Rule2024-05011
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 15, 2024
Effective
May 14, 2024
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) amends Regulation Z, which implements the Truth in Lending Act (TILA), to address late fees charged by card issuers that together with their affiliates have one million or more open credit card accounts (referred to as "Larger Card Issuers" herein). This final rule adopts a late fee safe harbor threshold of $8 for those issuers and provides that the annual adjustments to reflect changes in the Consumer Price Index (CPI) do not apply to this $8 amount.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 52 (Friday, March 15, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 52 (Friday, March 15, 2024)]
[Rules and Regulations]
[Pages 19128-19223]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05011]
[[Page 19127]]
Vol. 89
Friday,
No. 52
March 15, 2024
Part III
Consumer Financial Protection Bureau
-----------------------------------------------------------------------
12 CFR Part 1026
Credit Card Penalty Fees (Regulation Z); Final Rule
Federal Register / Vol. 89 , No. 52 / Friday, March 15, 2024 / Rules
and Regulations
[[Page 19128]]
-----------------------------------------------------------------------
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: Final rule; official interpretation.
-----------------------------------------------------------------------
SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau)
amends Regulation Z, which implements the Truth in Lending Act (TILA),
to address late fees charged by card issuers that together with their
affiliates have one million or more open credit card accounts (referred
to as ``Larger Card Issuers'' herein). This final rule adopts a late
fee safe harbor threshold of $8 for those issuers and provides that the
annual adjustments to reflect changes in the Consumer Price Index (CPI)
do not apply to this $8 amount.
DATES: Effective date: May 14, 2024.
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#6a292c3a28352b09090f191903080306031e132a090c1a08440d051c"><span class="__cf_email__" data-cfemail="cc8f8a9c8e938dafafa9bfbfa5aea5a0a5b8b58cafaabcaee2aba3ba">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
The CFPB is amending provisions in Regulation Z, Sec. 1026.52(b)
and its accompanying commentary as they relate to credit card penalty
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 (not home-secured) consumer credit plan,
such as a late payment, exceeding the credit limit, or a returned
payment, 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) (so-called cost analysis provisions) or complies with
the safe harbor provisions set forth in Sec. 1026.52(b)(1)(ii).
Section 1026.52(b)(1)(ii)(A) and (B) 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 CFPB has determined that for Larger Card Issuers (i.e.,
card issuers that together with their affiliates have one million or
more open credit card accounts),\3\ the discretionary safe harbor
dollar amounts for late fees, as currently set forth in Sec.
1026.52(b)(1)(ii)(A) and (B), are too high and, therefore, are not
consistent with TILA's statutory requirement that such fees be
reasonable and proportional to the omission or violation to which the
fee relates. With respect to the current higher safe harbor threshold
for late fees for certain subsequent violations, the CFPB also is
concerned based on data from certain Larger Card Issuers that this
amount 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 a consumer's ability to make future payments on the
account.
---------------------------------------------------------------------------
\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 as
amended by this final rule. In addition, the CFPB is releasing an
unofficial, informal redline to assist industry and other
stakeholders in reviewing the revisions by this final rule to the
regulatory text and commentary of Regulation Z. This redline can be
found on the CFPB's website, <a href="https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_credit-card-penalty-fees_final-rule_2024-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_credit-card-penalty-fees_final-rule_2024-01.pdf</a>. If any conflicts exist between the redline and the
text of Regulation Z, its commentary, or this final 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)(C) provides an additional
safe harbor when a charge card account becomes seriously delinquent.
\3\ This final rule does not define the term ``Larger Card
Issuer'' in the regulatory or commentary text, but this document
uses this term to aid understanding of the changes in this final
rule and readability of the document. This document uses the term
``Larger Card Issuers'' to refer to card issuers that are not
Smaller Card Issuers as defined in Sec. 1026.52(b)(3) and thus are
card issuers that together with their affiliates have one million or
more open credit card accounts.
---------------------------------------------------------------------------
To address these concerns, this final rule amends Sec. 1026.52(b)
and its accompanying commentary to help ensure that the safe harbor
sets late fees imposed by Larger Card Issuers at amounts that are
consistent with the TILA's requirement that such fees be reasonable and
proportional to the cost from an omission or violation. First, with
respect to Larger Card Issuers, this final rule repeals the current
safe harbor threshold amounts in Sec. 1026.52(b)(1)(ii)(A) and (B),
adopts in Sec. 1026.52(b)(1)(ii) a late fee safe harbor dollar amount
of $8, and eliminates for 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.\4\ Second, with
respect to late fees imposed by Larger Card Issuers, this final rule
provides that the current provision in Sec. 1026.52(b)(1)(ii)(D) that
provides for annual adjustments for the safe harbor dollar amounts to
reflect changes in the CPI will not apply to the $8 safe harbor amount
for those late fees. This final rule also amends comments 7(b)(11)-4,
52(a)(1)-1.i and iv, 60(a)(2)-5.ii, and sample forms in appendix G to
revise current examples of late fee amounts to be consistent with the
$8 safe harbor late fee amount discussed above.
---------------------------------------------------------------------------
\4\ This final rule does not amend the safe harbor set forth in
Sec. 1026.52(b)(1)(ii)(C) applicable to charge card accounts.
---------------------------------------------------------------------------
This final rule does not adopt the following revisions for Smaller
Card Issuers as defined in new Sec. 1026.52(b)(3): (1) repeal of the
current safe harbor threshold amounts in Sec. 1026.52(b)(1)(ii)(A) and
(B), adoption of $8 late fee safe harbor threshold amount, and
elimination of a higher late fee safe harbor dollar amount for
subsequent violations; and (2) the elimination of the annual
adjustments for the safe harbor threshold dollar amounts. This final
rule defines the term ``Smaller Card Issuer'' in Sec. 1026.52(b)(3) to
mean a card issuer that together with its affiliates had fewer than one
million open credit card accounts for the entire preceding calendar
year.\5\ For purposes of defining ``Smaller Card Issuer,'' this final
rule incorporates the definition of ``open credit card account'' from
Sec. 1026.58(b)(6), which defines the term to mean a credit card
account under an open-end (not home-secured) consumer credit plan and
either: (1) The cardholder can obtain extensions of credit on the
account; or (2) There is an outstanding balance on the account that has
not been charged off. As discussed below, the safe harbors in Sec.
1026.52(b)(1)(ii)(A) and (B), as revised in this final rule pursuant to
the annual adjustments in Sec. 1026.52(b)(1)(ii)(D), will continue to
apply to late fees imposed by Smaller Card Issuers.
---------------------------------------------------------------------------
\5\ This final rule contains an exception if a card issuer
together with its affiliates had fewer than one million open credit
card accounts for the entire preceding calendar year but meets or
exceeds that number of open credit card accounts in the current
calendar year. In this case, this final rule provides that the card
issuer will no longer be a Smaller Card Issuer as of 60 days after
meeting or exceeding that number of open credit card accounts. See
Sec. 1026.52(b)(3)(ii).
---------------------------------------------------------------------------
[[Page 19129]]
Pursuant to the annual adjustments for safe harbor dollar amounts
in Sec. 1026.52(b)(1)(ii)(D), this final rule revises the safe harbor
threshold amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) to $32, except
that it sets forth a safe harbor of $43 for each subsequent violation
of the same type that occurs during the same billing cycle or in one of
the next six billing cycles. These revised safe harbor threshold
amounts of $32 and $43 apply to penalty fees other than late fees for
all card issuers (i.e., Smaller Card Issuers and Larger Card Issuers)
as well as late fees imposed by Smaller Card Issuers, as noted above.
This final rule also amends comment 52(b)(1)(i)-2.i to make it
explicitly clear 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. This
clarification applies to all card issuers that use the cost analysis
provisions in Sec. 1026.52(b)(1)(i) for determining penalty fee
amounts, including late fees.
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.\6\ The CARD Act
primarily amended TILA \7\ 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.\8\
---------------------------------------------------------------------------
\6\ Public Law 111-24, 123 Stat. 1734 (2009).
\7\ 15 U.S.C. 1601 et seq.
\8\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).
---------------------------------------------------------------------------
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.\9\ 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.\10\ The CARD Act authorized the Board to establish different
standards for different types of fees and charges, as appropriate.\11\
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.\12\ As discussed in more detail below, the authority to
implement TILA, including TILA section 149, transferred from the Board
to the CFPB in 2011.
---------------------------------------------------------------------------
\9\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).
\10\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(c)).
\11\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(d)).
\12\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(e)).
---------------------------------------------------------------------------
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).\13\ 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). Alternatively, if the
card issuer did not want to use the cost analysis provisions in Sec.
226.52(b)(1)(i) to determine the late fee amount, the issuer could use
the safe harbors set forth in Sec. 226.52(b)(1)(ii).\14\ 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.\15\ 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.\16\ 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 CPI would result in an increase or
decrease of $1.\17\
---------------------------------------------------------------------------
\13\ 75 FR 37526 (June 29, 2010).
\14\ 12 CFR 226.52(b)(1).
\15\ 12 CFR 226.52(b)(1)(ii)(A) and (B).
\16\ 12 CFR 226.52(b)(1)(ii)(C).
\17\ 12 CFR 226.52(b)(1)(ii)(D).
---------------------------------------------------------------------------
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.\18\ In
addition, Sec. 226.52(b)(2)(ii) prohibited issuers from imposing
multiple penalty fees based on a single event or transaction.\19\
---------------------------------------------------------------------------
\18\ 12 CFR 226.52(b)(2)(i).
\19\ 12 CFR 226.52(b)(2)(ii).
---------------------------------------------------------------------------
C. Transfer of Authority for TILA to the CFPB and the CFPB's Rule
The Board's 2010 Final Rule implementing TILA section 149 took
effect on August 22, 2010.\20\ 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 CFPB pursuant to
sections 1061 and 1100A of the Consumer Financial Protection Act of
2010 (CFPA).\21\
---------------------------------------------------------------------------
\20\ 75 FR 37526 at 37526.
\21\ Public Law 111-203, 124 Stat. 1376, 1955-2113 (2010).
---------------------------------------------------------------------------
On December 22, 2011, the CFPB issued an interim final rule issuing
its Regulation Z, 12 CFR part 1026, to reflect its assumption of
rulemaking authority over TILA.\22\ As set forth in the interim final
rule, the CFPB'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).\23\
---------------------------------------------------------------------------
\22\ 76 FR 79768 (Dec. 22, 2011); see also 81 FR 25323 (Apr. 28,
2016).
\23\ 76 FR 79768 at 79822.
---------------------------------------------------------------------------
The dollar safe harbor amounts adopted by the Board in 2010 have
been adjusted pursuant to Sec. 1026.52(b)(1)(ii)(D).\24\ 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.\25\
---------------------------------------------------------------------------
\24\ Comment 52(b)(1)(ii)-2.
\25\ Although the safe harbors discussed above apply to charge
card accounts, Sec. 1026.52(b)(1)(ii)(C) 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.
---------------------------------------------------------------------------
D. A Decade of the Late Fee Safe Harbor
In the wake of the Board's and the CFPB's implementation of TILA
section 149, late fees represent almost all
[[Page 19130]]
penalty fee volume on credit cards. Over-the-limit fees are now
practically nonexistent and fees for returned payments account for less
than one percent of total fee volume based on Y-14+ data collected from
a group of mass market and specialized issuers.\26\
---------------------------------------------------------------------------
\26\ Consumer Fin. Prot. Bureau (CFPB), The Consumer Credit Card
Market, at 62-67 (Oct. 2023) (2023 Report), <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf</a>. See part V for a description of the Y-14+
data.
---------------------------------------------------------------------------
Prior to the passage of the CARD Act in 2009, the average late fee
was $33 for issuers in the CFPB'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.\27\ 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.\28\
---------------------------------------------------------------------------
\27\ CFPB, Card Act Report, at 23 (Oct. 2013) (2013 Report),
<a href="https://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf">https://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf</a>.
From 2008 to 2015, the CFPB used the CCDB to measure the amount of
average late fees to include in the CARD Act reports that the CFPB
releases every two years. In its 2017 report, the CFPB 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 V for a description of the Y-14 and Y-14+ data.
\28\ Id.
---------------------------------------------------------------------------
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--growing to over $14 billion in total late fee volume
for issuers contained in the Y-14+ data in 2019.\29\ At the end of
2012, the average late fee for major issuers in the CCDB reached about
$27.\30\ 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 to reflect changes in the CPI in 2014.\31\ In 2019, the
average late fee charged by credit card issuers in the Y-14+ rose to
$31, approaching nominal pre-CARD Act levels.\32\ In 2020, the average
late fee for issuers in the Y-14+ data stayed at $31.\33\
---------------------------------------------------------------------------
\29\ CFPB, Credit Card Late Fees, at 4 (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>.
\30\ 2013 Report, at 23.
\31\ CFPB, 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>.
\32\ Late Fee Report, at 6.
\33\ Late Fee Report, at 5; CFPB, The Consumer Credit Card
Market, at 55 (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>.
---------------------------------------------------------------------------
Total late fee volume for issuers contained in the Y-14+ exceeded
pre-pandemic levels in 2022, following declines in both 2020 and 2021
given record-high payment rates and public and private relief efforts,
as discussed in the 2023 Proposal (88 FR 18906 (Mar. 29, 2023)).\34\
Data published after the 2023 Proposal found issuers in the Y-14+
reported $14.5 billion in late fees in 2022, up from $11.3 billion in
2021, $11.9 billion in 2020, and slightly above $14.2 billion in
2019.\35\ The average late fee increased from $31 in 2021 to $32 in
2022 across both first-time and repeat incidents of late payment,
explaining part of the increase in total volume in 2022.\36\
---------------------------------------------------------------------------
\34\ 2021 Report, at 117; 2023 Report, at 65.
