of the maximum late fee amount, which is
necessarily greater than average fee income per late payment.
The Bureau also notes that average late fees are lower than the
disclosed maximum late fees. As discussed in part II.D, in 2019, the
average late fee charged by issuers in the Y-14+ data was $31.\102\
Reasoning that the average late fees are lower than the current maximum
safe harbor of $41 and yet still generate late fee income that is again
more than five times the ensuing (estimated) pre-charge-off collection
costs since August 2021, the Bureau preliminarily concludes that $8 is
likely to recover the average issuer's pre-charge-off collection costs.
Because the proposed safe harbor, if adopted, could be used by card
issuers generally, and is not tailored to any particular type of
issuers or consumers, the Bureau preliminarily finds that is
appropriate to consider average issuers' pre-charge-off collection
costs in determining the late fee safe harbor amount. The Bureau also
preliminarily finds that establishing a generally applicable safe
harbor will facilitate compliance by issuers and increase consistency
and predictability for consumers.
---------------------------------------------------------------------------
\102\ Late Fee Report, at 6. To gain further insights into how
the average late fee compares to the disclosed maximum late fee in
the agreements, the Bureau analyzed a 40 percent random subsample of
tradelines of Y-14 data from 2019 to observe the incidence of late
fees and the fee amounts assessed. The Bureau observed that the
average late fees have been lower than the amounts in the card
agreements for several reasons, including (1) some late fees did not
occur within six months of an earlier late fee and thus are set at
the lower safe harbor amount; and (2) some late fees reflect the
current limitation in Sec. 1026.52(b)(2)(i)(A) and related
commentary that prohibits late fees from exceeding the minimum
payment amount that is due. The Bureau also observed that some late
fees are imposed but later reversed and that some late fees are
charged to accounts that never make another payment.
---------------------------------------------------------------------------
The Bureau acknowledges that not all issuers in the Y-14 data face
the average pre-charge-off collection costs. By using estimates of pre-
charge-off collection costs per paid incident using the Y-14 data from
September 2021 to August 2022, the Bureau estimates that fewer than
four of the 12 card issuers in the Y-14 data have estimated pre-charge-
off collection costs that are significantly higher than one-fifth of
their late fee income. For these issuers, the proposed $8 safe harbor
amount may not have been enough to fully recover estimated pre-charge-
off collection costs, such that the benefits of using the cost analysis
provisions may outweigh the administrative simplicity of using the safe
harbor. While the most recent data suggest that the proposed safe
harbor amount would cover pre-charge-off collection costs for most
issuers, the Bureau recognizes that some issuers may choose to
determine the late fee amount using the cost analysis provisions in
Sec. 1026.52(b)(1)(i), rather than using the proposed $8 safe harbor
amount, if $8 is insufficient to recover their pre-charge-off
collection costs.\103\
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\103\ The Bureau estimates from the same data that a $5 safe
harbor amount would drive half of the market represented in the Y-14
data to use the cost analysis provisions in Sec. 1026.52(b)(1)(i)
to determine the late fee amount and that a $4 safe harbor amount
would do so for eight issuers holding around three-quarters of the
represented issuers' outstanding balances.
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The Bureau recognizes that the analysis above is based on data from
the largest issuers, and may not be representative of smaller issuers,
who do not report to the Y-14 collection. As discussed above, the
Bureau did not receive specific cost data in response to its request in
the ANPR for data on card issuers' pre-charge-off collection costs,
including data on pre-charge-off collection costs incurred by smaller
issuers. Although the Bureau does not have data equivalent to the Y-14
data for smaller issuers' pre-charge-off collection costs, it has no
reason to expect that smaller issuers exhibit substantially higher pre-
charge-off collection costs than larger issuers. On the other hand, the
Bureau expects that the proposed $8 amount would have a proportionately
smaller impact on smaller issuers' late fee income, due to smaller
issuers' having lower late fee amounts. In 2020, the average late fee
for issuers in the Y-14+ data was $31.\104\ The Bureau collects card
agreements from many more smaller issuers than issuers for which the
[[Page 18918]]
Bureau has financial data. Based on a review of those agreements from
over 500 credit card issuers, each outside the top 20 by outstanding
credit card loans and having more than 10,000 credit card accounts, the
Bureau established that smaller issuers charged smaller late fees in
2020 than larger issuers, with a modal maximum disclosed late fee for
smaller issuers of $25.\105\ The Bureau solicits comment on this
analysis and the potential impact on smaller issuers of the proposed $8
safe harbor amount, including whether smaller issuers can provide data
or evidence related to the cost of collecting late payments. The Bureau
also solicits comment on whether the pre-charge-off collection costs
for smaller issuers differ from such costs for larger issuers, and if
so, how the costs differ.
---------------------------------------------------------------------------
\104\ 2021 Report, at 55.
\105\ Late Fee Report, at 14.
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The Bureau notes that the analysis based on the Y-14 data discussed
above does not take into account any potential changes in consumer
behavior in response to the proposed change in the late fee safe harbor
amount. In particular, the discussion does not take into account the
possibility that reduced late fees will lead to more late payments.
However, as discussed below, the Bureau's analysis of Y-14 data and
other information suggests that the proposed $8 safe harbor amount for
the first and subsequent late payments would still have a deterrent
effect on late payments. The Bureau also expects that any increase in
the frequency of late payments, as a result of the reduced late fee
safe harbor amount, would increase both fee income and collection
costs. Even if more consumers pay late because of the decreased amount,
the increased number of late payments are unlikely to be more costly,
on average, to administer and collect than the current number of late
payments. Therefore, the Bureau expects that collection costs to card
issuers would not increase by more than fee income. The Bureau seeks
comment specifically as to this analysis, including data or evidence as
to whether reduced fees would affect the frequency of late payments or
collection costs.
The Bureau does not expect the proposal to cap late fees at 25
percent of the required minimum periodic payment due, discussed in the
section-by-section analysis of Sec. 1026.52(b)(2)(i), to materially
change the late fee income issuers can collect overall when the issuer
is using the proposed $8 safe harbor amount. The cap would require
issuers to impose late fees lower than the proposed $8 safe harbor
amount only when the minimum periodic payment due is $32 or less.
Nonetheless, as discussed in more detail in the section-by-section
analysis of Sec. 1026.52(b)(2)(i), the instances where 25 percent of
the minimum payment may be less than the proposed $8 safe harbor do not
appear to be frequent. The Y-14 data from October 2021 to September
2022 shows that for those months in which an account was late, only 7.7
percent of those accounts had a minimum payment of less than $32.\106\
---------------------------------------------------------------------------
\106\ For more information on the distribution of minimum
payments for late accounts in the Y-14 data, see Figure 3 and
related discussion in the section-by-section analysis of Sec.
1026.52(b)(2)(i). However, issuers could adjust how they determine
minimum payments such that the 25 percent limitation on late fees
would only affect those accounts with balances of less than $32,
whose minimum payment will always be less than $32 as the minimum
payment can never exceed the statement balance. Based on the Y-14
data between October 2021 and September 2022, for those months in
which an account was late, only 2.1 percent of accounts had balances
of less than $32.
---------------------------------------------------------------------------
The Bureau notes that the Y-14 data discussed above on which the
Bureau relied in considering card issuers' pre-charge-off collection
costs are far richer and more extensive than the data on which the
Board relied when it established the penalty fee safe harbor amounts in
its 2010 Final Rule. This is due in large part to the Bureau's access
to nearly a decade's worth of Y-14 data--a data source that did not
exist when the Board was developing its rule. In contrast, as discussed
above, the data and other information on which the Board relied was
limited, as systematic reporting of card issuers' collection costs was
not available and relatively few commenters on the Board's proposal
provided any data on collection costs in response to the Board's
request for such data, with some providing data that the Board found
unreliable.
Similarly, the Bureau did not receive specific cost data in
response to its request in the ANPR for data on card issuers' pre-
charge-off collection costs, including costs associated with notifying
(other than through periodic statements) cardholders of delinquencies
and resolving delinquencies (including the establishment of workout and
temporary hardship arrangements) prior to charge-off, including
payments to third-party debt collectors. In general, card issuers and
their trade groups provided information on card issuers' late fee
pricing structures, individually or industry-wide, and further provided
high-level explanations for those pricing structures, including
recovering collection costs, risk management, and the effects of the
safe harbor provisions themselves. In a joint comment, for example,
several trade groups asserted that the similarity of late fees across
issuers is a predictable response to the benefits of legal certainty
granted under the law. These trade groups further asserted that the
safe harbor allows issuers to recover some (though not all) of the
costs associated with late payments and encourages on[hyphen]time
payments, while also providing issuers with compliance certainty. These
trade groups, however, did not provide data on issuers' pre-charge-off
collection costs. Neither did any other commenters.
One credit union trade group provided estimates of the hourly labor
costs of collecting late payments, based on the average salary of a
collections agent that the commenter obtained from a publicly available
source. This credit union trade group commenter did not provide
estimates of what portions of those hourly labor costs are pre-charge-
off and post-charge-off, nor did it provide the number of hours of
labor that would be needed per late payment. As a result, it was not
possible to determine the late fee cost per account based on the data
provided.
The Bureau also notes the current safe harbor amounts of $30 and
$41 are significantly higher than the pre-charge-off collection costs
as shown in the Bureau's analysis. Moreover, as discussed in part II.E,
most large issuers have taken advantage of the increased safe harbors
as adjusted for inflation by increasing their fee amounts.\107\
Eighteen of the top 20 issuers by outstanding balances contracted for a
maximum late fee at or within 10 percent of the higher safe harbor
amount in 2020.\108\ Although card issuers generally do not impose late
fees at the highest contracted-for amount, issuers have steadily been
charging consumers more in credit card late fees each year,\109\ with
the average late fee imposed increasing in amount from $23 at the end
of 2010 to $31 in 2019.\110\
---------------------------------------------------------------------------
\107\ Late Fee Report, at 14.
\108\ Id.
\109\ As noted above, the one exception to this trend is a brief
period during the pandemic when there was a drop in card issuers'
late fee income corresponding with government stimulus payments.
\110\ Late Fee Report, at 6. See also 2013 Report, at 23.