\35\ 2023 Report, at 65.
\36\ Id.
---------------------------------------------------------------------------
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.\37\
---------------------------------------------------------------------------
\37\ See comment 52(b)(1)-1.i.A.
---------------------------------------------------------------------------
As noted in the 2023 Proposal, an analysis by the CFPB in 2022 of
credit card agreements submitted to the CFPB's Credit Card Agreement
Database in the fourth quarter of 2020 found no evidence of any issuers
using the cost analysis provisions to charge an amount higher than the
safe harbor.\38\ Most top issuers by outstanding balances have taken
advantage of the increased safe harbors as annually adjusted to reflect
changes in the CPI by increasing their fee amounts.\39\ 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 CFPB's Credit Card Agreement Database in the fourth
quarter of that year.\40\ Yet, the most common maximum late fee
disclosed in agreements submitted to the CFPB was $25, as driven by the
practices of smaller banks and credit unions not in the top 20 issuers
by asset size.\41\ Finally, a small but growing number of issuers offer
credit card products with no late fees.\42\
---------------------------------------------------------------------------
\38\ Late Fee Report, at 14.
\39\ Id.
\40\ Id. The Credit Card Agreement Database is available at
<a href="https://www.consumerfinance.gov/credit-cards/agreements">https://www.consumerfinance.gov/credit-cards/agreements</a>.
\41\ Late Fee Report, at 14.
\42\ Id. at 15.
---------------------------------------------------------------------------
An analysis by the CFPB in 2023 of credit card agreements submitted
to the CFPB's Credit Card Agreement Database in the second quarter of
2023 was consistent with the 2022 results. The CFPB did not find
evidence of issuers using the cost analysis provision to charge an
amount higher than the safe harbor. Of the approximately 30 to 35
submitters that the CFPB would expect to be Larger Card Issuers, most
of those issuers continued to contract at a maximum late fee at or near
the higher safe harbor amount of $41 in 2023 with all Larger Card
Issuers in the Y-14+ data charging a maximum late fee between $38 and
$41. For Larger Card Issuers, the maximum late fee in their submitted
agreements ranged from $20 to $41 with 13 issuers charging $40 and 11
charging $41. Smaller Card Issuers with more than 10,000 accounts
submitting agreements to the CPFB's Credit Card Database continue to
charge far below the late fee safe harbor. Only six Smaller Card
Issuers for whom the CFPB has data charged a maximum late fee of $41.
Over two-thirds of the sample of Smaller Issuers charge $25 or less per
late payment and 10 already charge $8 or less.
Some Larger Card Issuers 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 the Larger Card Issuers 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.\43\ The share of late fees
for Larger Card Issuers in the Y-14+ data ranged from approximately
five to 30 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.\44\
---------------------------------------------------------------------------
\43\ Id. at 13.
\44\ Id. at 14.
---------------------------------------------------------------------------
As noted in the 2023 Proposal, 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)
[[Page 19131]]
(APR), drive credit card usage.\45\ In addition, recent academic work
\46\ 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.\47\ 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 percent of
the time with an average font size of 13.02. The CFPB notes that the
authors of the study explained that most of the analysis reported in
the paper excludes the post-2007 data to abstract from the impact of
the 2008 financial crisis and the CARD Act.\48\ However, the authors
also stated that ``the main results are qualitatively and
quantitatively very similar if we include data until 2016.'' \49\ Since
the CFPB issued the 2023 Proposal, other survey data indicate that late
fee amounts are less impactful to consumers than annual fees, rewards,
intro sign-up bonuses, credit limits, other benefits, and promotional
or ongoing interest rates when deciding whether to apply for a new
credit card or choosing whether to use an existing credit card.\50\
---------------------------------------------------------------------------
\45\ Karen Augustine, U.S. Consumers and Credit: Rising Usage,
Mercator Advisory Group, at 40 (2018).
\46\ Hong Ru & Antoinette Schoar, Do Credit Card Companies
Screen for Behavioural Biases? (Feb. 21, 2023), BIS Working Paper
No. 842, <a href="https://ssrn.com/abstract=3549532">https://ssrn.com/abstract=3549532</a>.
\47\ Id. This survey used detailed information from Comperemedia
on more than 1.3 million individual credit card offers that were
sent to a set of representative households in the United States
between 1999 and 2016. Thus, the CFPB expects that this survey
likely focused on Larger Card Issuers, which represent the bulk of
the credit card market in terms of outstanding balances. Id. at 3.
\48\ Id. at 12.
\49\ Id.
\50\ Auriemma Consulting Group, Impact of Late Fee and
Interchange Regulation, Variable Rates, and Credit Card Value
Proposition Preferences (Oct. 2023).
---------------------------------------------------------------------------
F. Consumer Impact of Late Fees
As noted in the 2023 Proposal, late fees represented over one-tenth
of the $120 billion issuers in the Y-14+ charged to consumers in
interest and fees in 2019, totaling over $14 billion in that year.\51\
Since the CPFB issued the 2023 Proposal, this remains true as late fees
represented over one-tenth of the more than $130 billion issuers in the
Y-14+ charged to consumers in interest and fees in 2022, totaling over
$14 billion that year.\52\ A small share of accounts in low credit
score tiers incur a high proportion of late fees.\53\ Overall, the
average deep subprime account in the Y-14 data \54\ was charged $138 in
late fees in 2019, compared with $11 for the average superprime
account.\55\ 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.\56\
---------------------------------------------------------------------------
\51\ Late Fee Report, at 4.
\52\ 2023 Report, at 65.
\53\ Late Fee Report, at 7; 2023 Report, at 65.
\54\ The Y-14 data are discussed in more detail in part V.
\55\ Late Fee Report, at 8.
\56\ Id.
---------------------------------------------------------------------------
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.\57\ 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.\58\ 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.\59\
---------------------------------------------------------------------------
\57\ Id. at 9.
\58\ Id. at 10.
\59\ Id. at 11.
---------------------------------------------------------------------------
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 \60\ 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.
---------------------------------------------------------------------------
\60\ 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.
---------------------------------------------------------------------------
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).\61\ 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.
---------------------------------------------------------------------------
\61\ 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 CFPB 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.
---------------------------------------------------------------------------
III. Summary of Rulemaking Process
A. Advance Notice of Proposed Rulemaking
On June 22, 2022, the CFPB 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.\62\ The CFPB
received 43 comments in response to the ANPR.
---------------------------------------------------------------------------
\62\ 87 FR 38679 (June 29, 2022).
---------------------------------------------------------------------------
Consumer group commenters generally made a number of
recommendations with respect to restrictions on late fees, including
that the CFPB should more closely tailor the late fee safe harbor 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.
Card issuers and their trade associations that commented on the
ANPR generally opposed revisions to
[[Page 19132]]
Regulation Z's safe harbor provisions related to late fees, including
lowering the safe harbor amounts. Several industry trade association
commenters also asserted that because lowering the safe harbor would
have a significant impact on small financial institutions, the CFPB
must comply with the Small Business Regulatory Enforcement Fairness Act
(SBREFA) by convening a SBREFA panel in any late fee rulemaking.
B. 2023 Proposal
On February 1, 2023, the CFPB issued a notice of proposed
rulemaking containing several proposed amendments to Regulation Z,
which implements 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. This notice of proposed rulemaking was
published in the Federal Register on March 29, 2023 (2023
Proposal).\63\ The CFPB generally proposed that the final rule, if
adopted, would take effect 60 days after publication in the Federal
Register.
---------------------------------------------------------------------------
\63\ 88 FR 18906 (Mar. 29, 2023).
---------------------------------------------------------------------------
As described more fully below, the CFPB proposed to amend
provisions in Sec. 1026.52(b) and its accompanying commentary as they
relate to credit card late fees. Because late fees are by far the most
prevalent penalty fees charged by card issuers and the CFPB's current
data primarily relate to late fees, the CFPB's proposed changes to the
restrictions in Sec. 1026.52(b) were limited to late fees, although
the CFPB solicited comments on whether the proposed amendments should
apply to other penalty fees.
The proposal would have amended Sec. 1026.52(b) and its
accompanying commentary to help ensure that late fees are reasonable
and proportional. First, the proposal would have amended 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.\64\
Second, the proposal would have provided that the current provision in
Sec. 1026.52(b)(1)(ii)(D) that provides for annual adjustments to
reflect changes in the CPI for the safe harbor dollar amounts would not
apply to the safe harbor amount for late fees. Third, the proposal
would have amended 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
have amended 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. The CFPB also
solicited comment on whether card issuers should be prohibited from
imposing late fees on consumers that make the required payment within
15 calendar days following the due date. In addition, the CFPB
solicited 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.
---------------------------------------------------------------------------
\64\ The proposal would not have amended the safe harbor set
forth in Sec. 1026.52(b)(1)(ii)(C) applicable to charge card
accounts.
---------------------------------------------------------------------------
The CFPB proposed one clarification that would have applied to
penalty fees generally. Specifically, the proposal would have amended
comment 52(b)(1)(i)-2.i to make it explicitly clear 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 CFPB solicited comment on several issues
related to penalty fees generally. First, the CFPB solicited 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 CFPB should finalize the proposed safe harbor for late fees and
eliminate the safe harbors for other penalty fees. Second, the CFPB
solicited 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 CFPB 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 CFPB also solicited
comment on whether, in that event, the cost analysis provisions would
need to be amended and, if so, how.
The CFPB received approximately 57,900 responses to the 2023
Proposal. Of those responses, around 56,800 were from consumers that
generally supported the 2023 Proposal. The vast majority of these
consumer letters had the same content, and specifically supported the
proposed $8 safe harbor threshold amount for late fees. In certain
consumer letters, consumers who supported the proposal included
additional information, such as their experiences with late fees. Some
consumers who supported the proposal indicated they had limited income
and that even a small late fee can impact consumers on a tight budget.
Some consumers who supported the proposal indicated that they were
charged a late fee in the past because (1) their mailed payment was not
received by the card issuer by the due date because of slower postal
service; (2) they paid on the due date but after the cut off time on
the due date; (3) they forgot to pay on time because of vacations,
medical issues, or family issues; or (4) they experienced cash flow
issues because of unexpected expenses, such as an illness, and in some
cases were not able to change the due date for their payments.
Around 350 individual consumers, including approximately 170
individuals who identified themselves as ``bankers'' who submitted the
same letter, opposed the proposed $8 safe harbor amount. The
individuals who identified themselves as bankers asserted that the CFPB
should withdraw the proposal and restart the rulemaking process after
taking into consideration small business' input through the SBREFA
process.
Consumer group commenters generally supported the 2023 Proposal.
These consumer group commenters expressed strong support for: (1) the
CFPB's proposed safe harbor of $8 for credit card late fees; and (2)
the CFPB's proposal 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 CFPB received around 100 comment letters from industry
commenters. Industry commenters generally opposed the proposal,
including the following proposed changes: (1) lowering the late fee
safe harbor amount to $8 and eliminating the higher safe harbor amount
for subsequent late payments; (2) eliminating the annual adjustment
provisions for late fee amounts; (3) limiting late fee amounts to 25
percent of the require minimum payment; and (4) clarifying 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
[[Page 19133]]
collection costs that are incurred after an account is charged off
pursuant to loan loss provisions.
One Member of Congress was concerned about the impact of the 2023
Proposal on small issuers. This commenter advised that the CFPB either
work to ensure that the cost analysis provisions--an alternative to the
safe harbor--would not impose undue burdens on small issuers or that
the CFPB consider a separate safe harbor for small issuers that more
accurately reflects their unique costs.
The Office of Advocacy, an independent office within the Small
Business Administration (SBA), expressed concern that the CFPB's
analysis of pre-charge-off costs from the Y-14 issuers does not
accurately represent the collection costs for late payments of smaller
issuers. The agency also criticized the CFPB for insufficiently
considering the extent to which the proposed $8 safe harbor amount
would cover the collection costs of smaller issuers.
The CFPB also received comments from other types of entities,
namely several academics, law firms, and financial regulatory advocacy
groups. The comments from these entities varied, with some of these
entities generally supporting the 2023 Proposal, and some of them
generally opposing it. These comments, as well as the other comments
received by the CFPB on the 2023 Proposal, are discussed in more detail
below in part VII.
C. CARD Act Consultation With Certain Federal Agencies
Consistent with the CARD Act, the CFPB consulted with the following
agencies regarding rules that implement TILA section 149, both before
issuing the 2023 Proposal and before issuing this final rule: (1) the
Comptroller of the Currency; (2) the Board of Directors of the Federal
Deposit Insurance Corporation (FDIC); and (3) the National Credit Union
Administration Board.\65\ The CFPB also consulted with the Board and
several other Federal agencies, before issuing the 2023 Proposal and
before issuing this final rule, as discussed in part IX.
---------------------------------------------------------------------------
\65\ 15 U.S.C. 1665d(b) and 1665d(e).
---------------------------------------------------------------------------
IV. Legal Authority
A. Section 1022 of the CFPA
Section 1022(b)(1) of the CFPA authorizes the CFPB to prescribe
rules ``as may be necessary or appropriate to enable the CFPB to
administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof.'' \66\ Among
other statutes, the CFPA and TILA are Federal consumer financial
laws.\67\ Accordingly, in issuing this final rule, the CFPB exercises
its authority under the CFPA section 1022(b)(1) to prescribe rules
under TILA and the CFPA that carry out the purposes and objectives and
prevent evasion of those laws.
---------------------------------------------------------------------------
\66\ 12 U.S.C. 5512(b)(1).
\67\ CFPA 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 the CFPA); CFPA
section 1002(12); codified at 12 U.S.C. 5481(12) (defining
``enumerated consumer laws'' to include TILA).
---------------------------------------------------------------------------
B. The Truth in Lending Act
As amended by the CFPA, TILA section 105(a) \68\ directs the CFPB
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 CFPB, 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' 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.\69\ Thus, strengthened competition among financial institutions
is a goal of TILA, achieved through the effectuation of TILA's
purposes.
---------------------------------------------------------------------------
\68\ 15 U.S.C. 1604(a).
\69\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
---------------------------------------------------------------------------
As described above, the CARD Act was signed into law on May 22,
2009,\70\ and the Act amended TILA \71\ 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.\72\
---------------------------------------------------------------------------
\70\ Public Law 111-24, 123 Stat. 1734 (2009).
\71\ 15 U.S.C. 1601 et seq.
\72\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).
---------------------------------------------------------------------------
At the time of its passage, the CARD Act added section 149(b) to
TILA, which 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.\73\ Section 149(d) also authorized the Board to
establish different standards for different types of fees and charges,
as appropriate.\74\ 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.\75\ 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 CFPB's
Regulation Z, 12 CFR 1026.52(b)(1)(i)). That required rulemaking
included cost analysis provisions that enabled issuers to determine the
late fee amount that were reasonable and appropriate under the statute.
In addition, the Board exercised its discretionary power to include
optional safe harbor provisions that issuers could elect to use as an
alternative to the cost analysis provisions (now contained in the
CFPB's Regulation Z, 12 CFR 1026.52(b)(1)(ii)).
---------------------------------------------------------------------------
\73\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).
\74\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(d)).
\75\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(e)).
---------------------------------------------------------------------------
On July 21, 2011, the Board's rulemaking authority to implement the
provisions of TILA, including the discretionary authority to issue
rules regarding penalty fee safe harbors in TILA section 149(e),
transferred to the CFPB pursuant to sections 1061 and 1100A of the
CFPA.\76\
---------------------------------------------------------------------------
\76\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
For the reasons discussed in this final rule, the CFPB is amending
certain provisions in Regulation Z that impact the amount of late fees
that Larger Card Issuers can charge.
With respect to late fees charged, pursuant to section 149(e), the
CFPB has analyzed whether the current safe harbor threshold amounts for
late fees should be presumed to be reasonable and proportional to a
cardholder's omission or violation. In considering whether and what is
the appropriate amount for the safe harbor, the CFPB
[[Page 19134]]
looked to whether the safe harbor is a ``reasonable and proportional''
fee, as originally prescribed by the Board, such that any fee under the
safe harbor amount should be presumed to have met that standard. In
addition, the CFPB is guided by, but was not required to consider, the
four statutory factors applicable to the Board's 2010 Final Rule: (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.
As described below and pursuant to its rulemaking authority under
TILA sections 105(a) and 149(e),\77\ the CFPB has determined that the
current safe harbor thresholds are too high with respect to late fees
charged by Larger Card Issuers, and therefore, repeals the safe harbor
provisions with respect to late fees charged by those issuers. The CFPB
then establishes a new safe harbor of $8 applicable to late fees
charged by Larger Card Issuers. Separately, at this time and as
described below, the CFPB is not exercising its discretionary authority
to impose the new $8 threshold amount on Smaller Card Issuers.
---------------------------------------------------------------------------
\77\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------
V. Data Considered for This Rulemaking
A. The CFPB's Proposal
The CFPB considered four primary data sources in developing the
2023 Proposal, as described below: (1) Y-14; (2) Y-14+; (3) credit card
debt collection data received from an information order made pursuant
to section 1022(c)(4) of the CFPA; and (4) the CFPB's Credit Card
Agreement Database.
Y-14 Data
First, as explained in the 2023 Proposal, the CFPB relied upon data
that the Board collects as part of its Y-14M (Y-14) data.\78\ Since
June 2012, the Board has collected these data monthly from bank holding
companies with total consolidated assets exceeding $50 billion (from
June 2012 to November 2019) and exceeding $100 billion (from December
2019 to present).\79\ 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 CFPB's biennial report to Congress on the consumer credit card
market.
---------------------------------------------------------------------------
\78\ 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 CFPB 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 do not include
transaction-level data pertaining to consumer purchases.
\79\ In the 2023 Proposal, the CFPB incorrectly indicated that
the Y-14 data from June 2012 to the present is collected from bank
holding companies with total consolidated assets exceeding $50
billion. In fact, in December 2019, the Board adjusted the cutoff
threshold from $50 million to $100 billion. This difference in the
threshold to submit Y-14 data does not impact the CFPB's analysis
because the CFPB was merely describing the issuers covered by that
data, which the CFPB still used in its totality. The increased
threshold did not impact the analysis of pre-charge-off collection
costs set forth in the section-by-section of Sec. 1026.52(b)(1)(ii)
because that analysis focused on periods after 2019.
---------------------------------------------------------------------------
The Y-14 data contain confidential supervisory information.\80\
Given this and as detailed in the 2023 Proposal, the CFPB could not
release the raw data, but did provide the data in summary form and
explained the source of the data, the analysis, and the metrics used in
its analysis. The 2023 Proposal began by explaining that these data
contain reported information on the following four metrics used in
developing the 2023 Proposal:
---------------------------------------------------------------------------
\80\ The Board's instructions to Y-14 issuers provide: As these
data will be collected as part of the supervisory process, they are
subject to confidential treatment under exemption 8 of the Freedom
of Information Act. 5 U.S.C. 552(b)(8). In addition, commercial and
financial information contained in these information collections may
be exempt from disclosure under Exemption 4. 5 U.S.C. 552(b)(4).
Disclosure determinations would be made on a case-by-case basis.
<a href="https://www.federalreserve.gov/apps/reportingforms/Download/DownloadAttachment?guid=dce3da6a-55b4-4fb4-8730-3fec04d32627">https://www.federalreserve.gov/apps/reportingforms/Download/DownloadAttachment?guid=dce3da6a-55b4-4fb4-8730-3fec04d32627</a>.
---------------------------------------------------------------------------
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 CFPB's purposes in developing the 2023 Proposal.
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.\81\ These reported costs do not include projected losses, and the
dollar amount of charge-offs and any associated recoveries.\82\
---------------------------------------------------------------------------
\81\ Types include General Purpose, Private Label, Business, and
Corporate cards.
\82\ Issuers report projected losses, the dollar amount of
charge-offs and any associated recoveries, interest expense, and
loan loss provisions separately.
---------------------------------------------------------------------------
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.
As described in the 2023 Proposal, the Y-14 data received by the
CFPB covered the period from the middle of 2012 through September 2022
and are provided by certain Larger Card Issuers that account for just
under 70 percent of outstanding balances on U.S. consumer credit cards
as of year-end 2020. With respect to credit card data, the 2023
Proposal explained that, for purposes of its analysis, the CFPB
generally used the complete portfolio data (including late fee income
and collection costs) for all the Y-14 issuers included in the data
collection. The 2023 Proposal also explained that the analysis
generally used 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. For the purposes of the
analysis using these data in the 2023 Proposal, the CFPB 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.
Determination of Post-Charge-Off Collection Costs Using Credit Card
Debt Collection Data Received From an Information Order Made Pursuant
to Section 1022(c)(4) of the CFPA
In the 2023 Proposal, the CFPB stated its understanding that
collection costs in the Y-14 data are total collection costs, therefore
include both pre-charge-off and post-charge-off collection costs
because, as described in the 2023 Proposal, the Board requires that
issuers report in the Y-14 data ``costs incurred to collect problem
credits that include the total collection cost of delinquent, recovery,
and bankrupt accounts'' (emphasis added). While the line item reported
to the Board for the Y-14 data relates to total collection costs, the
Board's 2010 Final Rule generally explains that the collection costs
used for determining late fees under the cost analysis provisions in
Sec. 1026.52(b)(1)(i) are limited to the use of pre-charge off
collection costs. As explained in the 2023 Proposal and as the Board
noted in
[[Page 19135]]
that 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.'' \83\ The Board further noted that ``it would be inconsistent
with TILA section 149(c)(1) to permit the costs of the loss to be
included as `costs incurred by the creditor from [an] omission or
violation,' which could be construed to mean that it is appropriate to
exclude losses where--as here--card issuers do not incur losses as a
result of the overwhelming majority of violations.'' \84\
---------------------------------------------------------------------------
\83\ 75 FR 37526 at 37538.
\84\ Id.
---------------------------------------------------------------------------
The CFPB did not propose to amend the Board's rule in this respect
and further noted that this limitation was appropriate given that card
issuers write accounts off as a loss when an account has been charged
off; therefore, any cost in collecting amounts owed to a card issuer
that incurred post-charge-off is related to mitigating a loss as
opposed to the cost of a violation of the account terms.\85\
---------------------------------------------------------------------------
\85\ In the 2023 Proposal, the CFPB proposed to amend comment
52(b)(1)(i)-2.i to make it explicitly clear 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.
---------------------------------------------------------------------------
Given that the rule's cost analysis provisions in Sec.
1026.52(b)(1)(i) limit the collection costs to costs that are incurred
pre-charge off, consistent with the statute, the CFPB similarly limited
its calculation of the appropriate safe harbor to this pre-charge off
cost in the Y-14 data by excluding the post-charge-off collection
costs. As explained in the 2023 Proposal, to do this, the CFPB
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.
To determine what percentage of Y-14 data were pre-charge off, the
CFPB examined confidential information gathered in the course of its
statutory functions \86\ on commissions paid to third-party debt
collectors for charged-off accounts 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.\87\ In the 2023 Proposal, the CFPB noted 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 CFPB stated its understanding 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.
---------------------------------------------------------------------------
\86\ The CFPB collected these confidential data through an
information order pursuant to section 1022(c)(4) of the CFPA.
\87\ As part of its review of the practices of credit card
issuers for its biennial review of the consumer credit card market,
the CFPB 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.
---------------------------------------------------------------------------
As explained in the 2023 Proposal, 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. 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 CFPB estimated
the post-charge-off commission costs to be $10,000. As noted in the
proposal, to calculate the post-charge-off collection costs as a share
of total cost of collections, the CFPB 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 used 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).
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 CFPB explained in the 2023 Proposal that it
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 these data, in the 2023 Proposal, the CFPB 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).
Y-14+ Data
As discussed in the 2023 Proposal, the CFPB also considered Y-14+
data in developing the proposal. The Y-14+ data include confidential
information gathered in the course of statutory functions from the
Board's Y-14 data and a diverse group of specialized issuers.\88\ The
additional data that included specialized issuers were used to
calculate the average late fee charged by Y-14+ issuers in 2019 and
2020. As explained in the proposal, in 2019, the average late fee
charged by issuers in the Y-14+ data was $31. In the proposal, the CFPB
noted that because the average late fee charged by the Y-14+ issuers is
lower than the current maximum safe harbor of $41 and yet issuers still
generate late fee income that is more than five times the ensuing
(estimated) pre-charge-off collection costs since August 2021, the CFPB
preliminarily concluded that $8 is likely to recover the average
issuer's pre-charge-off collection costs. In addition, in the proposal,
the CFPB used the average late fee charged by Y-14+ issuers in 2020 in
forming its expectation 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. The CFPB noted that it
collects card agreements from more smaller issuers than issuers for
which the CFPB has financial data. Based on the CFPB's 2022 review of
agreements from over 500 credit card issuers having more than 10,000
credit card accounts, the CFPB established that issuers outside the top
20 by outstanding credit card balances charged smaller late fees in
2020 than issuers within the top 20.
---------------------------------------------------------------------------
\88\ The CFPB received the information from the specialized
issuers through an information order pursuant to section 1022(c)(4)
of the CFPA which provides that the CFPB will treat the information
received in response to the order in accordance with its
confidentiality regulations at 12 CFR 1070.40 through 1070.48.
---------------------------------------------------------------------------
CFPB's Credit Card Agreement Database
In the 2023 Proposal, the CFPB discussed a 2022 review conducted by
the CFPB of credit card agreements submitted to the CFPB's Credit Card
Agreement Database in the fourth quarter of 2020 to determine the
maximum late fee amount charged across agreements by issuers submitting
to that database. As discussed above, the 2023 Proposal relied on these
data in
[[Page 19136]]
developing preliminary conclusions about the potential impact the
proposed $8 late fee safe harbor threshold amount would have on card
issuers, including smaller issuers.
B. CFPB Revenue and Collection Costs Report
At the time it issued the 2023 Proposal, the CFPB also published a
related report, ``Credit Card Late Fees: Revenue and Collection Costs
at Large Bank Holding Companies'' (Revenue-Costs Report).\89\ Although
the CFPB recognized that it could not publish the confidential Y-14
data, as discussed above, the Revenue-Costs Report provides additional
information on the monthly values for the aggregate late fee revenue
and collection costs for general purpose and private label credit cards
in the Y-14 data since 2016. The Revenue-Costs Report includes the
total number of accounts in these portfolios, aggregate interest
revenue for these accounts, the CFPB's estimate of pre-charge-off
collection costs, total account balances, and the weighted ratio of
late fee income to estimated pre-charge-off collection costs.\90\ The
CFPB provided this information in order to enable commenters to better
understand how the CFPB determined the relationship between late fee
revenue and pre-charge-off collection costs for Y-14 issuers for
purposes of the 2023 Proposal. The Revenue-Costs Report shows that
revenue from late fees has consistently far exceeded pre-charge-off
collection costs over the last several years.