---------------------------------------------------------------------------
The Bureau is thus concerned that credit card late fee amounts
imposed pursuant to the current safe harbor amounts--which, as adjusted
for inflation, were established in 2010 based on limited data available
at the time--far exceed card issuers' actual pre-charge-off collection
costs resulting from late payment violations and thus
[[Page 18919]]
are not reasonable and proportional. In considering the costs of such
violations to issuers, the Bureau has analyzed available data sources
and other information, including Y-14 data extending back several
years, as discussed above. The Bureau recognizes that the costs of
collecting late payments will vary from issuer to issuer and that a
late fee safe harbor amount of $8 may not cover all of those costs for
all issuers. The Bureau notes, however, that TILA section 149(e)
authorizes the Bureau to issue rules to provide, for any penalty fee or
charge, a safe harbor amount that is presumed to be reasonable and
proportional to the omission or violation to which the fee or charge
relates.
The Bureau also considered cost as one of the factors in making
that determination. The Act, however, does not require the Bureau to
establish a late fee safe harbor amount that covers the costs for all
issuers or the entire costs of the omission or violation in all
instances. Moreover, the Bureau is concerned that setting a higher safe
harbor amount for late fees in order to cover the pre-charge-off
collection costs of all card issuers could result in an amount that
exceeds the costs for most card issuers. As discussed in part II.E, the
Bureau is concerned that card issuers may have a disincentive to charge
a lower fee amount than the safe harbor amount, even if their average
collection costs are less than the safe harbor amount, given the
industry's reliance on late fees as a source of revenue and that many
consumers may not shop for credit cards based on the amount of the late
fee.
In addition, because the Bureau anticipates that most card issuers
would use the proposed $8 late fee safe harbor threshold amount, the
proposed safe harbor provisions in Sec. 1026.52(b)(1)(ii) would
continue to save costs for most card issuers, by continuing to save
them the administrative burden and complexity of using the cost
analysis provisions in Sec. 1026.52(b)(1)(i) to determine the late fee
amount. As discussed above, in considering the appropriate safe harbor
amount for late fees, the Bureau is guided by the factors in TILA
section 149(c), which provides that the Bureau can consider such other
factors that the Bureau deems necessary or appropriate. The Bureau
preliminarily finds that it is both necessary and appropriate, when
considering the portion of card issuers' pre-charge-off costs that a
late fee safe harbor amount would cover, to take into account the cost
savings from compliance certainty and administrative simplicity
accorded by a safe harbor. The Bureau also preliminarily finds that a
late fee safe harbor amount of $8 for the first and subsequent late
payments strikes the appropriate balance of these considerations. The
Bureau seeks comment on all aspects of the analysis above, including
data or other information to support why the $8 amount is or is not
sufficient to cover card issuers' pre-charge-off costs. The Bureau also
seeks specific comment on whether the data on pre-charge-off collection
costs discussed above accurately reflect the costs that card issuers
incur as the result of a late payment violation before charge-off,
including data or other information indicating whether the Bureau's
analysis over- or underestimates such costs.
The Bureau further notes that if the proposed $8 safe harbor amount
is not sufficient to cover a particular card issuer's pre-charge-off
costs in collecting late payments, the card issuer can charge a higher
amount, if consistent with the cost analysis provisions in Sec.
1026.52(b)(1)(i) and the requirements in Sec. 1026.52(b)(2). Card
issuers also may undertake efforts to reduce collection costs or use
interest rates or other charges to recover some of the costs of
collecting late payments. Building those costs into upfront rates would
provide consumers greater transparency regarding the cost of using
their credit card accounts.
For the foregoing reasons, the Bureau preliminarily concludes that
a late fee of $8 for the first and subsequent violations is appropriate
to cover pre-charge-off costs for card issuers on average while
providing issuers compliance certainty and administrative simplicity.
Deterrence. As noted above, in the 2010 Final Rule, the Board did
not expressly discuss how it took deterrence into account in setting
the $25 penalty fee amount; instead, the Board limited its discussion
of that factor to the role it played in the Board's decision to set a
higher safe harbor amount for any additional violation of the same type
that occurs during the same billing cycle or in one of the next six
billing cycles.
In developing this proposal, the Bureau analyzed available data to
consider the extent to which lower late fees for both the first and
subsequent late payments could potentially lessen deterrence. The
Bureau recognizes that late fees are a cost to consumers of paying
late, and a lower late fee amount for the first or subsequent late
payments might cause more consumers to pay late. The Bureau also
recognizes that it does not have direct evidence on what consumers
would do in response to a fee reduction similar to those contained in
the proposal, and market participants did not provide data on
deterrence in response to the Bureau's ANPR. The Bureau notes, however,
that the Y-14 data and other information that has become available
since the Board issued its 2010 Final Rule support the proposed
reduction.
As discussed in more detail below, the Bureau preliminarily finds
that this available evidence suggests that the proposed $8 safe harbor
amount would still have a deterrent effect on late payments. Even if
the proposed $8 safe harbor would increase the frequency of late
payments by some percentage, the Bureau has preliminarily determined
that some cardholders may benefit from the proposed $8 safe harbor
threshold amount in terms of a greater ability to repay revolving debt.
The Bureau also notes that card issuers have methods other than higher
late fees (1) to deter late payment behavior; and (2) to facilitate
timely payments, for example, automatic payment and notification within
a certain number of days (e.g., five days) prior to the due date that
the payment is coming due.
In making its preliminary determination that lowering late fee
amounts to the proposed $8 safe harbor amount would still have a
deterrent effect on late payments, as discussed in more detail below,
the Bureau considered (1) a comparison of the proposed $8 late payment
safe harbor amount to minimum payment amounts on accounts in the Y-14
data; and (2) available empirical evidence on the effects of credit
card late fees on the prevalence of late payments.
The Bureau notes that whether a consumer is late in making a
required payment depends in part on the consequences of paying late,
including both penalty fees for late payments and other consequences
such as increased interest charges and potential credit reporting
consequences (as discussed in part II.G and in more detail below). From
the point of view of a rational consumer faced with the decision of
whether to make a minimum balance payment on time or to put off the
payment until later, the decision represents a tradeoff weighing the
value to the consumer of retaining the money for longer against the
total costs of paying late. For the median minimum payment amount of
approximately $100 for accounts that paid late in the Y-14 data from
October 2021 through September 2022, the costs of paying late are quite
steep both under current late payment fee amounts and under the
[[Page 18920]]
proposed $8 safe harbor amount.\111\ For example, a consumer who
effectively borrows a minimum payment amount of $100 until the next due
date (that is, who makes a payment one month late) and pays a $8 late
fee would be incurring an effective APR of 96 percent even ignoring
other consequences. In addition, a consumer who effectively borrows a
minimum payment amount of $40 for 10 days (past due) and pays a $8 late
fee would be incurring an effective APR of 730 percent. As the median
minimum due was $39 for all cardholders between October 2021 and
September 2022 in the Y-14 data,\112\ and around half of late payers
made a payment in less than 10 days past the due date, the effective
APR could be higher than 730 percent for some consumers. Thus, the
Bureau has preliminarily determined that the proposed $8 late fee safe
harbor amount is still a powerful deterrent to those consumers who pay
attention to financial penalties.
---------------------------------------------------------------------------
\111\ For more information about the distribution of minimum
payment amounts for late accounts in the Y-14 data, see Figure 3 and
related discussion in the section-by-section analysis of Sec.
1026.52(b)(2)(i).
\112\ For purposes of the calculations of the distribution of
the minimum payment amounts in the Y-14 data, the calculations do
not include account-months where a late fee was charged but the
minimum due was reported to be $0.
---------------------------------------------------------------------------
The Bureau also has considered available empirical evidence on the
effects of credit card late fees on the prevalence of late payments. In
particular, the Bureau considered (1) a 2022 paper analyzing the effect
of the reduction of late fee amounts that became effective as a result
of the CARD Act in 2010; (2) analysis by the Bureau using Y-14 data of
how the prevalence of late payments is affected by increases in late
fee amounts during the six months following a violation; and (3) other
empirical investigations into the correlates of late fee amounts and
late fee incidence as discussed below.
In analyzing the available data, the Bureau notes a 2022 paper by
Grodzicki et al., containing an empirical analysis that concluded that
a decrease in the late fee amount stemming from the Board's 2010 Final
Rule raised the likelihood of a cardholder paying late.\113\ While the
Bureau recognizes that this paper suggests that consumers may engage in
more late payments when they are less costly to consumers, for the
reasons discussed below, the Bureau does not consider this robust
evidence that the proposed $8 safe harbor late fee amount would not
have a deterrent effect. The Bureau also notes the paper focused on the
late fee variations resulting from the limitations on penalty fee
amounts in the Board's 2010 Final Rule and thus could be confounded by
other market changes coinciding with the rule going into effect. In
particular, the late fee provisions in the Board's 2010 Final Rule were
implemented in August 2010, as the U.S. economy was still dealing with
the aftermath of the Great Recession,\114\ and thus it was difficult to
attribute consumer finance statistical trends to particular events.
Moreover, the Board's 2010 Final Rule affected all consumers and all
issuers, so there was no suitable control group of consumers that were
charged the same amount of late fees before and after the
implementation of the Board's 2010 Final Rule. Thus, the 2022 paper
compared consumer behavior in the year before and the year after August
2010, and the causal attribution of an increase in late payments to a
reduction of the late fee amount is hard to prove due to the general
economic uncertainty around that time.
---------------------------------------------------------------------------
\113\ Daniel Grodzicki, et al., Consumer Demand for Credit Card
Services, Journal of Financial Services Research (Apr. 25, 2022),
<a href="https://link.springer.com/article/10.1007/s10693-022-00381-4">https://link.springer.com/article/10.1007/s10693-022-00381-4</a>.
\114\ The Great Recession began in the fourth quarter of 2007
and ended in the second quarter of 2009. See generally Nat'l Bureau
of Econ. Res., Business Cycle Dating Committee, (Sept. 20, 2010),
<a href="http://www.nber.org/cycles/sept2010.html">http://www.nber.org/cycles/sept2010.html</a>.