---------------------------------------------------------------------------
\89\ CFPB, Credit Card Late Fees: Revenue and Collection Costs
at Large Bank Holding Companies (Revenue-Costs Report) (Feb. 2023),
<a href="https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-collection-costs-large-bank_2023-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-collection-costs-large-bank_2023-01.pdf</a>.
\90\ Since not every issuer in the Y-14 data reports values for
every month, the Revenue-Costs Report also included the number of
portfolios that are included in the aggregate for the applicable
month.
---------------------------------------------------------------------------
C. Comments Received Related to Data and Analysis
Using Y-14 Data Without Releasing Underlying Data
Several credit unions, industry trade associations, and individuals
on behalf of a credit union, one law firm representing several card
issuers, and one academic commenter criticized the CFPB for failure to
release the underlying Y-14 data. These commenters asserted they did
not have the ability to understand or evaluate the CFPB's proposal in a
thorough and meaningful way or to replicate the CFPB's analysis due to
the lack of insight into the underlying data, methodology used, and
analyses that form the basis of the 2023 Proposal. Several of these
commenters asserted that the failure to disclose the raw Y-14 data
relied upon in the rulemaking conflicts with requirements under section
553 of the Administrative Procedure Act (APA).\91\
---------------------------------------------------------------------------
\91\ 5 U.S.C. 553(b), (c).
---------------------------------------------------------------------------
One of the credit union commenters urged the CFPB to provide a
breakdown of the components used to arrive at the proposed $8 late fee
safe harbor and the source of the data. One of the industry trade
association commenters noted that the CFPB failed to provide a clearly
defined list of data inputs that banks provide in reporting collection
costs on the Y-14 data. The law firm representing several card issuers
asserted that, although the CFPB compiled and released a set of
aggregated and anonymized values at the same time as the proposal, it
did not include an explanation of which Y-14 data fields it used to
populate the document, how and why the CFPB designated the data for
inclusion in the categories the document sets forth, or how the CFPB
ensured that the data categorizations were consistent from bank to
bank--all of which it claimed prevented commenters from assessing the
validity and accuracy of the proposal or the conclusions it supports.
One of the industry trade association commenters also expressed
concerns that the CFPB did not provide information about the
distribution of the ratio of late fee income to future collection costs
for the Y-14 issuers; and about whether the CFPB used all of the
issuers in the Y-14 data in analyzing the ratio of late fee income to
future collection costs.
The academic commenter focused on a narrower set of data related to
a Y-14 seven-month analysis. These data were used to support analysis
in the proposal that lower late fees in month seven do not affect the
late payment rate. This commenter asserted that these claims would
require further review and validation by industry and urged the CFPB to
release the underlying Y-14 data used in this seven-month analysis.
Several of the industry trade association commenters and the
academic commenter also requested that the CFPB release further
anonymized or aggregated Y-14 data to the public and postpone the
rulemaking until it could release these additional data.
The CFPB disagrees with the commenters that the 2023 Proposal
failed to provide sufficient data or description of methodology for
commenters to offer meaningful comment. The CFPB also does not agree
that it is improper to cite supervisory or other confidential data
gathered for statutory functions or shared by the Board pursuant to
those statutory functions in the rulemaking process; this is
information the CFPB obtains as part of its lawful and authorized
activities, and it provides insight into the issues addressed here.
CFPB's published reports were collected through its supervision
function, and the CFPB's regulations protect confidential supervisory
information from disclosure. As noted above, the Board's instructions
to the Y-14 issuers indicates that the Y-14 data are collected as part
of the supervisory process and are subject to confidential treatment
under certain exemptions of the Freedom of Information Act.\92\ The
CFPB was authorized to use this robust dataset if it complied with the
Board's confidentiality conditions, and it would have been unreasonable
to burden the industry with duplicative data requests. Also, as noted
above, the CFPB collects certain information pursuant to information
orders under section 1022(c)(4) of the CFPA and those orders provide
that the CFPB will treat the information received in response to the
order in accordance with its confidentiality regulations at 12 CFR
1070.40 through 1070.48. Courts have held that an agency can rely on
confidential information in its rulemaking so long as the agency
discloses information to allow interested parties to comment on the
methodology and general data.\93\ The CFPB disclosed how it obtained
the data, the methodologies used to analyze the data, the number of
accounts reviewed, characteristics about the accounts reviewed, and the
results of the various studies.
---------------------------------------------------------------------------
\92\ See supra note 80.
\93\ See NRDC v. Thomas, 805 F.2d 410, 418 n.13 (D.C. Cir.
1986); see also Riverkeeper Inc. v. EPA, 475 F.3d 83, 112 (2d Cir.
2007); rev'd on other grounds, 556 U.S. 208 (2009).
---------------------------------------------------------------------------
As noted above, the 2023 Proposal provides a detailed description
of each of the four sources of data used in the rulemaking: (1) Y-14;
(2) Y-14+; (3) credit card debt collection data received from an
information order made pursuant to section 1022(c)(4) of the CFPA; and
(4) the CFPB's Credit Card Agreement Database. Although the CFPB did
not release the raw Y-14 data used in developing the 2023 Proposal, it
took several steps to release aggregate data, as well as providing
detailed descriptions of methodology and analysis, so that commenters
could evaluate and provide meaningful
[[Page 19137]]
comment on the CFPB's data and analysis.
As noted above, contrary to what some commenters stated, the 2023
Proposal explained the source of the Y-14 data (from the Board), as
well as the specific question about estimating collection costs for
late fees that was used to generate the data. In the 2023 Proposal, the
CFPB also described the four types of Y-14 data that it used for the
analysis in the proposal, namely, late fee income, collection costs,
late fee amount, and total required payments.\94\ The 2023 Proposal
further detailed the relevant years of data examined, as well as the
reasons why the CFPB preliminarily determined it was appropriate to
rely on data from the Y-14 issuers, noting that those issuers
constituted approximately 70 percent of the market. The CFPB also
adequately described in the 2023 Proposal how it used the Y-14 data in
the analysis, including the methodology it used to calculate the ratio
of collection costs to late fee income.\95\ As described in the 2023
Proposal, that methodology involved the CFPB comparing 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.\96\ The CFPB developed monthly
estimates of this late fee income-to-cost ratio for each year from 2013
up to early 2022. The CFPB also described the methodology for
conducting the Y-14 seventh-month analysis in relation to the impact of
higher subsequent late fees on late payment incidence, which included
conducting statistical analysis on a random subsample from account-
level data available in 2019 from the Y-14 data to investigate whether
the lower late fee amount in month seven leads to a discontinuous jump
in late payments in the seventh month after the last late payment.\97\
---------------------------------------------------------------------------
\94\ 88 FR 18906 at 18910-11.
\95\ Id. at 18916-18.
\96\ 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 CFPB
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. In the 2023 Proposal, the CFPB
noted that its preliminary findings based on the weighted average of
this ratio across issuers and market segments were robust to
shifting, expanding, or shortening the time period of delay in
collection costs as they relate to late fee income.
\97\ Id. at 18920. The CFPB 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.
---------------------------------------------------------------------------
As noted above, the CFPB also issued along with the 2023 Proposal
the Revenue-Costs Report at the time of the proposal to aid in the
ability of commenters to examine data from issuers and provide
additional analysis and methodology, enhancing the ability of
commenters to offer meaningful comment. The Revenue-Costs Report
included additional monthly values for the aggregate late fee revenue
and collection costs for general purpose and private label credit cards
in the Y-14 data since 2016.\98\ The report also provided (1) the
number of portfolios that are included in the aggregate for the
applicable month; (2) the total number of accounts in these portfolios,
(3) aggregate interest revenue for these accounts, and (4) the CFPB's
estimate of pre-charge-off collection costs, total account balances,
and the weighted ratio of late fee income to estimated pre-charge-off
collection costs. Many credit unions and individuals on behalf of
credit unions and one industry credit union trade association used the
information in the Revenue-Costs Report to compare the average pre-
charge-off collection cost and the average late fee income per account
for the Y-14 issuers to the average pre-charge-off collection cost and
the average late fee income per account for the credit card industry.
Specifically, using the information in the Revenue-Costs Report, these
commenters calculated the annual average pre-charge-off collection cost
and the annual average late fee income per account for the Y-14 issuers
($0.22 and $13.80 respectively) using monthly averages for the 12-month
period ending September 2022 contained in the Revenue-Costs Report and
compared these data to the annual average pre-charge-off cost per
account and the annual average late fee income for the credit union
industry that the commenters collected ($0.33 and $7 respectively).
---------------------------------------------------------------------------
\98\ See supra note 89.
---------------------------------------------------------------------------
Throughout the process, the CFPB sought to provide as much
information as possible to ensure that commenters could themselves
analyze the CFPB methodology, critique data, and provide feedback.
Indeed, as described below, the CFPB received approximately 10 comments
that specifically analyzed the CFPB's use of the Y-14 data, as well as
the CFPB's methodology and analysis. For example, the CFPB received
comments that criticized the CFPB's bottom line late fee estimate and
offered contrary amounts based on issuers' own analysis using the
CFPB's methodology. Other commenters also provided meaningful feedback
on the source of the data and data fields. The CFPB has determined this
feedback further supports the fact that throughout this rulemaking
(including an ANPR that sought data from issuers), the CFPB has sought
to share as much information as possible. For comparison, the CFPB's
rulemaking, unlike the original 2010 rule, analyzed and presented 10
years of data specifically from card issuers' own reports of collection
costs. While these raw data could not be disclosed, the CFPB published
data in an aggregate form, and in both the 2023 Proposal and the
related Revenue-Costs Report, the CFPB described its methodology and
analysis to further the ability of commenters to meaningfully examine,
understand, and comment on the data.
Y-14 Data as Representative of Issuers' Collection Costs and Late Fee
Income
As noted in the 2023 Proposal, the Y-14 data provided 10 years of
information related to total collection costs, which as required by the
Board is defined to include ``costs incurred to collect problem credits
that include the total collection cost of delinquent, recovery, and
bankrupt accounts.''
Several industry trade associations and one law firm representing
several card issuers asserted that the CFPB improperly relied on this
Y-14 data field in developing the proposal because that ``total
collection cost'' line item may be underinclusive of some issuers'
collection costs. The law firm representing several card issuers
asserted that there are expenses caused by late payments that are not
included in the ``total collection cost'' line item relied on by the
CFPB in the Y-14 data. For example, this commenter asserted that
technology-related expenses associated with delinquent customer
servicing and processing platforms, forms of customer communications
for consumers in delinquent status, payment-processing expenses
associated with programs for late payers, and costs associated with
supporting collection activities such as human resources, risk
management, and legal may not be reported.
Several industry trade associations asserted that the CFPB's
analysis of this line item from the Y-14 data incorrectly excludes
attributable expenses and overhead, including systems expenses and risk
department expenses related to consumer credit card accounts. These
[[Page 19138]]
trade association commenters also stated that the amount excluded the
costs of funding delinquent accounts (i.e., costs to fund the balances
for longer than expected because of late payments), and these
commenters asserted that indirect costs represent real and reasonable
expenses associated with late and delinquent accounts. While these
commenters did not provide data for the costs associated with all late
payments, these commenters did provide data for accounts that were late
for 60 days or more and estimated that these 60-day plus delinquent
accounts cost issuers $46.30, including $33.00 in direct expenses,
$9.00 in attributable expenses, and $4.30 in funding costs.
Another industry trade association asserted that the Y-14 total
collection cost line item on which the CFPB relied is not a
sufficiently uniform or defined data set for purposes of assessing card
issuer collection costs associated with late payments, due to
variations in the way that the largest banks report their data.
Specifically, this commenter asserted that Y-14 data are reported for
stress-testing purposes, and as a result, institutions may not report
it in a uniform way because for stress-testing purposes, it is less
important whether an institution reports a particular cost in this line
item or in another line item for costs, so long as the institution
reports that particular cost in some way in the reporting forms
overall. According to this commenter, some banks include certain
overhead and fixed costs such as real estate and information technology
(IT) in the total collection cost line item, while others do not. This
commenter further asserted that the share of total collection costs
across an institution's divisions may result in variation of how they
report the Y-14 collection cost line item. In addition, this commenter
asserted that not all reporting banks include commissions paid to third
party collections agencies after a loan is charged off, which could
mean that the reported amount is underinclusive.
This same industry trade association commenter also asserted that
the Y-14 data on late fee income may be overstated. This commenter
asserted that the Y-14 item for late fee income is the sum of fees
assessed during the month minus fee reversals and refunds applied
during the month (which included reversals due to charge off).
According to this commenter, however, in accordance with banks' loss
mitigation practices, each month some delinquent accounts may be
modified through re-aging or converted into fixed payment plans, while
others may be closed in a debt settlement, without explicit reversal of
late fees but with concessions to the borrower. This commenter asserted
that these implicit reversals of fee income are not captured in the Y-
14 item for net fees assessed for some issuers, which therefore may
overstate those issuers' realized late fee income.