---------------------------------------------------------------------------
In developing this proposal, the Bureau analyzed Y-14 data from
2019, where the variation in late fees does not correspond to other big
changes or differences that might plausibly affect late payment. As
this proposal discusses, the current rule sets a higher late fee safe
harbor amount for instances where another late payment occurred over
the course of the preceding six billing cycles. The Bureau conducted
statistical analysis to investigate whether the lower late fee amount
in month seven leads to a distinct rise in late payments (Y-14 seventh-
month analysis). Specifically, the Bureau estimated whether there are
discontinuous jumps in late payments in the seventh month after the
last late payment.\115\ This analysis focused on these potential jumps
to isolate the potential impact that the lower late fee that would
apply in month seven might have on late payment rates, given that month
seven is generally comparable to month six other than the lower late
fee amount. In a random subsample from account-level data available in
2019 from the Y-14 data, this statistical analysis did not support that
the lower late fees in month seven have an effect on the late payment
rate, at conventional confidence levels. In addition, as a separate
observation, the Bureau observed that for consumers that incurred a
higher fee for a late payment during the six months after the initial
late payment, the payment of that higher late fee did not lead to a
discernibly lower chance of late payment for a third time in the future
than for those consumers whose second late fee was lower because they
paid late seven or more months after their first late payment.
---------------------------------------------------------------------------
\115\ The Bureau observed in the Y-14 data that, consistent with
the safe harbor provisions of the current rule, consumers who paid
late again within the six months after a late payment paid higher
late fees during those six months than they paid after the initial
late fee.
---------------------------------------------------------------------------
The Bureau acknowledges that the variation in late payments in the
Y-14 seventh-month analysis discussed above is not the same as the
changes that would result from the proposed rule. Nonetheless, this
evidence suggests the prevalence of late payments is not highly
sensitive to the level of late fees at the current order of magnitude.
An advantage of the Y-14 seventh-month analysis is that it avoids
confounding factors that often are found in other studies of late fees,
including the 2022 paper by Grodzicki et al., discussed above. Studies
that compare behaviors of consumers facing higher or lower fees (if
late) with consumers in a comparison group are often fraught with
multiple confounding factors that may also vary across time periods,
issuers, products, or consumer behavior in each group.
The preliminary finding from the Y-14 seventh-month analysis
described above is still contingent upon the fact that some consumers
understand that their issuers charge lower late fees starting the
seventh month after an initial violation. The Bureau recognizes that
the higher late fees for subsequent late payments within the next six
billing cycles might be more of a deterrent if consumers understand
them better in 2022 than they did in 2019, but the Bureau has no
evidence to indicate that is the case. However, this analysis is not
dependent on all issuers charging the lower late fee safe harbor amount
more than six months after a late payment nor the higher late fee safe
harbor amount within the six billing cycles. As long as some issuers
made use of the higher safe harbor, and the analysis described above
shows they did, the Bureau should still have been able to detect an
increase in the deterrent effect of their fee structure.
The Bureau also notes that because the Y-14 seventh-month analysis
discussed above focused on a potential discrete jump in late payments
more than six months after a preceding late payment, it also allowed
for late payments to trend down as more time passed after a late
payment. As described above, the Bureau did not see
[[Page 18921]]
the lower late fee amount that could be charged in month seven change
this downward trend.
The Bureau also has preliminarily determined that other publicly
available studies on late fees suggest that the proposed $8 safe harbor
amount would still have a deterrent effect on late payments. Empirical
investigations into the correlates of late fee amounts \116\ and late
fee incidence \117\ noted that late fee payment can often be avoided by
small and relatively costless changes in behavior. This suggests that
the lower proposed $8 late fee safe harbor amount would still be higher
than the costs of making a timely payment. The Bureau has preliminarily
determined that the triggers that make cardholders avoid the current
prevailing late fees also would make cardholders avoid a $8 late
fee.\118\
---------------------------------------------------------------------------
\116\ Nadia Massoud, et al., The Cost of Being Late? The Case of
Credit Card Penalty Fees, 7 Journal of Financial Stability, at 49-59
(2011).
\117\ Sumit Agarwal, et al., The Age of Reason: Financial
Decisions Over the Life Cycle and Implications for Regulation, 2
Brookings Papers on Economic Activity, at 51-117 (2009).
\118\ The Bureau notes that several industry commenters on the
ANPR discussed a survey conducted by Argus Advisory, a TransUnion
Company, in 2010. The commenters indicated that this survey
demonstrates that there is a threshold which late fees must reach in
order to encourage cardholders to pay on time. The commenters
indicated that this survey shows that to deter a majority of
cardholders from making a late payment, a fee of $40 to $46 would be
required. The Bureau acknowledges that an order of magnitude higher
fee amounts is likely to deter more consumers from paying late but
finds that questions to consumers on hypothetical late payment
amounts are less informative about the effects of late payment fees
in practice. The Board also discussed this survey when it adopted
the 2010 Final Rule and did not believe that it would be appropriate
to give significant weight to the results of the survey. The Board
noted: ``Although surveys of this type are sometimes used to gauge
the prices consumers may be willing to pay for retail products, the
Board understands that their accuracy is limited even in that
context. Furthermore, the Board is not aware of this type of survey
being used to measure the deterrent effect of fees. Accordingly, the
Board does not believe that it would be appropriate to give
significant weight to the results of this survey.'' 75 FR 37526,
37541 n. 43 (June 29, 2010).
Several industry commenters also argued that late fees are often
used in other industries, and similar to the card market, higher
fees are more effective at encouraging compliance with due dates.
The commenters pointed to studies in the video rental market that
showed that payment of a late fee decreases the likelihood of a late
return the next month by nearly 9 percent, and the deterrent effect
of late fees increases with the size of the penalty. Haselhuhn et
al., The Impact of Personal Experience on Behavior: Evidence from
Video-Rental Fines, Management Science, vol. 58, No. 1 (2012). These
commenters also pointed to another study on the video rental market
that found that (1) paying a late fee reduces the likelihood that
the next return will be late by 19 percent; (2) these effects
decrease the farther out from the initial payment the customer gets.
Fishman and Pope, Punishment-Induced Deterrence: Evidence from the
Video-Rental Market, Univ. of Cal., Berkeley, Dept. of Econ. (2006).
The Bureau recognizes that the results of these studies are in line
with the broader literature (see also supra note 93) indicating that
consumers learn by trial and error of personal experience, but the
Bureau finds that these studies are less useful to extrapolate how
many more cardholders would make a late payment on U.S. credit cards
if the late fee safe harbor amount were lowered.
---------------------------------------------------------------------------
As discussed above, in support of applying higher late fee safe
harbor amounts for the following six billing cycles after a late
payment, the Board in adopting its 2010 Final Rule pointed to a 2008
study by Agarwal et al., of four million credit card statements, which
found that a consumer who incurs a late payment fee is 40 percent less
likely to incur a late payment fee during the next month, although this
effect depreciates approximately 10 percent each month.\119\
---------------------------------------------------------------------------
\119\ See Agarwal et al., supra note 93.
---------------------------------------------------------------------------
The Bureau has consulted the last available revision of the cited
working paper by Agarwal et al., from 2013, and has preliminarily
determined that the study is of limited relevance as to whether the
late fee amount impacts late payment incidence, for two reasons. First,
the study considers the months following any late fee and compares them
to months with no recent late payment. That comparison is not the same
as comparing to months in which a payment was late, but a lower late
fee (or even a $0 late fee) was charged. Second, even if the study had
compared to months where a payment was missed but no late fee was
charged, that comparison still would not be relevant to the proposal in
that the proposal would reduce the safe harbor amount to $8, not
completely eliminate the late fee.
The Bureau notes that the Y-14 seventh-month analysis discussed
above shows that in the surrounding months reoffending rates trend down
with each month after the last late payment. The Bureau's Y-14 seventh-
month analysis, however, does not show a jump in late payment rates in
month seven after the last late fee, which suggests that the higher
late fee amount during the prior six months is not contributing to this
downward trend.
The Bureau also notes that the 2013 study by Agarwal et al.,
discussed above did not separate the effects of the late fee itself
from other possible consequences of a late payment, such as additional
finance charges, a lost grace period, penalty rates, and reporting of
the late payment to a credit bureau which could affect the consumer's
credit score. Given these other consequences of a late payment as
discussed in more detail below and in part II.G, it is not clear that
the proposal's lower late fee safe harbor amount would meaningfully
affect the decreased chance that consumers will pay late again after an
initial late payment in ways similar to those established in this 2013
study.
As discussed above, in adopting the safe harbor amounts in its 2010
Final Rule, the Board also considered the limitations that the United
Kingdom's OFT placed on credit card default charges in 2006. The Bureau
notes that it is not aware of evidence suggesting that the [pound]12
($21 on the day of the rule, $13.40 in November 2022) limit the OFT
imposed on default charges (including late fees) in 2006 meaningfully
increased late payments in the United Kingdom (U.K.). The OFT ruled on
April 5, 2006, that it would presume default charges higher than
[pound]12 unfair and challenge the company unless exceptional business
factors drove the decision for the company to charge higher fees. As
fees were routinely as high as [pound]25 ($43.75 on the day of the
rule) until that spring, this episode is the closest to what the Bureau
would foresee as the outcome to its proposal: a salient reduction in
late fees impacting the entire marketplace at once, letting both
issuers and cardholders learn and adapt to the lower later fees. The
Bureau solicits comment from the public for any relevant information on
the causal effects of this U.K. fee reform on missed or late payments
and longer delinquencies, especially ones leading to more costly
collections than before the reform.
For the reasons discussed above, the Bureau preliminarily finds
that the available evidence indicates that the proposed $8 safe harbor
amount for the first and subsequent late payments would still have a
deterrent effect on late payments, although that effect may be lessened
by the proposed change to some extent, and other factors may be more
relevant (or may become more relevant) towards creating deterrence.
Even if the proposed $8 safe harbor increases the frequency of late
payments by some percentage, for the reasons discussed below, the
Bureau has preliminarily determined that some cardholders may benefit
from the proposed $8 safe harbor threshold amount. As discussed above,
in considering the appropriate safe harbor amount for late fees, the
Bureau is guided by the factors in TILA section 149(c), which provides
that the Bureau can consider such other factors that the Bureau deems
necessary or appropriate. The Bureau preliminarily finds that it is
both necessary and appropriate when considering whether a late fee is
reasonable and proportional to take into account the possible impact of
lower
[[Page 18922]]
late fees on cardholders' repayment behavior and finances.