Although several commenters stated that there were potential
variations in the Y-14 data, the CFPB has determined that such data are
relevant and an important source of information on total collection
costs and late fee income. As discussed below, the CFPB notes that the
Y-14 data contains 10 years of data that is collected directly from
certain Larger Card Issuers by the Board, using its supervisory powers,
and these issuers accounted for just under 70 percent of outstanding
balances on U.S. consumer credit cards as of year-end 2022. The Y-14
dataset contains data fields that are clearly worded to collect data
relevant to this rulemaking, such as late fee income and collection
expenses. The CFPB notes that many of the studies cited by industry
commenters, and discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii) in part VII, used smaller subsets of the Y-14 data or
notably similar precursors for their analysis related to late fees and
late payments. The CFPB recognizes that there may be some potential
variation in the Y-14 data collected based on the variation of inputs
from card issuers, but as discussed below, the CFPB has determined that
some variations in the costs that issuers' consider to be collection
costs are consistent with the cost analysis provisions in Sec.
1026.52(b)(1)(i) and are not likely to impact the analysis related to
the $8 late fee safe harbor threshold for Larger Card Issuers set forth
in the section-by-section analysis of Sec. 1026.52(b)(2)(ii).
With respect to the argument that some issuers may exclude post-
charge off amounts from the total collection costs line item, the plain
definition provided by the Board for such data contains no such
exclusion. The total collection costs line item instructs issuers to
report ``costs incurred to collect problem credits that include the
total collection cost of delinquent, recovery, and bankrupt accounts''
(emphasis added). Given that the definition is inclusive of total
collection costs, the CFPB has determined it appropriately relied upon
this line item.
In addition, as explained in the 2023 Proposal and above, this
total collection costs line-item requests cost data that are generally
consistent with the collection costs that may appropriately be
considered under the cost analysis provisions in Sec.
1026.52(b)(1)(i), except with respect to post-charge-off collection
costs.
Current comment 52(b)(1)(i)-6.i provides that for purposes of Sec.
1026.52(b)(1)(i), the costs incurred by a card issuer as a result of
late payments include the costs associated with the collection of late
payments, such as the costs associated with notifying consumers of
delinquencies and resolving delinquencies (including the establishment
of workout and temporary hardship arrangements). The Y-14 total
collection costs line item, therefore, provides a source of data that
enables the CFPB to examine more than a decade of late fee collection
cost information that is relevant to the rule.
The one difference in the data, as discussed in the CFPB's 2023
Proposal, is that the Board's Y-14 late fee cost information includes
post-charge off collection costs. As a result, and as described in
detail in the proposal, the CFPB used a ratio based on debt collection
agreements to appropriately limit the total collection costs to pre-
charge off collection costs. With respect to the one comment that some
issuers may not include commissions paid to third party collections
agencies after a loan is charged off when reporting total collection
costs in the Y-14 data, the CFPB recognizes that some issuers may not
report post-charge-off costs but would expect that these issuers are
outliers since the plain language of the instruction for the Y-14 data
asks for total collection costs, which would cover both pre-charge-off
and post-charge-off collection costs. In addition, the comments do not
suggest that most card issuers exclude post-collection costs from the
Y-14 data. As such, the CFPB has determined that it is appropriate to
exclude the estimated ratio of post-charge-off collection costs from
the Y-14 data for total collection costs when setting the safe harbor
amount to be consistent with the collection costs that may be
considered for purposes of the cost analysis provisions in Sec.
1026.52(b)(1)(i).
The CFPB also recognizes that there may be some variation in the
particular costs that issuers report in the Y-14 total collection costs
line item with respect to late payments. For example, several trade
association commenters indicated that some banks include certain
overhead and fixed costs such as real estate and IT in the total
collection cost line item, while others do not. Nonetheless, the CFPB
has determined that these variations do not undermine the reliance on
this data field to help the CFPB determine total collection costs
related to late payments, particularly given that the total collection
costs line
[[Page 19139]]
item is nearly the same as the definition for collection costs in the
rule, and that this data field allows the CFPB to examine 10 years of
data that were not available at the time of the original rule.
The CFPB notes that the cost analysis provisions in Sec.
1026.52(b)(1)(i) also would involve a certain amount of variability
from issuer to issuer in terms of which costs the issuer determines are
related to collecting late payments for purposes of determining late
fees amounts. As a general matter, if a card issuer is using the cost
analysis provisions Sec. 1026.52(b)(1)(i), the card issuer has the
responsibility to determine whether certain costs it incurs relate to
the collection of late payments based on all relevant facts and
circumstances, within the framework set forth in Sec. 1026.52(b)(1)(i)
and related commentary. For example, while not all overhead costs would
be costs of collecting late payment, some overhead costs may be
incurred as a result of collecting late payments, depending on all the
relevant facts and circumstances. A card issuer, however, must be able
to demonstrate to the regulator responsible for enforcing compliance
with TILA and Regulation Z that its determination is consistent with
Sec. 1026.52(b)(1)(i) and related commentary.\99\ Thus, the CFPB has
determined that that some variations in the costs that issuers'
consider to be collection costs are consistent with the cost analysis
provisions in Sec. 1026.52(b)(1)(i) and are not likely to impact the
analysis related to the $8 late fee safe harbor threshold for Larger
Card Issuers set forth in the section-by-section analysis of Sec.
1026.52(b)(2)(ii). The CFPB also notes that many of the studies cited
by industry commenters, and discussed in the section-by-section
analysis of Sec. 1026.52(b)(1)(ii) in part VII, used smaller subsets
of the Y-14 data or notably similar precursors for their analysis
related to late fees and late payments. As such, the Y-14 data is more
than sufficient to make appropriate estimates of (1) the collection
costs that the Y-14 issuers incur in collecting late payments for
purposes of guiding the CFPB in determining an appropriate safe harbor
threshold amount for late fees charged by Larger Card Issuers; and (2)
how collection costs for Larger Card Issuers change over time in
relation to changes in the CPI.
---------------------------------------------------------------------------
\99\ The CFPB's determinations are consistent with how the Board
viewed the costs analysis provisions when it adopted its version of
these provisions in Sec. 226.52(b)(1)(i). 75 FR 37526 at 37536. See
also id. at 37540 where the Board discussed whether all overhead
costs should be excluded from the cost analysis provisions and noted
that it believes that the determination of whether certain costs are
incurred as a result of violations of the account terms or other
requirements should be made based on all the relevant facts and
circumstances.
---------------------------------------------------------------------------
With respect to the late fee income reported in the Y-14 data, some
industry commenters suggest that the reported late fee income may be
overinclusive because it includes late fees where there has not been an
explicit reversal of late fees, yet there have been concessions to the
borrower as a result of delinquent accounts being modified through re-
aging or converted into fixed payment plans or closed in a debt
settlement. Although there may be instances where the late fees are
waived, subject to a concession, or otherwise removed or reduced, the
CFPB has determined that some overinclusion based on fee waivers would
not significantly impact the ratio of pre-charge-off collection costs
to late fee income discussed in the section-by-section analysis of
Sec. 1026.52(b)(1)(ii).
Further, in response to the commenter, the CFPB also notes the fact
that certain fees may be waived is generally consistent with the fact
that the cost analysis provisions only permit certain uncollected fees
to be considered under Sec. 1026.52(b)(1)(i). Specifically, comment
52(b)(1)(i)-5 provides that for purposes of Sec. 1026.52(b)(1)(i), a
card issuer may consider fees that it is unable to collect when
determining the appropriate fee amount under the cost analysis
provisions. Fees that the card issuer is unable to collect include fees
imposed on accounts that have been charged off by the card issuer, fees
that have been discharged in bankruptcy, and fees that the card issuer
is required to waive in order to comply with a legal requirement (such
as a requirement imposed by 12 CFR part 1026 or 50 U.S.C. app. 527).
However, fees that the card issuer chooses not to impose or chooses not
to collect (such as fees the card issuer chooses to waive at the
request of the consumer or under a workout or temporary hardship
arrangement) are not relevant for purposes of determining the late fee
amount under the cost analysis provisions.
The CFPB also notes that it has repeatedly provided opportunities
for issuers to provide specific data about their late fees, including
in an ANPR, and it has carefully considered all such data that were
provided, in addition to seeking out and considering additional data on
its own. The Y-14 data provide the best means for the CFPB to examine
relevant collections costs and late fee income data in order to
determine what costs are incurred and to guide its determination of an
appropriate safe harbor threshold for late fees, except with respect to
Smaller Card Issuers, as discussed in part VI below. The CFPB is not
using the Y-14 collection costs and late fee income data to cap the
late fee amounts that issuers can charge. If the $8 safe harbor amount
adopted as part of this final rule for those issuers that are subject
to this 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 consistent with the cost analysis
provisions in Sec. 1026.52(b)(1)(i) and the requirements in Sec.
1026.52(b)(2). In other words, to the extent that an issuer has higher
costs and determines the safe harbor amount is too low based on its own
cost analysis calculation, that issuer may charge a higher late fee.
The Y-14 data, therefore, are not used to create a limit on fees, but
rather to ensure that the CFPB's discretionary safe harbor is
appropriate and consistent with the statutory requirement that is
intended to limit fees to those that are ``reasonable and
proportional'' to the late payment.
Thus, for the reasons discussed above, the CFPB has determined that
it is appropriate to use the Y-14 data for total collection costs and
late fee income in this final rule to estimate (1) the collection costs
that the Y-14 issuers incur in collecting late payments and the late
fee income they collect for purposes of guiding the CFPB in determining
an appropriate safe harbor threshold amount for late fees charged by
Larger Card Issuers; and (2) how collection costs for Larger Card
Issuers change over time in relation to changes in the CPI.
Y-14 Data Do Not Include Cost Information for Smaller Issuers
As discussed in part VI below, many smaller issuers and industry
trade associations, several individual consumers on behalf of credit
unions, one Member of Congress, and the Office of Advocacy, an
independent office within the SBA, expressed concern that the CFPB's
analysis of pre-charge-off costs from the Y-14 issuers does not
accurately represent the collection costs for late payments of smaller
issuers. These comments are discussed in more detail in part VI.
D. The Final Rule
Consistent with the 2023 Proposal, the CFPB considered four primary
data sources in developing this final rule: (1) Y-14; (2) Y-14+; (3)
credit card debt collection data received from an information order
made pursuant to section 1022(c)(4) of the CFPA; and (4)
[[Page 19140]]
the CFPB's Credit Card Agreement Database.
Y-14 Data
For the reasons discussed above, the CFPB has determined that it is
appropriate to consider the Y-14 data as one basis for adopting the
changes to Regulation Z contained in this final rule. Prior to issuing
the 2023 Proposal, the Y-14 data received by the CFPB covered the
period from the middle of 2012 through September 2022 and are provided
by certain Larger Card Issuers that are covered by the $8 amount. These
issuers accounted for just under 70 percent of outstanding balances on
U.S. consumer credit cards as of year-end 2022. Consistent with the
2023 Proposal, with respect to credit card data, in this final rule,
the CFPB generally uses the complete portfolio data (including late fee
income and collection costs) for all the card issuers included in the
data collection. The CFPB also generally uses 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. Consistent with the 2023 Proposal, the CFPB for this final
rule 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 non-zero data on late fee income, collection
costs, late fee amounts, and total required payments in the Y-14 data.
For this final rule, the CFPB relied upon the data in the proposal
for its analysis. After issuing the 2023 Proposal, the CFPB received 14
more months of data for the Y-14 issuers (account-level data through
November 2023, portfolio data up to August 2023). These additional data
did not change the CFPB's original findings or rationale as set forth
in 2023 Proposal. Because the data are relevant, however, the CFPB has
determined that it is appropriate to explain how those new data
supplement and support its original data and analysis. The CFPB's use
of the Y-14 data (including the supplemental data received after the
2023 Proposal was issued) is discussed in more detail in part VII.
Determination of Post-Charge-Off Collection Costs Using Credit Card
Debt Collection Data Received From an Information Order Made Pursuant
to Section 1022(c)(4) of the CFPA
In addition, for the reasons discussed above, and consistent with
the 2023 Proposal, the CFPB has determined that it is appropriate to
subtract an estimate of the post-charge-off collection costs from the
total collection costs Y-14 data. Consistent with the 2023 Proposal,
for this final rule, the CFPB used commissions paid to third-party debt
collectors for charged-off accounts to estimate the percentage of
collection costs that may occur after charge-off. The CFPB 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. Consistent with the 2023 Proposal, the CFPB's 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.\100\
---------------------------------------------------------------------------
\100\ 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 CFPB 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 CFPB
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).
---------------------------------------------------------------------------
As discussed above, for the 2023 Proposal, the CFPB estimated from
debt collection reports the commission expenses that six major card
issuers paid in 2019 and 2020 and based on those data, the CFPB
estimated that these post-charge-off costs are around 25 percent of
total collection costs for these issuers. Based on those data, for the
2023 Proposal, the CFPB 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).
For this final rule, the CFPB relied upon the data in the proposal
for its analysis. In addition, after the Proposal's release--as part of
the CFPB's 1022(b)(2) market gathering for purposes of its CARD Market
Report--the CFPB also obtained updated data for 2021 and 2022 related
to commission expenses that the CFPB collected for its most recent
biennial review of the consumer credit card market released in October
2023. These additional data did not change the CFPB's original findings
or rationale. Because the data are relevant, however, the CFPB has
determined it is appropriate to explain how those new data supplement
and support its original data and analysis. Based on commission
expenses that six major card issuers paid in 2021 and 2022 to third-
party debt collectors for charged-off accounts, the CFPB estimated that
these post-charge-off costs are around 20 percent of total collection
costs for these issuers; the average ratio was 20 percent in 2021 and
21 percent in 2022. In 2021, the median ratio of estimated post-charge-
off commission costs to annual collection costs for the six major
issuers surveyed was 19.0 percent; in 2022, it was 23.7 percent. Thus,
for 2021 and 2022, the CFPB estimated that pre-charge-off collection
costs were equal to 80 percent of the collection costs. These new data
indicate pre-charge-off collection costs in 2021 and 2022 that were
similar, though slightly higher than in the proposal and, therefore,
supplemented and supported the CFPB's data and analysis. Both the
estimates of pre-charge-off collection costs for Y-14 issuers used in
the 2023 Proposal (based on the 75 percent estimate) and developed
using the supplemental information (based on the 80 percent estimate)
are discussed in more detail in the section-by-section analysis of
Sec. 1026.52(b)(1)(ii) for purposes of its analysis related to the
final changes to the safe harbor thresholds for late fees for Larger
Card Issuers.