For the more constrained cardholders, like subprime borrowers, who
pay a disproportionate proportion of late fees, the current, higher
late fee may be impacting cardholder repayment conduct--i.e., the
higher late fee amount could have gone toward a payment on the account.
As discussed in part VII, the Bureau estimates that reducing the safe
harbor for late fees to $8 would likely reduce late fee revenue by
billions of dollars. While issuers may respond to this reduction in
revenue from late fees by adjusting interest rates or other card terms
to offset the lost income, the Bureau expects less than full offset,
with consumers gaining in total from reduced late fees. This expected
savings would benefit consumers. The money saved by cardholders on late
fees may go toward repayment. The 2022 paper by Grodzicki et al.,\120\
described above, with all the caveats noted there, found such a pattern
for subprime cardholders: A decrease in late fees after the
implementation of the CARD Act increased borrowing for prime borrowers
but triggered repayment for subprime cardholders.\121\ If this
prediction held true for the current proposed reform, it would imply
that lowering late fees may provide some benefits to subprime consumers
in terms of a greater ability to repay revolving debt. This effect
might also lower issuers' losses from delinquencies, as it could
subsequently reduce the likelihood and the severity of default in the
population most prone to default.\122\
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\120\ Supra note 113.
\121\ Although the paper found that lower late fees may cause
subprime cardholders to pay late more often, it also found that
lower late fees may cause subprime cardholders to make a larger
payment when they ultimately make the payment. This paper explained
that this latter effect on subprime cardholders might result from
the lower late fee amount lessening the need for subprime
cardholders to focus on avoiding late fees and instead allowing some
subprime cardholders to start to pay more attention to the high cost
of their revolving debt.
\122\ Even if lower late fees would decrease losses from
delinquencies, issuers may still prefer higher late fees to maximize
profits. As current late fee levels generally produce profits to
issuers on the average late payment, the Bureau does not take the
prevalence of high fees as strong evidence that lower fees would
raise issuers' losses from delinquency. Even if lowering late fee
amounts reduced delinquency, doing so might not be in issuers'
interest: a $1 reduction in the late fee amount might decrease
delinquency losses by less than $1 per incident, and thus lower
profits.
---------------------------------------------------------------------------
As discussed above, in considering the appropriate safe harbor
amount for late fees, the Bureau is guided by the factors in TILA
section 149(c), which provides that the Bureau can consider such other
factors that the Bureau deems necessary or appropriate. The Bureau
preliminarily finds that the combined benefits of these effects are
necessary and appropriate factors to take into account, along with
deterrence, in determining whether a late fee safe harbor amount is
reasonable and proportional. The Bureau also preliminarily finds that a
late fee safe harbor amount of $8 for the first and subsequent late
payments strikes the appropriate balance of these considerations.
In addition, the Bureau notes that card issuers have methods to
deter late payment behavior other than charging higher late fees. As
discussed in part II.G, for cardholders who typically pay their balance
in full every month (so-called transactors), a late fee is in addition
to new interest incurred for carrying or revolving a balance. For these
customers who do not roll over a balance in the month before or after a
late fee is assessed, the loss of a grace period and coinciding
interest charges may pose a similar or even greater deterrent effect
than the late fee itself.
Card issuers also have other tools to deter late payment behavior,
and therefore, minimize the potential frequency and cost to card
issuers of late payments, such as reporting the late payment to a
credit bureau which could affect the consumer's credit score,
decreasing the consumer's credit line, limiting the cardholder's
earning or redemption of rewards, and imposing penalty rates. After 30
or so days, card issuers typically report delinquencies to credit
bureaus, which can lower the consumers' credit scores. Since the
Board's 2010 Final Rule went into effect, many credit card issuers,
financial institutions, and third parties have begun providing free
credit scores to consumers.\123\ Access to real-time changes in
consumers' credit scores have likely increased their awareness of any
decline related to late payments. Thus, the deterrent effect of any
negative credit score impact is likely greater than in 2011 and further
encourages payment within one billing cycle of the due date without the
imposition of additional financial penalties.
---------------------------------------------------------------------------
\123\ Bureau of Consumer Fin. Prot., The Consumer Credit Card
Market, at 174 to 176 (Dec. 2017) (2017 Report), <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2017.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2017.pdf</a>.
---------------------------------------------------------------------------
Also, an issuer may take steps to reduce a cardholder's credit line
and limit the cardholder's earning or redemption of rewards. If a
consumer does not make the required payment by the due date, Sec.
1026.55(b)(3) permits a card issuer to take actions to reprice new
transactions on the account according to a penalty rate in certain
circumstances. After 60 days, Sec. 1026.55(b)(4) permits card issuers
to take steps to reprice the entire outstanding balance on the account
according to a penalty rate in certain circumstances.
The Bureau also notes that card issuers have methods to facilitate
timely payments, including, for example, automatic payment and
notification within a certain number of days (e.g., five days) prior to
the due date that the payment is coming due. Both the availability and
adoption of these methods have increased since the Board issued its
2010 Final Rule. In 2013, issuers tracking the number of consumers
making payments online reported that an average of 38 percent of
consumers made at least one non-automatic payment online or through
automatic payment; \124\ in 2020, 61 percent of active accounts made at
least one non-automatic online payment online, and 18 percent of
accounts made at least one automatic payment.\125\ Even in the past few
years, digital enrollment has grown with 80 percent of active accounts
enrolled in an issuer's online portal in 2020 (a 7 percentage point
increase from 2017), 64 percent enrolled in a mobile app (a 13
percentage point increase from 2017), and 56 percent receiving only e-
statements (a 12 percentage point increase from 2017).\126\
---------------------------------------------------------------------------
\124\ 2013 Report, at 68.
\125\ These categories are not mutually exclusive. 2021 Report,
at 39.
\126\ 2021 Report, at 171.
---------------------------------------------------------------------------
Indeed, in response to the ANPR, several card issuers and their
trade groups noted that card issuers currently use many of these
methods. One large trade group, for example, noted that issuers have
developed functions such as automatic payment to help consumers avoid
forgetting to make monthly payments. This commenter further asserted
that automatic payment generally allows consumers to choose an amount
to pay each month and a payment due date based on what best fits their
financial circumstances, increasing the likelihood that consumers will
be able to pay on time. A joint comment submitted by several industry
trade groups stated that issuers promote on-time payments through a
variety of means in addition to late fees, including multiple payment
reminders sent via mail, email, or text notification depending on
consumer preference. These commenters further stated that one issuer
reported that as of five months after rollout of its new alert system,
the issuer's gross monthly late
[[Page 18923]]
fees were 20 percent lower and the late fee incidence rate per balance
had fallen by nearly 25 percent. Similarly, a large credit union trade
group noted that some credit unions already have systems in place or
are currently contracting with third-party vendors to offer their
members convenient reminders for upcoming payment due dates via text
message and email.
The Bureau expects these other consequences to decrease the
likelihood of late payment not only in cases where issuers consider the
deterrence effects of lower late fees to be insufficient. As discussed
in part VII, issuers may offset lost revenue from lower late fees by
increasing interest rates, which would indirectly make late payments
more costly than without this response. Also, issuers may have less
ability to charge consumers higher late fees to maximize profits and
thus may be more inclined to take other, more efficient steps to deter
late payments, including providing timely reminders of an upcoming due
date, well-chosen due dates aligned with cardholders' cash flow, and
encouraging automatic payments.
Consumer conduct. As discussed above, the Board took consumer
conduct into account in adopting the higher $35 fee for repeat late
fees within six billing cycles. The Board explained its belief that
``multiple violations during a relatively short period can be
associated with increased costs and credit risk and reflect a more
serious form of consumer conduct than a single violation.'' \127\
---------------------------------------------------------------------------
\127\ 75 FR 37526, 37527 (June 29, 2010).
---------------------------------------------------------------------------
The Bureau has preliminarily determined that the proposed $8 late
fee safe harbor amount for the first and subsequent late payments
better reflects a consideration of consumer conduct. For example, it is
not clear from analysis of the Y-14 data and other relevant information
that multiple violations during a relatively short period are
associated with increased credit risk and reflect a more serious
consumer violation. Based on the account-level Y-14 data, the Bureau
estimated that only 13.6 percent of accounts incurred a late fee and
then no additional payments were made on that account. In addition, for
accounts that incurred a late fee, the Bureau estimates that a third of
accounts paid the amount due within five days of the payment due date,
half the accounts paid the amount due within 15 days of the payment due
date, and three out of five accounts paid the amount due within 30 days
of the payment due date.\128\
---------------------------------------------------------------------------
\128\ For more information related to the estimates using the Y-
14 data of how many days after the due date accounts that incurred a
late fee paid the amount due, see Figure 4 and related discussion in
part VII.
---------------------------------------------------------------------------
In addition, the Bureau understands that the Metro 2 reporting
format used by the industry for reporting information to credit bureaus
does not consider a payment to be late if it is made within 30 days of
the due date. Thus, for risk management purposes, the industry itself
does not appear to consider the consumer's conduct in paying late to be
a serious form of consumer conduct until the consumer is 30 or more
days late. As discussed above, the Bureau estimates that a majority of
accounts become current before card issuers even consider the consumer
late for credit reporting purposes.
The Bureau also recognizes that some consumers may pay late
chronically but otherwise make a payment within 30 days for a number of
reasons, including cash flow issues, that do not necessarily indicate
that they are at significant risk of defaulting on the credit. For
example, consumers may make a credit card payment after the due date
from the next paycheck to smooth out expenses and avoid paying
overdraft fees. The Bureau notes that a study from 2021 suggests that
some consumers who are paid on a bi-weekly basis may not make the
required payment by the due date but will make the required payment
within 30 days after the due date from their next paycheck.\129\
---------------------------------------------------------------------------
\129\ Paolina C. Medina, Side Effects of Nudging: Evidence from
a Randomized Intervention in the Credit Card Market, 34 The Review
of Financial Studies, (May 2021), at 2580-2607, <a href="https://doi.org/10.1093/rfs/hhaa108">https://doi.org/10.1093/rfs/hhaa108</a>.
---------------------------------------------------------------------------
The Bureau also notes that card issuers have methods other than
late fees to address credit risk. Specifically, card issuers may take
steps to reduce a cardholder's credit line. Also, card issuers that
charge an interest rate are permitted by Sec. 1026.55(b)(3) to reprice
new transactions on the account according to a penalty rate in certain
circumstances. In addition, after 60 days, Sec. 1026.55(b)(4) permits
these issuers to take actions to reprice the entire outstanding balance
on the account according to a penalty rate in certain circumstances.
The Bureau recognizes that card issuers do not charge interest on
charge card accounts, and thus would not be able to use the interest
rate charged on the account to manage credit risk. Nonetheless, current
Sec. 1026.52(b)(1)(ii)(C) permits card issuers to impose a late fee
that does not exceed 3 percent of the delinquent balance on a charge
card account that requires payment of outstanding balances in full at
the end of each billing cycle, when a charge card issuer has not
received the required payment for two or more consecutive billing
cycles. As the Board noted in the 2010 Final Rule, this provision is
intended to provide charge card issuers with more flexibility to charge
higher late fees and thereby manage credit risk when an account becomes
seriously delinquent, because charge card issuers do not apply an APR
to the account balance and therefore cannot respond to serious
delinquencies by increasing that rate.\130\ The proposal would not
amend the current safe harbor set forth in Sec. 1026.52(b)(1)(ii)(C).
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\130\ See generally, 75 FR 37526, 37544 (June 29, 2010).
---------------------------------------------------------------------------
Consideration of all statutory factors--preliminary findings and
determinations. In considering all statutory factors, the Bureau
preliminarily finds that an $8 late fee for the first and subsequent
late payments better represents a balance of issuer costs, deterrent
effects, consumer conduct, as well as the benefits to issuers that
result from relying on a safe harbor amount, like reduced
administrative costs, and the possible beneficial effects of lower late
fees on subprime cardholders' repayment behavior. Further, the Bureau
preliminarily finds that this amount is supported by careful analysis
of the Y-14 data. Finally, the Bureau notes that it has taken into
consideration changes in the market, like automatic payment, that
facilitate billing and payment, thus making it easier for card issuers
to collect timely payments. For these reasons, the Bureau preliminarily
determines that a late fee amount of $8 for the first and subsequent
violations is presumed to be reasonable and proportional to the late
payment violation to which the fee relates.
The Bureau seeks comment on all aspects of its proposal to lower
the late fee safe harbor dollar amounts in Sec. 1026.52(b)(1)(ii) to a
fee amount of $8 for the first and subsequent violations and provide
that a higher safe harbor dollar amount for penalty fees occurring
within the same billing cycle or the next six billing cycles does not
apply to late fees. In particular, the Bureau seeks comment on whether
to set a different amount and, if so, what amount and why, including
any relevant data or other information. The Bureau also seeks comment
on whether to retain the higher safe harbor amount and, if so,
[[Page 18924]]
what amount and why, including any data and other information related
to the deterrent effects of the higher amount or its effects on
consumer conduct. Further, the Bureau seeks comment on whether and why
to set a staggered late fee amount with a cap on the maximum dollar
amount, such that card issuers could impose a fee of a small dollar
amount every certain number of days until the cap is hit.\131\ The
Bureau seeks comment on what small dollar amount and maximum dollar
amount cap may be appropriate and why, including any relevant data or
other information. The Bureau also seeks comment on whether the safe
harbor threshold for late fees should be structured as a percentage of
the minimum payment amount, and if so, what percentage should be used.
In addition, the Bureau seeks comment on what other revisions may be
appropriate to ensure that credit card late fees imposed pursuant to
the safe harbor provisions are reasonable and proportional. In
particular, the Bureau seeks comment on whether, as a condition of
using the safe harbor for late fees, it may be appropriate to require
card issuers to offer automatic payment options (such as for the
minimum payment amount), or to provide notification of the payment due
date within a certain number of days prior to the due date, or both.
---------------------------------------------------------------------------
\131\ In the ANPR, the Bureau solicited comment on a staggered
late fee approach but received no responsive comments.
---------------------------------------------------------------------------
The Bureau further seeks comment on whether and why to lower the
safe harbor amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) (including
whether and why to eliminate the higher safe harbor amount for
subsequent violations that occur during the same billing cycle or in
one of the next six billing cycles) for all other credit card penalty
fees, including fees for returned payments, over-the-limit
transactions, and when payment on a check that accesses a credit card
account is declined. In particular, the Bureau seeks comment on what
the safe harbor amounts for such fees should be, including any relevant
data and information on the costs of such violations to card issuers.
In the alternative, the Bureau seeks comment on whether to finalize the
proposed safe harbor for late fees and eliminate the safe harbors for
other penalty fees.
Proposed Amendments to Sec. 1026.52(b)(1)(ii) Commentary
In addition to the proposed amendments to the late fee safe harbor
amounts in Sec. 1026.52(b)(1)(ii), the Bureau proposes amendments to
the provision's commentary. The Bureau proposes these amendments for
purposes of clarity and consistency with the proposal to lower the late
fee safe harbor amount to a fee amount of $8 for the first and
subsequent violations.
Existing comment 52(b)(1)(ii)-1 explains the circumstances in which
a card issuer may impose a higher penalty fee amount under Sec.
1026.52(b)(1)(ii)(B) for a violation of the same type that occurred
during the same billing cycle or one of the next six billing cycles.
Because Sec. 1026.52(b)(1)(ii)(B) would no longer apply under the
Bureau's proposal to limit the late fee safe harbor amounts to a fee
amount of $8 for the first and subsequent violations, the Bureau
proposes to amend comment 52(b)(1)(ii)-1.i to explain additionally that
a card issuer cannot impose a late fee in excess of $8, as provided in
proposed Sec. 1026.52(b)(1)(ii), regardless of whether the card issuer
has imposed a late fee within the six previous billing cycles. The
Bureau also proposes to amend the illustrative examples in comment
52(b)(1)(ii)-1.iii.A to remove references to late fees and replace them
with references to over-the-limit fees, as Sec. 1026.52(b)(1)(ii)(B)
would still apply to such fees under the Bureau's proposed amendments
to Sec. 1026.52(b)(1)(ii). In addition, the Bureau proposes to amend
the illustrative examples in comments 52(b)(1)(ii)-1.iii.B and C to
reflect a late fee amount of $8, consistent with the proposed
amendments to Sec. 1026.52(b)(1)(ii), and to make minor technical
changes for consistency with the proposal.
The Bureau invites comment on all aspects on these proposed
amendments to the commentary to Sec. 1026.52(b)(1)(ii), including
comment on what additional amendments may be needed to help ensure
clarity and compliance certainty.
Alternatives Considered
The Bureau considered several alternatives in developing the
proposal to lower the safe harbor amounts for late fees. These included
proposing to eliminate for late fees the safe harbor provisions in
Sec. 1026.52(b)(1)(ii) altogether, in which case card issuers could
only impose late fees in amounts that issuers determine to be
reasonable and proportional under the cost analysis provisions in Sec.
1026.52(b)(1)(i). In the ANPR, the Bureau solicited comment on several
questions related to facilitating use of the cost analysis provisions
and to eliminating the safe harbor provisions for late fees. These
included requests for comment on what information card issuers would
use if they were to use the cost analysis provisions in Sec.
1026.52(b)(1)(i) to determine the amount of late fees and what
additional details the Bureau may need to provide concerning how to
comply with the cost analysis provisions, beyond the detail currently
provided in the commentary. In addition, the Bureau requested comment
on what additional processes and procedures, if any, the Bureau should
adopt to ensure compliance if the Bureau were to require that card
issuers use the cost analysis provisions to determine the amount of
late fees.
No commenters expressly supported eliminating the safe harbor
provisions, and most card issuer and trade group commenters expressly
opposed it. No card issuers stated that they use the cost analysis
provisions to determine the amount of late fees. Of the commenters
opposing eliminating the safe harbor provisions, many expressed their
belief that doing so could result in higher late fees or an increase in
the cost of credit for consumers. In addition, a large trade group
commenter expressed concern that eliminating the safe harbor provisions
could increase issuers' compliance costs in determining the overall
costs resulting from late payments (placing a disproportionately high
burden on smaller issuers, community banks, and new entrants) and
potentially result in complicated formulas to determine costs and
appropriate late fees. A credit union expressed concern about increased
compliance costs as well and further noted that those increased costs
would be borne by credit union members. Another trade group commenter
noted that before eliminating the safe harbor provisions, the Bureau
would have to take into account all of the factors that the Bureau is
required to consider under the CARD Act in issuing rules to establish
standards for assessing whether the amount of any penalty fee is
reasonable and proportional to the omission or violation to which it
relates.
The Bureau seeks comment on what revisions to the cost analysis
provisions in Sec. 1026.52(b)(1)(i), if any, may be appropriate to
ensure that late fee amounts determined pursuant to those provisions
are reasonable and proportional and to facilitate compliance. The
Bureau also seeks comment on whether to eliminate the safe harbor
provisions for late fees, rather than lowering the safe harbor amounts
to a fee amount of $8 for the first and subsequent violations as
proposed. As discussed above, the Bureau anticipates that, under the
proposal to lower the late fee safe harbor amount, some card issuers
whose pre-charge-off collection costs are higher than $8 would opt
instead to determine their late fee amounts under the cost
[[Page 18925]]
analysis provisions. Thus, the Bureau notes that its requests for
comment on potential revisions to the cost analysis provisions are
relevant to both retaining the safe harbor provisions as proposed or
eliminating the safe harbor provisions for late fees.
In particular, the Bureau seeks comment on what additional
guidance, if any, should be added to the commentary to Sec.
1026.52(b)(1)(i) concerning the specific costs and other factors that
card issuers may take into account in determining late fee amounts,
including any relevant data or information. Such factors include those
that the Bureau must consider under the CARD Act, such as deterrence
and consumer conduct, in issuing rules to establish standards for
assessing whether the amount of any penalty fee is reasonable and
proportional to the omission or violation to which it relates.
The Bureau also seeks comment on whether and to what extent to rely
on the Bureau's analysis of data related to collection costs,
deterrence, and consumer conduct, as discussed above, in making any
revisions to the cost analysis provisions. In addition, the Bureau
seeks comment on what additional requirements related to card issuers'
internal processes and procedures for calculating and documenting
costs, if any, the Bureau should adopt to ensure compliance.