Y-14+ Data
Consistent with the 2023 Proposal, the CFPB also considered Y-14+
data in developing this final rule. As noted above, the Y-14+ data
include confidential information from the Board's Y-14 data and a
diverse group of specialized issuers. In the 2023 Proposal, these
additional data that included specialized issuers were used to
calculate the average late fee charged by Y-14+ issuers in 2019 and
2020. As explained in the proposal, in 2019 and 2020, the average late
fee charged by issuers in the Y-14+ data was $31. The updated data from
the Y-14+ issuers further support this original analysis because, based
on the CFPB calculations, they show that the average late fee charged
by those issuers was $31 in 2021 and $32 in 2022.
In addition, after issuing the 2023 Proposal, the CFPB obtained
confidential total collection costs and late fee income data from
specialized issuers that are included in the Y-14+ data. In particular,
the CFPB requested from these issuers' data for total
[[Page 19141]]
collections costs and late fee revenue using the same instructions for
this data request that are used in the Y-14 data collection. These
additional data did not change the CFPB's original findings or
rationale. Because the data are relevant, however, the CFPB has
determined it is appropriate to explain how those new data supplement
and support its original data and analysis. These additional data are
consistent with the CFPB's determination in this final rule based on
the data used for the proposal related to Y-14 issuers that the average
Larger Card Issuer would recover pre-charge-off collection costs even
if late fees were reduced to one-fifth of their current level.
The average late fees charged by the Y-14+ issuers in 2020 and 2022
and the data on total collections costs and late fee income from the
specialized issuers in the Y-14+ are discussed in more detail in the
section-by-section analysis of Sec. 1026.52(b)(1)(ii).
CFPB's Credit Card Agreement Database
As noted above, in the 2023 Proposal, the CFPB discussed a 2022
review conducted by the CFPB of credit card agreements submitted to the
CFPB's Credit Card Agreement Database in the fourth quarter of 2020 to
determine the maximum late fee amount charged across agreements by
issuers submitting to that database. Since the 2023 Proposal was
issued, the CFPB in 2023 conducted a subsequent review of agreements
submitted to that database as of the second quarter of 2023 to
determine the maximum late fee amount charged across agreements by
issuers submitting to that database.
These additional data did not change the CFPB's original findings
or rationale. Because the data are relevant, however, the CFPB has
determined it is appropriate to explain how those new data supplement
and support its original data and analysis. As discussed in part II.E,
the results of the 2023 survey of agreements to determine the maximum
late fee amount charged across agreements by issuers submitting to that
database are consistent with the results of the 2022 survey of
agreements with respect to the maximum late fee amount charged across
agreements by issuers submitting to that database. The data from the
2022 review of agreements and the 2023 review of agreements are
discussed in more detail in part II.E and the section-by-section
analysis of Sec. 1026.52(b)(1)(ii).
VI. Certain Provisions Not Applicable to Issuers That Together With
Their Affiliates Have Less Than One Million Open Credit Card Accounts
A. The CFPB's Proposal
The 2023 Proposal would have applied the revisions in the proposal
to all card issuers of credit card accounts under an open-end (not
home-secured) consumer credit plan. Specifically, the 2023 Proposal
would have applied the following proposed revisions to all issuers of
such accounts: (1) the $8 late fee safe harbor threshold and the
elimination of the higher late fee safe harbor amount for subsequent
violations; (2) the elimination of the annual adjustments for the
proposed $8 safe harbor threshold, (3) the restriction on late fee
amounts to 25 percent of the required minimum payment; and (4) the
clarification in comment 52(b)(1)(i)-2.i that the collection costs to
calculate penalty fees under the cost analysis provisions does not
include post-charge-off collection costs.
With respect to proposed revisions to the late fee safe harbor
amounts, in the 2023 Proposal, the CFPB recognized its estimates of
pre-charge-off collection costs incurred by card issuers were based on
late fee income and collection cost data from larger issuers that
report to the Y-14 collection, as well as data from some additional Y-
14+ issuers. The CFPB did not have data equivalent to the Y-14 data for
smaller issuers' pre-charge-off collection costs, but the CFPB stated
that it had no reason to expect that smaller issuers would have
substantially higher pre-charge-off collection costs than larger
issuers. Based on a 2022 review of about 2,500 credit card agreements
from over 500 card issuers (as discussed in part II.E), the CFPB also
noted that smaller issuers appeared to charge lower late fee amounts,
and therefore, any reduction in late fee amounts would have a
proportionately smaller impact on their late fee income. Specifically,
in the 2023 Proposal, the CFPB noted that (1) in 2020, the average late
fee charged by larger issuers included in the Y-14+ data was $31; \101\
(2) the CFPB collects card agreements from more smaller issuers than
issuers for which the CFPB has financial data; and (3) based on the
review of agreements, as described above in part II.E, the CFPB
established that issuers outside the top 20 by outstanding credit card
balances charged smaller late fees in 2020 than issuers within the top
20.\102\ In the 2023 Proposal, the CFPB solicited comment on this
analysis and the potential impact on smaller issuers of the proposed $8
safe harbor amount, including whether smaller issuers could provide
data or evidence related to the cost of collecting late payments. The
CFPB also solicited 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.
---------------------------------------------------------------------------
\101\ 2021 Report, at 55. The average late fee charged by
issuers included in the Y-14+ data is based on the Y-14 data and
data collected from other specialized card issuers in response to an
information order pursuant to section 1022(c)(4) of the CFPA.
\102\ Late Fee Report, at 14.
---------------------------------------------------------------------------
For the reasons discussed below, including the CFPB's review of the
comment letters about collection costs, as well as the CFPB's concerns
about impact on consumers and competition, the CFPB is not adopting at
this time certain proposed changes for Smaller Card Issuers as defined
in new Sec. 1026.52(b)(3). The term ``Smaller Card Issuer'' is defined
to mean a card issuer that together with its affiliates had fewer than
one million open credit card accounts as defined in Sec. 1026.58(b)(6)
for the entire preceding calendar year.\103\ Specifically, the
following proposed changes are not being adopted at this time for
Smaller Card Issuers (1) the $8 late fee safe harbor threshold and the
elimination of the higher late fee safe harbor amount for subsequent
violations; and (2) the elimination of the annual adjustments for the
safe harbor threshold dollar amounts.
---------------------------------------------------------------------------
\103\ See supra note 5.
---------------------------------------------------------------------------
For these Smaller Card Issuers, the safe harbor thresholds in Sec.
1026.52(b)(1)(ii)(A) through (C) will continue to apply to late fees
that they charge (as revised in this final rule pursuant to the annual
adjustment provisions in Sec. 1026.52(b)(1)(ii)(D)). In addition, the
annual adjustment provisions for the safe harbor dollar amount
thresholds to reflect changes in the CPI in Sec. 1026.52(b)(1)(ii)(D)
will continue to apply to late fees imposed by Smaller Card Issuers.
Also, as discussed in the section-by-section analysis of Sec.
1026.52(b)(2)(i), the proposed provisions to restrict late fee amounts
to 25 percent of the required minimum payment are not being finalized
in this final rule with respect to any card issuers, including Smaller
Card Issuers. In contrast, the clarification in comment 52(b)(1)(i)-2.i
that the collection costs for calculating penalty fee amounts under the
cost analysis provisions in Sec. 1026.52(b)(1)(i) do not include post-
charge-off collection costs is being adopted for all card issuers,
including Smaller Card Issuers, because this provision is intended to
[[Page 19142]]
clarify the existing rule and commentary.
B. Comments Received
Impact on credit unions and small card issuers--$8 late fee safe
harbor amount. Many banks and credit unions, industry trade
associations, and individual consumers on behalf of credit unions, one
Member of Congress, and the Office of Advocacy, an independent office
within the SBA, expressed concern that the CFPB's estimated pre-charge-
off collection costs for Y-14 issuers that the CFPB used in its
analysis to support the proposed $8 do not accurately represent the
pre-charge-off collection costs for late payments of smaller issuers.
Many credit unions and individuals on behalf of credit unions and
one industry credit union trade association commenter asserted that (1)
credit union call report data indicate that credit card late fees
incurred per member per year are only $2.65; (2) annual total pre-
charge-off collection costs per credit card account offered by credit
unions amounted to $0.33, which is 10 cents higher than the pre-charge-
off collection costs per credit card account for large issuers that the
CFPB notes in the proposal; (3) and the ratio of monthly late fees to
total pre-charge-off costs for the credit union industry is 2.8,
compared to 5.7 for large issuers in 2022. These commenters also
asserted that credit unions (1) have much lower fee-to-cost ratios than
big card issuers because credit unions are not-for-profit, community
focused, relationship-oriented financial institutions; and (2) face
higher pre-charge-off collection costs as compared to big banks that
can achieve economies of scale based on their numbers of customers and
employees.
Many credit unions and individuals on behalf of credit unions and
three industry trade association commenters asserted that Federal
credit unions did not have the same options as larger issuers to
recover potential lost revenue from late fees, and this could impact
their ability to offer credit cards to consumers. Specifically, these
commenters explained that Federal Credit Union Act limits Federal
credit unions' ability to increase APRs in order to recover revenue
losses resulting from a lower late fee safe harbor amount. Two of these
industry trade associations indicated that National Credit Union
Administration (NCUA) Board's action in January 2023 regarding the
Federal Credit Union Act currently imposes a cap of 18.0 percent on the
APR.\104\ The other industry trade association asserted that the
Federal Credit Union Act makes the credit union business model
fundamentally different than that of the largest credit card issuers
and that these limitations should not be ignored by the CFPB.
---------------------------------------------------------------------------
\104\ The Federal Credit Union Act generally limits Federal
credit unions to a 15 percent interest rate ceiling on loans.
However, the NCUA Board may establish a temporary, higher rate for
up to 18 months after considering certain statutory criteria.
National Credit Union Administration Letter (23-FCU-02), Permissible
Loan Interest Rate Ceiling Extended (Mar. 2023), <a href="https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/permissible-loan-interest-rate-ceiling-extended-2">https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/permissible-loan-interest-rate-ceiling-extended-2</a>. A January 2023
NCUA Board action established a temporary 18 percent interest rate
ceiling through September 10, 2024. See id.
---------------------------------------------------------------------------
Many credit unions and individuals on behalf of credit unions and
one industry credit union trade association commenter asserted that
credit unions already offer some of the lowest late fees in the market,
which benefits consumers. One of the credit union commenters asserted
that its net earnings are returned to members in the form of higher
annual percentage yields (APYs), lower APRs, and greater servicing.
More than fifty individual commenters on behalf of credit unions
asserted that the proposal, if adopted, would have potentially massive
unintended consequences, including that some credit unions would leave
the market. They asserted that this, in turn, could limit credit
availability and increase industry consolidation, and would restrict
credit unions' ability to offer solutions to consumers experiencing
real financial hardship. A bank and a community bank trade association
commenter expressed similar comments and indicated that the 2023
Proposal, if adopted, ultimately would force many community banks to
exit the credit card market, leaving consumers, and in particular,
rural consumers, fewer options for financial services.
A credit union trade association commenter asserted that the 2023
Proposal, if adopted, would (1) make it more difficult for credit
unions to balance safety and soundness considerations with the desire
to provide credit access to all consumers, especially those building or
rebuilding their credit; and (2) further consolidate credit card
issuers, strengthening the largest providers that may compensate lower
late payment fees with product add-ons and other practices that are not
consumer friendly. This commenter also asserted that (1) use of the
cost-analysis provisions are not feasible for credit unions; (2) while
the risk of operating outside of the safe harbor provision is common
for the largest credit card issuers with large legal departments, not-
for-profit credit unions are in a different position; (3) even when the
fee is reasonable, it would be a safety and soundness concern to charge
more than $8 as the risk of class action lawsuits continues to grow;
(4) defending a reasonable fee through litigation is cost prohibitive
for a not-for-profit financial institution and could severely impact
their operations; and (5) while the safe harbor late fee amount
proposed would not be a legal cap it may become an effective cap for
credit unions, once again only benefiting the largest credit card
issuers.
Many credit unions and individuals on behalf of credit unions urged
the CFPB to exempt credit unions from its rulemaking as credit unions
do not profit from any fees assessed to their members and the data are
clear that credit unions already offer some of the lowest fees
available in the market. Some of these commenters indicated that if the
CFPB is hesitant to exempt just a particular type of financial
institution, in light of the considerable impact that the 2023 Proposal
is likely to have on small entities, the CFPB should consider a broader
exemption for small entities, currently defined by the SBA's size
standard of $850 million in total assets. These commenters asserted
this would allow smaller entities to continue to maintain their ability
to cover the costs of offering credit card accounts and remain
competitive in the marketplace. An industry credit union trade
association commenter asserted that one possible way to negate the
impact of the 2023 Proposal on credit unions is to scale the rule for
larger and smaller issuers.
One Member of Congress noted from the Congressional Research
Service that smaller issuers sometimes serve more subprime cardholders
who are more likely to make late payments which therefore implies that
certain smaller issuers would face higher than average collection costs
from late payments. The commenter noted that although the CFPB's
proposal asserts that credit cards represent only a small percentage of
credit unions' assets and revenues, the loss of late fee revenue would
represent a distinct impact on credit unions because as nonprofits,
they are unable to raise funds from stockholders. This commenter
advised that the CFPB either work to ensure that the cost analysis
provisions--an alternative to the safe harbor--would not impose undue
burdens on small issuers or that the CFPB consider a separate safe
harbor for
[[Page 19143]]
smaller issuers that more accurately reflects their unique costs.
The Office of Advocacy, an independent office within the SBA,
criticized the CFPB for insufficiently considering the extent to which
the proposed $8 safe harbor amount would cover the collection costs of
smaller issuers. This agency asserted that (1) determining a late fee
amount under the cost analysis provisions may not be feasible for
smaller institutions; (2) small institutions may not have ready access
to professional staff or consultants to develop a late fee that
qualifies under the cost analysis provisions, and also may lack the
information systems to provide the necessary support to determine the
late fee amount under those provisions; and (3) for that reason,
smaller institutions may rely on safe harbors to be certain that they
are complying with the law. As such, this agency noted that an adequate
safe harbor amount that reflects the costs that small entities incur in
processing late payments is necessary to prevent small institutions
from incurring potential legal fees if they were to use the incorrect
late fee amount under the cost analysis provisions. The commenter
further asserted that consumers, including small businesses, may choose
to obtain their credit cards from small depository institutions that
offer credit cards for a variety of reasons, including the ability of
consumers with low credit scores to obtain a credit card that may
otherwise be unavailable. The commenter also expressed concern that if
the safe harbor amount does not cover the costs of providing the
service, small depository institutions may decide to stop issuing
credit cards.
Impact on credit unions and small card issuers--elimination of
annual adjustment. Several banks and credit unions, and a few credit
union trade associations urged the CFPB to consider the impact
eliminating the annual adjustments for safe harbor threshold amounts to
reflect changes in the CPI may have on credit unions and small card
issuers. For example, one credit union and one credit union trade
association asserted that credit unions typically have higher than
average per account collection costs than larger banks. This credit
union trade association further asserted that credit unions currently
report that fee revenue does not cover the full cost of delinquency and
collections. Another credit union trade association asserted that
credit unions have less diversified revenue streams to make up for
costs in other areas. A bank commenter indicated that small issuers
have a smaller credit base by which economic effects may be mitigated.
Yet another credit union trade association asserted that (1)
elimination of the annual adjustments would increase credit card losses
and that Federal credit unions are subject to interest rate caps; and
(2) credit unions would have a limited ability to recoup credit card
losses.
Impact on credit unions and small card issuers--25 percent
limitation. As discussed in more detail in the section-by-section
analysis of Sec. 1026.52(b)(2)(i), several banks, credit unions and
industry trade associations and one individual commenter urged the CFPB
to consider the disproportionate impact the 25 percent limitation may
have on credit unions, small card issuers, and private label card
issuers.
Lack of SBREFA panel. Many banks and credit unions, industry trade
associations, and individuals on behalf of credit unions, the Office of
Advocacy, an independent office within the SBA, and one law firm
representing several card issuers asserted that the 2023 Proposal, if
adopted, would have a significant economic impact on a substantial
number of small entities (SISNOSE) and thus the CFPB is required to
hold a small business review panel (SBREFA panel) under the Regulatory
Flexibility Act (RFA) prior to finalizing the rulemaking. These
comments are discussed in more detail in part X.
C. The Final Rule
For the reasons discussed below, the CFPB is not adopting at this
time the following proposed changes for Smaller Card Issuers that are
defined in Sec. 1026.52(b)(3) as a card issuer that together with its
affiliates had fewer than one million ``open credit card accounts'' as
defined in Sec. 1026.58(b)(6) for the entire preceding calendar year:
\105\ (1) the $8 late fee safe harbor threshold and the elimination of
the higher late fee safe harbor amount for subsequent violations; and
(2) the elimination of the annual adjustments for the safe harbor
threshold. For Smaller Card Issuers, at this time, the safe harbor
thresholds set forth in Sec. 1026.52(b)(1)(ii)(A) through (C) will
continue to apply to late fees charged by Smaller Card Issuers (as
revised in this final rule pursuant to the annual adjustment provisions
in Sec. 1026.52(b)(1)(ii)(D)). In addition, the annual adjustment
provisions for the safe harbor thresholds to reflect changes in the CPI
in Sec. 1026.52(b)(1)(ii)(D) will continue to apply to late fees
imposed by Smaller Card Issuers. Also, as discussed in the section-by-
section analysis of Sec. 1026.52(b)(2)(i), the proposed provisions to
restrict late fee amounts to 25 percent of the required minimum payment
are not being finalized in this final rule with respect to any card
issuers, including Smaller Card Issuers. In contrast, the clarification
in comment 52(b)(1)(i)-2.i that the collection costs for calculating
penalty fee amounts under the cost analysis provisions in Sec.
1026.52(b)(1)(i) do not include post-charge-off collection costs is
being adopted for all card issuers, including Smaller Card Issuers,
because this provision is intended to clarify the existing rule and
commentary.
---------------------------------------------------------------------------
\105\ See supra note 5.
---------------------------------------------------------------------------
The CFPB also explains below that the limit to qualify as a Smaller
Card Issuers is set at one million open credit card accounts. The CFPB
has determined that a one million open credit card account limit for
this final rule is appropriate because comment letters have highlighted
several concerns specific to these Smaller Card Issuers. The CFPB has
determined that, based on comment letters from smaller issuers, the
2023 Proposal's late fee $8 safe harbor threshold would have impacted
Smaller Card Issuers more significantly than Larger Card Issuers, and
that Smaller Card Issuers might not have been as capable of responding
by using the cost analysis provisions to cover their pre-charge-off
collection costs related to late payments. Taken together, this result
could harm consumers and the credit card market as a whole.
The CFPB has determined to act cautiously and ensure that all card
issuers, large and small, can at least cover pre-charge-off collection
costs with their late fees. If Smaller Card Issuers have higher pre-
charge-off collections costs than Larger Card Issuers, Smaller Card
Issuers may need to rely on the cost analysis provisions in Sec.
1026.52(b)(1)(i) to cover their pre-charge-off collection costs,
resulting in heightened compliance burden for issuers with less assets
to cover them. Alternatively, Smaller Card Issuers may choose to forgo
those compliance burdens by using the safe harbor threshold amount even
if it does not cover their pre-charge-off collection costs rather than
use the cost analysis provisions in Sec. 1026.52(b)(1)(i). The CFPB
anticipates that under this final rule Larger Card Issuers generally
will recoup their applicable pre-charge-off collection costs using late
fees, either using the safe harbor (which is more likely to be enough
for the average Larger Card Issuer) or using the cost-analysis
provisions (the compliance
[[Page 19144]]
burdens of which Larger Card Issuers are more capable of absorbing).
Since the CFPB recognizes that Smaller Card Issuers may face additional
challenges in recouping pre-charge off collection costs using late
fees, it is exercising caution and not finalizing the proposal with
regard to Smaller Card Issuers.
Smaller Card Issuer commenters indicated that if the 2023 Proposal
were adopted, they might leave the market or cease offering credit
cards to certain consumers, particularly those with lower credit
scores. It is unclear to the CFPB whether Smaller Card Issuers would
actually leave the market entirely because they could not cover their
pre-charge-off collection costs through the proposed $8 late fee safe
harbor threshold. However, if they did, the CFPB is concerned about the
potential detriment of these actions to consumers. Based on comments,
the CFPB recognizes that consumers may choose to obtain their credit
cards from small depository institutions that offer credit cards for a
variety of reasons, including the access to credit cards issued by
small credit unions with substantially lower annual percentage rates
\106\ and the ability of consumers with low credit scores to obtain a
credit card that may otherwise be unavailable. Further, the top 10
issuers by average credit card outstandings represented 83 percent of
credit card loans in 2022,\107\ and a further reduction in competition
could be detrimental to all consumers in the credit card market.
---------------------------------------------------------------------------
\106\ For Y-14+ issuers, the average APR was 22.7 percent for
general purpose cards at the end of 2022, while Federal credit
unions are limited to charging an APR of 18 percent. See supra note
104; 2023 Report, at 53.
\107\ 2023 Report, at 19.
---------------------------------------------------------------------------
Based on its review of comment letters, data from the proposal, and
market expertise, the CFPB has determined that the appropriate
definition of ``Smaller Card Issuer'' is issuers that together with
their affiliates had fewer than one million open credit card accounts
for the entire preceding calendar year.\108\ By using the one million
open credit card account limit to qualify as a Smaller Card Issuers,
based on its review of both public and confidential data, the CFPB
expects the new $8 safe harbor amounts would apply to approximately the
largest 30 to 35 issuers by outstanding balances (out of around 4,000
financial institutions that offer credit cards). This would cover over
95 percent of the of the total outstanding balances in the credit card
market as of the end of 2022.
---------------------------------------------------------------------------
\108\ See supra note 5.
---------------------------------------------------------------------------
The new safe harbor limit for Larger Card Issuers, which covers
issuers that together with their affiliates have one million or more
open credit card accounts, is consistent with the Y-14 data used in the
CFPB's proposal to determine pre-charge off collection costs, as it
would cover the Y-14 issuers for which the CFPB had total collections
and late fee revenue data prior to the 2023 Proposal, the specialized
issuers in the Y-14+ for which the CFPB obtained total collections and
late fee revenue data after issuing the 2023 Proposal, and about a
dozen other similarly sized issuers with large credit card portfolios.
In choosing this threshold, the CFPB has determined it is appropriate
to limit the rule at this time to the larger issuers that either
submitted data to or had economies of scale similar to those issuers
that provided Y-14 and Y-14+ data because those data support the CFPB's
conclusion that the 2010 Final Rule's safe harbor amounts as to those
Larger Card Issuers were not reasonable and proportional to the costs
of the omission or violation, as required by the statute. For similar
reasons and administrability, the CFPB has determined that it is
appropriate at this time to only eliminate the annual adjustment
provisions in Sec. 1026.52(b)(1)(ii)(D) to the late fees charged by
Larger Card Issuers. As discussed in the section-by-section analysis of
Sec. 1026.52(b)(1)(ii)(D), the data the CFPB uses to compare
collections costs to changes in the CPI relate to certain Larger Card
Issuers (namely, the Y-14 issuers).
The CFPB recognizes that the new $8 safe harbor amount will apply
to about one dozen issuers for which the CFPB does not have total
collections data and late fee revenue data. Based on the CFPB's market
expertise and analysis of comment letters, the CFPB has determined that
it is appropriate to apply this new safe harbor amount to those issuers
because they have substantial credit card portfolios and, therefore,
the CFPB expects they will have economies of scale similar to the Y-14+
issuers in collecting late payments and the resources to use the cost
analysis provisions in Sec. 1026.52(b)(1)(i) to determine the late fee
if the $8 safe harbor threshold amount fails to cover pre-charge off
collections costs.
The CFPB has determined that basing the limitation on the number of
open credit card accounts, rather than total asset size for the
institution or bank holding company (such as the $100 billion threshold
for inclusion in the Y-14 data), or on the amount of credit card
outstanding balances held by the issuer, better captures card issuers
with larger credit card portfolios that may have similar economies of
scale to the Y-14 issuers but may not meet a threshold based on total
asset size or outstanding balances. The CFPB recognizes that some banks
or credit unions with smaller total assets than Y-14 issuers,
nonetheless, still may have significant credit card portfolios and
would benefit from economies of scales of larger card operations with
the resources to reasonably use the cost analysis provisions in Sec.
1026.52(b)(1)(i) to determine the late fee if the $8 safe harbor
threshold amount fails to cover pre-charge off collections costs, even
without other lines of business that could provide additional assets.
The CFPB also notes that its focus on the number of open credit card
accounts as opposed to total asset size or the amount of credit card
outstanding balances for purposes of this final rule is consistent with
the CFPB's focus on an issuers' number of open credit card accounts for
purposes of an exception to obligations of issuers to submit credit
card agreements to the CFPB under Sec. 1026.58.\109\
---------------------------------------------------------------------------
\109\ See Sec. 1026.58(c)(5).
---------------------------------------------------------------------------
VII. 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 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. Current
comment 7(b)(11)-4 also provides an example to illustrate how a card
issuer may meet the
[[Page 19145]]
standard set forth above, stating that a phrase indicating the late
payment fee could be ``up to $29'' complies with this standard.
The CFPB's Proposal
The 2023 Proposal would have amended 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).
Comments Received and the Final Rule
The CFPB received no comments on the proposed revisions to comment
7(b)(11)-4. This final rule adopts comment 7(b)(11)-4 as proposed. Even
though Smaller Card Issuers as defined in new Sec. 1026.52(b)(3) are
not subject to the new $8 late fee safe harbor threshold amount adopted
in Sec. 1026.52(b)(1)(ii) in this final rule, the CFPB has determined
it is useful to revise the late fee amount in the example to be $8,
consistent with the new $8 late fee safe harbor threshold amount that
applies to Larger Card Issuers.