The Bureau also seeks comment on whether to eliminate the safe
harbor for all other credit card penalty fees, including fees for
returned payments, over-the-limit transactions, and fees charged when
payment on a check that accesses a credit card account is declined. For
such fees, the Bureau seeks particular comment on what guidance, if
any, should be added to the cost analysis provisions in Sec.
1026.52(b)(1)(i) or related commentary concerning the specific costs
and other factors that card issuers may take into account in
determining that fee amounts are reasonable and proportional to the
costs of the specific violation, including any data or information
relevant to the factors that the Bureau must consider under the CARD
Act in issuing rules to establish standards for assessing whether the
amount of any penalty fee is reasonable and proportional to the
omission or violation to which it relates. In addition, the Bureau
seeks comments on what additional requirements related to card issuers'
internal processes and procedures for calculating and documenting
costs, if any, the Bureau should adopt to ensure compliance.
52(b)(1)(ii)(C)
As noted above, the Bureau is not proposing to lower the safe
harbor amount of a late fee that card issuers may impose under the
special rule in Sec. 1026.52(b)(1)(ii)(C) when a charge card account
becomes seriously delinquent. Under the special rule, a card issuer may
impose a fee of 3 percent of the delinquent balance on a charge card
account that requires payment of outstanding balances in full at the
end of each billing cycle if the card issuer has not received the
required payment for two or more consecutive billing cycles. This
provision, as discussed above, is intended to provide charge card
issuers with more flexibility to charge higher late fees and thereby
manage credit risk when an account becomes seriously delinquent,
because charge card issuers do not apply an APR to the account balance
and therefore cannot respond to serious delinquencies by increasing
that rate, as other card issuers can. For clarity, the Bureau proposes
to amend the special rule to provide that card issuers may impose a fee
on a charge card account in those circumstances notwithstanding the
limitation on the amount of a late payment fee in proposed Sec.
1026.52(b)(1)(ii). In addition, the Bureau proposes to amend comment
52(b)(1)(ii)-3, which provides illustrative examples of the application
of Sec. 1026.52(b)(1)(ii)(C). The proposed rule would amend these
examples to use a $8 late fee amount, consistent with the proposed
changes to the late fee safe harbor amount in proposed Sec.
1026.52(b)(1)(ii). The proposed rule also would amend a cross reference
contained in comment 52(b)(1)(ii)-3.iii so that it would correctly
reference paragraph i.
52(b)(1)(ii)(D)
Section 1026.52(b)(1)(ii)(D) provides that the dollar safe harbor
amounts for penalty fees set forth in Sec. 1026.52(b)(1)(ii)(A) and
(B) will be adjusted annually by the Bureau to reflect the changes in
the CPI. The Board included this provision in its Regulation Z, Sec.
226.52(b)(1)(ii)(D) as part of its 2010 Final Rule where it determined
that changes in the CPI, while not a perfect substitute, would be
``sufficiently similar to changes in issuers' costs and the deterrent
effect of the safe harbor amounts.'' \132\ In reaching this
determination, the Board rejected commentators' arguments that the
Board should adjust the safe harbor amounts as appropriate through
rulemaking because the Board believed that this approach would be
inefficient.\133\
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\132\ 75 FR 37526, 37543 (June 29, 2010).
\133\ Id.
---------------------------------------------------------------------------
The Bureau proposes to no longer apply the annual adjustments to
the safe harbor amount for late fees. The proposed rule would
accomplish this by including the $8 proposed late fee safe harbor
amount in the lead in text to Sec. 1026.52(b)(1)(ii), instead of
including it in Sec. 1026.52(b)(1)(ii)(A) or (B). Thus, Sec.
1026.52(b)(1)(ii)(D), which only applies the safe harbor adjustment to
the dollar safe harbor amounts in Sec. 1026.52(b)(1)(ii)(A) and (B),
would no longer apply to the late fee safe harbor amount. The Bureau
proposes one technical change to the cross reference to Sec.
1026.52(b)(1)(ii)(A) and (B) used in Sec. 1026.52(b)(1)(ii)(D) to
conform to OFR style requirements. In addition, for clarity, the
proposed rule would amend the lead-in paragraph in comment
52(b)(1)(ii)-2 to indicate that the inflation adjustment in Sec.
1026.52(b)(1)(ii)(D) does not apply to late fees. Under the proposal,
Sec. 1026.52(b)(1)(ii)(D) would continue to apply to the dollar amount
safe harbor amounts that apply to other penalty fees, such as over-the-
limit fees, and returned-payment fees. With respect to the dollar
amount of the late fee safe harbor, the Bureau would then monitor the
safe harbor amount for late fees for potential adjustments as
necessary. In addition, although the Bureau's proposal is limited to
late fees given available data, the Bureau also seeks comment about
whether the same approach should be taken with respect to other penalty
fees.
The Bureau notes that inflation adjustments, annual or otherwise,
are not statutorily required. TILA section 149, however, does
statutorily require that any late payment fee or any other penalty fee
or charge, must be ``reasonable and proportional'' to such omission or
violation. When the Board determined that the dollar safe harbor
amounts for penalty fees should be subjected to automatic annual
inflation adjustments, it did not expressly consider the effect such
adjustments may have on the reasonableness and proportionality of the
late payment fee (or any other penalty fee). The Board also did not
provide any other data or evidence to support these adjustments as
necessary. Instead, the Board summarily stated that automatic annual
adjustment would be ``sufficiently similar to changes in issuers' costs
and the deterrent effect of the safe harbor
[[Page 18926]]
amounts'' \134\ and also considered efficiency, which is not
statutorily required. The Board did not go into further details on why
an automatic annual adjustment would be similar to changes in issuers'
costs and the deterrent effect of the safe harbor amounts.
---------------------------------------------------------------------------
\134\ Id.
---------------------------------------------------------------------------
The Bureau analyzed relevant data that was not available to the
Board to take into consideration the statutorily mandated reasonable
and proportional standard by considering the costs incurred as a result
of the violation in determining whether a fee amount is reasonable and
proportional. The Bureau, based on this data, has preliminarily
determined that automatic adjustments based on the CPI are not
necessarily reflective of how the cost of late payment to issuers
changes over time and, therefore, may not reflect the ``reasonable and
proportional'' standard in the statute. While issuers' costs do appear
to be trending up, it does not appear that they are doing so lockstep
with inflation particularly when considering the month-to-month changes
in inflation versus costs. Additionally, there are factors outside of
inflation that may impact when issuers' cost goes up and by how much.
Figure 2 below shows monthly per-account collection costs in the Y-14
collection (for all consumer portfolios with positive costs that month,
solid line) and the CPI-U price index since 2013 (dashed). Given that
the costs fluctuate more than the price level, any overarching trend in
costs is better dealt with through ad hoc adjustments when the safe
harbor amounts are revisited.
[GRAPHIC] [TIFF OMITTED] TP29MR23.068
Thus, the Bureau has considered the cost incurred as a result of a
late payment violation and has preliminarily determined that this
proposal is more aligned with Congress' intent for late fees to be
reasonable and proportional than the current provision which requires
the Bureau to adjust for inflation regardless of what the exact changes
are, if any, in actual costs incurred by the card issuer.
As noted above, the Board also briefly considered deterrence and
efficiency when making the determination to implement an automatic
adjustment for inflation. The Bureau has preliminarily determined that
deterrence should not be the driving factor in whether the late fee
safe harbor amount should be automatically adjusted according to the
CPI, nor should it outweigh considerations of issuers' costs. The
Bureau notes while it is possible for the deterrent effect of the safe
harbor amount to be eroded year-to-year with inflation, there are three
overriding considerations as to why that does not necessarily mean
there should be an automatic adjustment for inflation. First, the
Bureau has preliminarily determined that it does not intend to tightly
peg the deterrent effect to a specific value and recognizes there may
be a range of values under which the deterrent effect would be
suitable. The deterrence of the proposed safe harbor amount is
sufficiently high so that the Bureau is not concerned by the lesser
deterrence of a potentially eroded real value under realistic
trajectories for medium-term inflation before any potential
readjustment could be put in effect. Second, similar to the cost
analysis above, the Bureau preliminarily finds that the deterrent
effect does not move in lockstep with the CPI. Third the Bureau
monitors the market so, under this proposal, the Bureau would be able
to make adjustments to the safe harbor amount on an ad hoc basis based
on this monitoring, at which point the Bureau would again consider the
deterrent effect when promulgating a new safe harbor amount. While TILA
section 149 authorizes the Bureau to consider other factors that the
Bureau deems necessary and important in issuing rules to establish
standards for assessing whether the amount of any penalty fee is
reasonable and proportional, the Bureau has preliminarily determined
that consideration of costs incurred, and the deterrent effect outweigh
consideration of efficiency to help ensure that late fee amounts are
reasonable and proportional.
The Bureau solicits comment on this proposal to eliminate the
automatic annual adjustments to reflect changes in the CPI for the late
fee safe harbor amount, including data and evidence as to why the
adjustment may or may not reflect the reasonable and proportional
standard. The Bureau also seeks
[[Page 18927]]
comment on potential future monitoring or other approaches to ensure
that the late fee amount is consistent with the reasonable and
proportional standard. The Bureau also solicits comments on whether
automatic annual adjustments to reflect changes in the CPI should be
eliminated for all other penalty fees subject to Sec. 1026.52(b),
including over-the-limit fees, returned-payment fees, and declined
access check fees.
52(b)(2) Prohibited Fees
As previously discussed, a card issuer must not impose a fee for
violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan unless the
dollar amount of the fee is consistent with Sec. 1026.52(b)(1) and
(2). Section 1026.52(b)(2) provides certain circumstances where fees
are prohibited. Specifically, Sec. 1026.52(b)(2) prohibits (1) fees
that exceed the dollar amount associated with the violation; and (2)
multiple fees based on a single event or transaction.
The Bureau received comments in response to the ANPR from consumer
group commenters indicating that the Bureau should prohibit the
assessment of a late fee without first providing consumers with a
period of time after each due date to make the required payment (a
``courtesy period''). These consumer group commenters noted that
courtesy periods are already utilized by financial institutions in
other financial products and services. For example, these consumer
group commenters indicated that mortgage loan contracts typically
provide a courtesy period of 10 or 15 days after the due date during
which time borrowers may make a payment without penalty.
The Bureau also received comments from multiple industry commenters
indicating that they already provide consumers with a courtesy period
on their credit card accounts before a late fee is assessed on an
account. Other industry commenters also indicated that card issuers do
not take significant action to collect late payments immediately after
the due date but instead wait to begin or otherwise increase activity
surrounding collection of the late payment.
Commenters also noted when card issuers generally consider a
consumer late from a risk perspective. Consumer group commenters
explained that for credit reporting purposes, card issuers typically do
not treat a consumer as late until payment is 30 days past due. This
was additionally supported by (1) an industry commenter that noted late
payments are not reported to credit bureaus until a cardholder reaches
30 days past due; and (2) another industry commenter that reported they
generally do not hand off accounts to third-party debt collectors until
the cardholder is continuously delinquent or has repeated late payments
for a period of 2-6 months.
The Bureau also received other comments from consumer group
commenters that illustrated how delays beyond consumers' control
contribute to the assessment of late fees. For example, consumers who
pay electronically may experience a delay in payment processing for
payments made over weekends. These unintended late payments could be
avoided with the implementation of a courtesy period.
In light of these comments, the Bureau is considering whether to
require a courtesy period, which would prohibit late fees imposed
within 15 calendar days after each payment due date and be applicable
only to late fees assessed if the card issuer uses the safe harbor or
alternatively, applicable to all late fees generally (regardless of
whether the card issuer assesses late fees pursuant to the safe harbor
amount set forth in Sec. 1026.52(b)(1)(ii) or the cost analysis
provisions set forth in Sec. 1026.52(b)(1)(i)). The Bureau has
preliminary determined that it may be appropriate that the late fee
amount essentially be $0 during the courtesy period because, as noted
above, card issuers may not incur significant costs to collect late
payments immediately after a late payment violation.
Further, given that the late payments may be caused by problems
with unavoidable processing delays, the implementation of a courtesy
period also is consistent with considerations of consumer conduct and
deterrence, since, in these circumstances, the consumer attempted to
pay timely. To the extent card issuers face increased cost from this
15-day courtesy period, the Bureau also believes that issuers have
options that may not have been as readily available at the time of the
Board's 2010 Final Rule to encourage timely payment, like sending
notifications to consumers to warn them of payment due dates or
facilitating automatic payment.
The Bureau solicits comments on whether Sec. 1026.52(b)(2) should
be amended to provide for a courtesy period which would prohibit late
fees imposed within 15 calendar days after each payment due date. The
Bureau additionally solicits comment on whether, if a 15-day courtesy
period is required, the courtesy period should be applicable only to
late fees assessed if the card issuer is using the late fee safe harbor
amount (in which case Sec. 1026.52(b)(1)(ii) would be amended instead
of Sec. 1026.52(b)(2)) or alternatively, if the courtesy period should
be applicable generally (regardless of whether the card issuer assesses
late fees pursuant to the safe harbor amount set forth in Sec.
1026.52(b)(1)(ii) or the cost analysis provisions set forth in Sec.
1026.52(b)(1)(i)). The Bureau also solicits comment, as well as data,
on whether a courtesy period of fewer or greater than 15 days may be
appropriate.
The Bureau notes that the alternative of applying a 15-day courtesy
period only to use of the safe harbor late fee amount may have certain
unintended effects on the possible late fee amounts assessed under the
cost analysis provisions. To illustrate, using the Y-14 data, the
Bureau estimated that a 15-day courtesy period tied to the safe harbor
would cut the incidence of consumers charged the proposed $8 safe
harbor amount by as much as half.\135\ This would cause card issuers
who use the safe harbor amount to recover as much as half of what they
would recover if a 15-day courtesy period were not required. Card
issuers who use the safe harbor amount, therefore, would recover an
average of $4 in late fees per late payment. On the other hand, card
issuers that opt to use the cost analysis provisions to assess late
fees would not be required to provide a 15-day courtesy period. This
could result in an outcome where card issuers who used the cost
analysis provisions to determine the late fee amount could charge a
late fee that is less than the proposed safe harbor amount, for example
$6, but still, on average, collect more in total late fees than if they
charged the proposed $8 late fee amount. In this example, they could
charge $6 on 100 percent of incidences, whereas if they used the
proposed $8 safe harbor amount, they could only charge the proposed $8
on approximately half of the incidences. This could lead to a scenario
where consumers who are subject to late fees determined by the cost
analysis provisions may be assessed a lower late fee amount than the
proposed $8 late fee safe harbor amount but would be charged a late fee
more frequently than consumers who are subject to the late fee safe
harbor amount.
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\135\ For more information related to the estimates using the Y-
14 data of how many days after the due date accounts that incurred a
late fee paid the amount due, see Figure 4 and related discussion in
part VII.
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The Bureau additionally solicits comments on whether a 15-day
courtesy period should apply to the other penalty fees that are subject
to Sec. 1026.52(b), including over-the-limit fees and
[[Page 18928]]
returned-payment fees, and if so, why it would be appropriate to apply
a 15-day courtesy period to these other penalty fees. For example,
should the Bureau provide consumers with (1) 15 calendar days after the
billing cycle ends to bring the balance below the credit limit to avoid
being charged an over-the-limit fee; and (2) 15 calendar days after
each due date to make the required periodic payment to avoid a
returned-payment fee if a payment has been returned. With respect to
declined access checks, is a 15-day courtesy period appropriate and if
so, how should it be structured?
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
Section 1026.52(b)(2)(i)(A) provides that a card issuer must not
impose a fee for violating the terms or other requirements of a credit
card account under an open-end (not home-secured) consumer credit plan
that exceeds the dollar amount associated with the violation. For late
fees, accompanying comment 52(b)(2)(i)-1 provides that the dollar
amount associated with a late payment is the full amount of the
required minimum periodic payment due immediately prior to assessment
of the late payment. Thus, Sec. 1026.52(b)(2)(i)(A) prohibits a card
issuer from imposing a late payment fee that exceeds the full amount of
the required minimum periodic payment.
In implementing TILA section 149, the Board noted that the
prohibition of fees based on violations of the terms or other
requirements of an account that exceed the dollar amount associated
with the violation as set forth in its Regulation Z, Sec.
226.52(b)(2)(i)(A) would be consistent with Congress' intent to
prohibit penalty fees that are not reasonable and proportional to the
violation.\136\ The Board in its reasoning addressed issuers' concerns
that when the dollar amount associated with a violation is small, Sec.
226.52(b)(2)(i)(A) could limit the penalty fee to an amount that is
neither sufficient to cover the issuer's costs nor to deter future
violations.\137\ The Board explained that while it is possible that an
issuer could incur costs as a result of a violation that exceed the
dollar amount associated with that violation, this would not be the
case for most violations.\138\ Additionally, the Board noted that if
card issuers could not recover all of their costs when a violation
involves a small dollar amount, prohibiting late fees that exceed the
full amount of the required minimum periodic payment would encourage
them either to undertake efforts to reduce the costs incurred as a
result of violations that involve small dollar amounts or to build
those costs into upfront rates, which would result in greater
transparency for consumers regarding the cost of using their credit
card accounts.\139\ Furthermore, the Board considered the deterrent
effect and believed that violations involving small dollar amounts are
more likely to be inadvertent and therefore the need for deterrence is
less pronounced.\140\
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\136\ 75 FR 37526, 37544 (June 29, 2010).
\137\ Id. at 37545.
\138\ Id.
\139\ Id.
\140\ Id.
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The Board also considered whether compliance with its Regulation Z,
Sec. 226.52(b)(2)(i)(A) would be burdensome on card issuers and
concluded that it would not be overly burdensome.\141\ The Board
explained that, although card issuers may incur substantial costs at
the outset, because Sec. 226.52(b)(2)(i)(A) required a mathematical
determination, issuers should generally be able to program their
systems to perform the determination automatically.\142\
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\141\ Id.
\142\ Id.
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When implementing comment 52(b)(2)(i)-1, the Board clarified that
the dollar amount associated with a late payment is the full amount of
the required minimum periodic payment due immediately prior to the
assessment of the late payment. Industry commenters had argued that the
dollar amount associated with a late payment should be the outstanding
balance on the account because that is the amount the issuer stands to
lose if the delinquency continues and the account eventually becomes a
loss.\143\ However, the Board explained that relatively few
delinquencies result in losses, and the violation giving rise to a late
payment fee is the consumer's failure to make the required minimum
periodic payment by the payment due date.
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\143\ Id.
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The Bureau proposes to amend Sec. 1026.52(b)(2)(i)(A) to limit the
dollar amount associated with a late payment to 25 percent of the
required minimum periodic payment due immediately prior to assessment
of the late payment. The Bureau also proposes to revise comment
52(b)(2)(i)-1 in the following two ways: (1) to clarify that the
required minimum periodic payment due immediately prior to assessment
of the late payment is the amount that the consumer is required to pay
to avoid the late payment fee, including as applicable any missed
payments and fees assessed from prior billing cycles; and (2) to revise
several examples consistent with the proposed 25 percent limitation.
Like the Board's reasoning in the 2010 Final Rule, this proposal
intends to ensure that late fees are reasonable and proportional, even
late fees that are imposed when consumers are late in paying small
minimum payments. However, the Bureau has preliminarily determined that
restricting the late fee to 25 percent of the minimum payment is more
consistent with Congress' intent to prohibit penalty fees that are not
reasonable and proportional to the violation than the current rule that
allows for a card issuer to potentially charge a late fee that is 100
percent of the minimum payment.
For example, when considering collection costs incurred by card
issuers, it is likely that allowing a late fee that is 100 percent of
the minimum payment is not reasonable and proportional to such costs.
Generally, most card issuers do not incur collection costs that are 100
percent of the amount they are trying to collect. The Bureau has
preliminarily determined that lowering the limitation on late fees to
25 percent of the minimum payment due would still likely allow card
issuers to cover contingency fees paid to third-party agencies for
collecting the amount of the minimum payment prior to account charge-
off. The Bureau understands, based on information requests issued under
order for purposes of compiling the Bureau's periodic CARD Act reports
to Congress, that card issuers that contract with third-party agencies
for pre-charge-off collections pay a contingency fee that is a
percentage of the amount collected, which may include an amount (if
collected) exceeding the minimum payment. These contingency fees can
range from 9.5 percent to 23 percent, further supporting that the
proposed 25 percent of minimum payment due is more reasonable and
proportional than permitting 100 percent of the minimum payment.\144\
It appears that the Board did not consider or have access to such
figures when it limited the dollar amount associated with a late
payment to 100 percent of the required minimum periodic payment. With
this additional data, the Bureau proposes a limitation on late fees
that it has preliminarily determined is more reasonable and
proportional than what was set forth in the Board's 2010 Final Rule.
---------------------------------------------------------------------------
\144\ 2021 Report, at 137.
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The Bureau recognizes that the proposed 25 percent limitation would
most likely impact the amount of the
[[Page 18929]]
late fee a card issuer can charge when (1) the minimum payment is
small, and (2) the card issuer is using the cost analysis provisions in
Sec. 1026.52(b)(1)(i) generally to set the late fee amount. Based on
the distribution of minimum payments in the Y-14 data, the Bureau
estimates that this may occur infrequently. Y-14 data from October 2021
to September 2022 shows that for those months in which an account was
late, only 12.7 percent of accounts had a minimum payment of $40 or
less. Additionally for those months in which an account was late, at
least 48.5 percent of accounts had a minimum payment above $100. If a
card issuer is using the proposed late fee safe harbor of $8, however,
the instances where 25 percent of the minimum payment may be less than
the proposed $8 safe harbor appear to be even less frequent. For
instance, based on the distribution of minimum payments due in the Y-14
on a monthly basis from October 2021 to September 2022, if card issuers
could only charge up to 25 percent of the minimum payment, only 7.7
percent of accounts would have been charged a late fee of less than $8.
Figure 3 plots the cumulative distribution function \145\ of total
payments due in the range of $1 to $100 in the account-level Y-14 data,
for all months payments were late between October 2021 and September
2022.
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\145\ The values plotted vertically are the shares of account-
months that paid late with minimum payments at or below the integer
dollar amounts shown on the horizontal axis.
[GRAPHIC] [TIFF OMITTED] TP29MR23.069
Additionally, when the dollar amount associated with the late
payment is small, the Bureau recognizes that the proposal could have
the potential to limit the late fee to an amount that is insufficient
to cover a card issuer's costs in collecting the late payment. However,
permitting a late fee that is 100 percent of the minimum payment does
not appear to be reasonable and proportional to the consumer's conduct
of paying late when the minimum payment is small. For instance, in
situations where the dollar amount associated with the late payment is
small and the card issuer is permitted to charge a late fee that is 100
percent of the minimum payment then a consumer is essentially required
to pay double the amount of a missed payment in the next billing cycle
in addition to the minimum payment due for that next billing cycle.
This result is neither reasonable nor proportional to the consumer's
conduct in paying late.
Furthermore, as the Board noted in its 2010 Final Rule and which
the Bureau has preliminarily determined is still relevant here, to the
extent card issuers cannot recover all of their costs through a late
fee when a late payment involves a small dollar amount, the proposed
limitation will likely encourage card issuers to undertake efforts to
either reduce costs incurred as a result of violations that involve
small dollar amounts or to build those costs into upfront rates, which
has the additional benefit of resulting in greater transparency for
consumers regarding the cost of using credit card accounts. Finally,
the Bureau has preliminarily determined that the Board's explanation
that compliance would not be overly burdensome also remains applicable
to the Bureau's proposal. The proposal would similarly require a
mathematical determination that issuers should generally be able to
program their systems to perform automatically.
In addition, as discussed above, the Bureau proposes to revise
comment 52(b)(2)(i)-1 to clarify that the required minimum periodic
payment due immediately prior to assessment of the late payment is the
amount that the consumer is required to pay to avoid the late payment
fee, including as applicable any missed payments and fees assessed from
prior billing cycles. The Bureau understands that card issuers report
two payment amounts when responding to Y-14 collection efforts, a
minimum payment calculated just for that billing cycle and the total
amount that is required to be paid that billing cycle which includes
missed payment amounts or fees assessed. The Bureau proposes this
revision to comment 52(b)(2)(i)-1 to address any potential confusion
about the payment amount to which the proposed 25 percent limitation
would apply.
The Bureau solicits comment on the proposed 25 percent limitation
discussed above. The Bureau also solicits comment on whether the dollar
amount associated with the other penalty fees covered by Sec.
1026.52(b) should be limited to 25 percent of the dollar amount
associated with the violation. For example, (1) should over-the-limit
fees be limited to 25 percent of the amount of credit extended by the
[[Page 18930]]
card issuer in excess of the credit limit during the billing cycle in
which the over-the-limit fee is imposed; \146\ (2) should the returned-
payment fee be limited to 25 percent of the amount of the required
minimum periodic payment due immediately prior to the date on which the
payment is returned to the card issuer; \147\ and (3) should the
declined access check fee be limited to 25 percent of the amount of the
check.\148\
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\146\ See comment 52(b)(2)(i)-3 for an explanation of the dollar
amount associated with an over-the-limit violation.
\147\ See comment 52(b)(2)(i)-2 for an explanation of the dollar
amount associated with a returned-payment violation.
\148\ See comment 52(b)(2)(i)-4 for an explanation of the dollar
amount associated with a declined access check violation.
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52(b)(2)(ii) Multiple Fees Based on a Single Event or Transaction
Section 1026.52(b)(2)(ii) prohibits card issuers from imposing
multiple penalty fees based on a single event or transaction. The
Bureau is not proposing to amend the text of Sec. 1026.52(b)(2)(ii).
However, the Bureau proposes to revise comment 52(b)(2)(ii)-1 to
clarify several examples illustrating this requirement. Specifically,
the proposed rule would amend several examples in comment 52(b)(2)(ii)-
1 to reflect a late fee amount of $8, consistent with the proposed
amendments to Sec. 1026.52(b)(1)(ii), and to make minor technical
changes for consistency with the proposal.
Section 1026.60 Credit and Charge Card Applications and Solicitations
60(a) General Rules
60(a)(2) Form of Disclosures; Tabular Format
Section 1026.60(a) provides that a card issuer must provide the
disclosures set forth in Sec. 1026.60 on or with a solicitation or an
application to open a credit or charge card account. Section
1026.60(a)(2) provides certain format requirements for the disclosures
required under Sec. 1026.60. Section 1026.60(a)(2)(i) provides that in
certain circumstances the disclosures required by Sec. 1026.60
generally must be disclosed in a tabular format. Section
1026.60(a)(2)(ii) provides that when a tabular format is required,
certain disclosures must be disclosed in the table using bold text,
including any late fee amounts and any maximum limits on late fee
amounts required to be disclosed under Sec. 1026.60(b)(9). Comment
60(a)(2)-5.ii includes a late fee example to illustrate the requirement
that any maximum limits on fee amounts must be disclosed in bold text.
The current example assumes that a card issuer's late fee will not
exceed $35. The proposed rule would amend the example to assume that
the late fee will not exceed $8, so that the maximum late fee amount in
the example would be consistent with the proposed $8 late fee safe
harbor amount set forth in proposed Sec. 1026.52(b)(1)(ii).
Appendix G to Part 1026--Open-End Model Forms and Clauses
Appendix G to part 1026 generally provides model or sample forms or
clauses for complying with certain disclosure requirements applicable
to open-end credit plans, including a credit card account under an
open-end (not home-secured) consumer credit plan. The following five
sample forms or clauses set forth an example of the maximum late fee
amount of ``Up to $35'' under the heading ``Late Payment'': (1) G-
10(B); (2) G-10(C); (3) G-10(E); (4) G-17(B); and (5) G-17(C). The
following two sample forms set forth an example of the maximum late fee
amount of ``Up to $35'' under the heading ``Late Payment Warning'': (1)
G-18(D); and (2) G-18(F). Sample form G-21 sets forth an example of the
maximum late fee amount of ``Up to $35'' under the heading ``Late
Payment Fee.'' The following two sample form or clause set forth an
example of the late fee amount ($35) a consumer may incur if the
consumer does not pay the required amount by the due date under the
heading ``Late Payment Warning'': (1) G-18(B); and (2) G-18(G). The
following three sample forms set forth an example of the late fee
amount ($35) that the consumer was charged in the particular billing
cycle under the heading ``Fees'': (1) G-18(A); (2) G-18(F); and (3) G-
18(G).
The Bureau solicits comment on whether the late fee amounts of $35
in these sample forms or clauses, as applicable, should be revised to
set forth late fee amounts of $8, and whether the maximum late fee
amounts of ``Up to $35'' in these sample forms or clauses, as
applicable, should be revised to set forth a maximum late fee amount of
``Up to $8'' so that the late fee amounts and maximum late fee amounts
in the examples are consistent with the proposed $8 late fee safe
harbor amount set forth in proposed Sec. 1026.52(b)(1)(ii). The Bureau
notes that the 11 forms or clauses discussed above are just samples;
card issuers would need to disclose the late fee amount that they
charge or the maximum late fee amount on the account, as applicable,
consistent with the restrictions in Sec. 1026.52(b).
In addition, as discussed in the section-by-section analysis of
Sec. 1026.52(b)(2)(i), the Bureau solicits comment on whether to
restrict card issuers from imposing a late fee on a credit card
account, unless the consumer has not made the required payment within
15 calendar days following the due date. If the Bureau were to adopt
such a limitation, the Bureau solicits comment on whether the following
10 sample forms or clauses that currently disclose an example of the
late fee amount ($35) or maximum late fee amount (``Up to $35'') that
could be incurred on the account should be revised to disclose that a
late fee will only be charged if the consumer does not make the
required payment within 15 calendar days of the due date: (1) G-10(B);
(2) G-10(C); (3) G-10(E); (4) G-17(B); (5) G-17(C); (6) G-18(B); (7) G-
18(D); (8) G-18(F),\149\ (9) G-18(G); \150\ and (10) G-21.\151\ If such
a disclosure were required, the Bureau also solicits comment on
effective ways to help ensure that consumers understand that a 15-day
courtesy period o
[…truncated; see source link]Indexed from Federal Register on March 29, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.