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).
Current 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). Current comment
52(a)(1)-1 also provides four examples to illustrate the provision set
forth above. The two examples in current comment 52(a)(1)-1.i and iv
contain late fee amounts of $15.
The CFPB's Proposal
The 2023 Proposal would have amended 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 would be consistent with the proposed $8
late fee safe harbor amount set forth in proposed Sec.
1026.52(b)(1)(ii).
Comments Received and the Final Rule
The CFPB received no comments on the proposed revisions to comment
52(a)(1)-1.i and iv. This final rule adopts comment 52(a)(1)-1.i and iv
substantially as proposed, with minor changes to make clear that the
card issuer in the examples is not a Smaller Card Issuer as defined in
Sec. 1026.52(b)(3). Even though Smaller Card Issuers as defined in new
Sec. 1026.52(b)(3) are not subject to the new $8 late fee safe harbor
threshold adopted in Sec. 1026.52(b)(1)(ii) in this final rule, the
CFPB has determined it is useful to revise the late fee amounts in the
examples to be $8, consistent with the new $8 late fee safe harbor
threshold amount that applies to Larger Card Issuers. This final rule
also makes technical changes to cross references in comments 52(a)(1)-2
and 52(a)(1)-4.ii.C to conform to OFR style requirements.
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 the cost analysis
provisions in Sec. 1026.52(b)(1)(i) 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.\110\ 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.\111\
---------------------------------------------------------------------------
\110\ See comment 52(b)(2)(i)-1.
\111\ See comment 52(b)-1.
---------------------------------------------------------------------------
The CFPB's Proposal
In the 2023 Proposal, the CFPB proposed 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.\112\
---------------------------------------------------------------------------
\112\ As discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii)(C) below, the CFPB did not propose 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.
---------------------------------------------------------------------------
In addition, as discussed in more detail below, the CFPB proposed
to provide that the current provision in Sec. 1026.52(b)(1)(ii)(D)
that provides for annual adjustments for the safe harbor dollar amounts
to reflect changes in the CPI 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 CFPB proposed 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 CFPB also proposed one clarification that would apply to
penalty fees generally. Specifically, the CFPB proposed to amend
comment 52(b)(1)(i)-2.i to make it explicitly clear 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 CFPB did not propose 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 CFPB proposed
certain amendments to the commentary to Sec. 1026.52(b) introductory
text and (b)(1). Specifically, the CFPB proposed to amend comment
52(b)-1.i.A to make it explicitly clear 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 CFPB also proposed 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 have reduced the dollar amounts of late fees in the
example to reflect amounts that would be permissible under the CFPB's
proposals to lower the late fee safe harbor amount to $8 and to cap
late
[[Page 19146]]
fees at 25 percent of the required minimum payment. In addition, the
CFPB proposed 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 have helped to explain why the dollar
amounts for penalty fees other than late fees in the examples in the
commentary are different from the ones set forth in the regulatory text
in Sec. 1026.52(b)(1)(ii)(A) and (B).
The CFPB also proposed 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). Specifically, the CFPB proposed 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 CFPB
proposed to substantially amend the safe harbor provisions for late
fees, the CFPB proposed to remove references to late fees from the
illustrative examples in comment 52(b)(1)-1.i.C and replace them with
references to over-the-limit fees.
In addition, the CFPB proposed 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 have reduced the dollar amount of a late fee
in the example to reflect an amount that would be consistent with the
CFPB's proposal to lower the late fee safe harbor amount.
The CFPB solicited comment on all aspects of these proposed
amendments to the commentary to Sec. 1026.52(b) introductory text and
(b)(1), including comment on what additional amendments may be needed
to help ensure clarity and compliance certainty.
Comments Received and the Final Rule
The CFPB received no comments on the proposed clarifications of the
commentary to Sec. 1026.52(b) introductory text and (b)(1). For
purposes of clarity and compliance certainty, this final rule adopts
amendments to the commentary to Sec. 1026.52(b) introductory text and
(b)(1) substantially as proposed, with minor changes reflecting the
CFPB's decision not to finalize the new $8 late fee safe harbor amount
for Smaller Card Issuers as defined in new Sec. 1026.52(b)(3) or to
restrict late fee amounts to 25 percent of the required minimum
payment. Accordingly, consistent with the proposal, comment 52(b)-1.i.A
is revised 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
CFPB finds this clarification necessary given the slight variations in
terms used to describe late fees in Regulation Z. Also, consistent with
the proposal, the illustrative example of rounding the amount of a
penalty fee to the nearest dollar in comment 52(b)-2 is revised to
lower the late fee amounts to be consistent with the new $8 late fee
safe harbor amount for Larger Card Issuers. The CFPB finds that this
revision and similar revisions to the commentary discussed below are
helpful to facilitate compliance with the new $8 late safe harbor
amount for card issuers to which it applies.
Consistent with the proposal, this final rule also adds 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 threshold of $8
for late fees. In a minor change from the proposal, the comment also
clarifies that the $8 threshold is applicable to card issuers other
than Smaller Card Issuers as defined in Sec. 1026.52(b)(3) (namely,
Larger Card Issuers as that term is used in this document). This new
comment helps to explain why the dollar amounts for penalty fees set
forth in the examples in the commentary are different from the ones set
forth in the regulatory text in Sec. 1026.52(b)(1)(ii)(A) and (B).
In addition, this final rule amends the illustrative example in
comment 52(b)(1)-1.i.B to reflect a late fee amount consistent with the
$8 late fee safe harbor amount for Larger Card Issuers. In addition,
because the CFPB in this final rule is substantially amending the safe
harbor provisions for late fees with respect to Larger Card Issuers,
this final rule removes references to late fees from the illustrative
examples in comment 52(b)(1)-1.i.C and replaces them with references to
over-the-limit fees, the amounts of which remain the same in this final
rule for all card issuers. In addition, this final rule reduces the
amount of the late fee in the illustrative example in comment 52(b)(1)-
1.ii for consistency with the lower $8 late fee safe harbor amount for
Larger Card Issuers.
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 CFPB's Proposal
The CFPB did not propose to amend the text of Sec.
1026.52(b)(1)(i). However, for purposes of clarity and compliance
certainty, the CFPB proposed to amend comment 52(b)(1)(i)-2.i to make
it explicitly clear 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 CFPB proposed to amend comment 52(b)(1)(i)-2.i to make it
explicitly clear that 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
CFPB's proposal, therefore, would have made it explicit that for any
collection costs that a card issuer incurs
[[Page 19147]]
after an account has been charged off are not considered costs incurred
for purposes of Sec. 1026.52(b)(1)(i). The CFPB understood 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.'' \113\
---------------------------------------------------------------------------
\113\ 75 FR 37526 at 37538.
---------------------------------------------------------------------------
The CFPB solicited 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 CFPB also solicited 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.
Comments Received
Many consumer groups in a joint letter, a credit union, and a
credit union trade association expressed support for the CFPB's
proposal that comment 52(b)(1)(i)-2.i be amended 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 consumer groups indicated that card issuers consider
charged off accounts to be a loss, therefore, such accounts should be
considered a loan loss. The consumer groups also indicated that card
issuers build loss rates into the price of credit (e.g., interest,
including any penalty interest rate). The credit union trade
association noted that credit unions' late fees cover pre-charge off
collection costs.
As discussed below, many industry commenters, including several
trade associations, and a few individual commenters expressed concerns
with the CFPB's proposal that comment 52(b)(1)(i)-2.i be amended 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.
Relationship to late fees. Several credit unions and banks, a few
individual commenters, one law firm representing several card issuers,
and a few industry trade associations indicated that post-charge-off
costs, including collection costs, are related to late fees and should
not be distinguished from pre-charge-off costs. A trade association and
a credit union indicated that card issuers consider costs across the
entire span of a cardholder's account and charge-off recoveries are
accounted for in the overall profitability of a portfolio. Another
industry trade association commenter specifically indicated that
including the risk of some account missing payments, which ultimately
lead to losses for card issuers, in pricing a late fee is appropriate
under card issuers' risk-based pricing function and is consistent with
the CARD Act's statutory factors. A credit union and an industry trade
association indicated that costs associated with contacting the
cardholder, be it before or after an account is charged off, are
substantially related to the late payment and should be factored into
the late fee. Several banks and credit unions, a law firm representing
several card issuers, and an industry trade association further
expanded what costs card issuers' face post-charge-off which
collectively included internal and supplier expenses; court costs and
vendor commissions associated with the recovery of unpaid balances;
technology expenses; and people-related expenses for recoveries
including the usage of third-party debt collectors.
An individual commenter, a law firm representing several card
issuers, and an industry trade association characterized charge-off as
an accounting concept. These commentors collectively noted that charge-
off as an accounting entry is mandated by regulators; this accounting
concept was unrelated to collection costs and designed to ensure
appropriate financial reporting of credit losses; and has no impact on
the collectability or obligation of the debt and the only difference
between pre-charge-off and post-charge-off delinquencies is the amount
of time the debt has been in delinquent status. Similarly, an
individual commenter noted that card issuers do not relinquish its
contract rights to collect payment when accounts are charged-off.
A law firm representing several card issuers indicated that costs
associated with post-charge-off collection activities are actually more
like pre-charge-off collection costs, as opposed to losses, because
card issuers cannot recoup those costs from consumers.
A law firm representing several card issuers, an industry trade
association and a regulatory advocacy group characterized the
distinction between pre-and-post-charge-off collection expenses as
arbitrary or arbitrary and capricious. The law firm noted that the
CFPB's proposal is arbitrary and capricious because it did not explain
why a card issuer writing off costs for its own accounting purposes
means that the card issuer has not incurred the cost of collecting
these payments.
An industry trade association indicated that the provision the CFPB
proposed to amend is currently consistent with the statutory factor
that the CFPB be guided by the cost incurred by the creditor from an
omission or violation. This commenter explained that in the commentary
to Regulation Z, the Board excluded the costs of reserves held against
potential losses and costs of funding delinquent amounts from what may
be recovered through late fees. This commenter expressed concerns that
the CFPB did not explain why the Board appropriately excluded these
costs from losses when statutorily guided by the cost incurred by the
creditor from an omission or violation.
Credit reporting related costs. An individual commenter highlighted
that while reporting to credit bureaus is not a direct collection
expense, credit bureau disputes are directly related to collections.
The individual commenter noted that disputes only originate on reports
of charge-off or delinquency and, in general, the level of monthly
disputes ranges from 0.3 percent to 0.5 percent of all accounts
reported in the last seven years. The commenter indicated these dispute
reasons are evidence that credit bureau disputes are directly related
to collections. Further, the individual commenter noted that working on
these disputes is costly and card issuers that lend more frequently to
credit challenged consumers will likely incur these costs more
frequently.
Relationship to funds for other products and services. A few credit
unions and an industry trade association indicated that excluding post-
charge-off collection costs would reduce the funds available for other
products and services. One of the credit unions noted that reduced
funds for other products and services may lead to reduced access to and
higher costs to other members utilizing these services. Another credit
union specifically noted that excluding post-charge-off collection
costs would also hinder innovation to offer improved mobile and online
platforms.
Certain pre-charge-off costs. An industry trade association
indicated that there are pre-charge-off costs beyond collections-
related expenses including costs associated with pre-charge-off
[[Page 19148]]
customer service, commissions, grants, program development, and
collections strategies.
Relationship to CARD Act. Several industry trade associations, a
regulatory advocacy group, and a law firm representing several card
issuers indicated that the CFPB's proposal 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 is not supported by the CARD Act. One of those industry
trade associations specified that the CARD Act requires a broader
consideration of the costs to issuers, namely the cost incurred by the
creditor from such violation or omissions. Several other trade
associations went a step further and indicated that this clarification
is not supported in statute or regulation, and that the statute or
regulation would have expressly limited the costs analysis provision to
pre-charge-off collection costs if that was the intent. Similarly, the
law firm representing several card issuers noted that the proposal
ignores the express language of the CARD Act regarding what constitutes
a permissible late fee. This law firm specified that the CFPB conflated
two concepts within the CARD Act--the requirement that late fees be
reasonable and proportional to the omission or violation to which the
fee relates and that the CFPB be guided by the cost incurred by the
creditor from an omission or violation. This commenter indicated that
by interchanging the two concepts the CFPB creates a new and narrower
standard to facilitate the reduction of late fees. This commenter
further indicated that the proposal also contradicts this narrower
standard because it seeks to impose a standard that makes late fees
equal to pre-charge-off collection costs and not late fees that are
reasonable and proportional to those costs.
Another industry trade association indicated that, in addition to
the proposal running afoul of the CARD Act, it may also come into
conflict with the Due Process and Takings Clauses of the Fifth
Amendment as it may deprive card issuers their property rights to
return on capital invested.
Another industry trade association suggested that the CFPB should
reopen the existing regulation to address conflicts with the CARD Act
to the extent that card issuers start using the cost analysis
provisions. This commenter specifically suggested that the current
regulation is in error because it permits the recovery of a fee that
represents a reasonable proportion of the total costs incurred by the
card issuer as a result of that type of violation, but those
limitations are not found in the statute.
Specific data provided. An individual commenter and a credit union
provided the CFPB with relevant data to its proposal that comment
52(b)(1)(i)-2.i be amended 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 individual commenter submitted publicly available
financials of two FDIC-insured institutions. The individual indicated
that these data show that non-interest income like annual fees and late
fees are not enough to cover charge-offs. The credit union estimated
that costs associated with servicing a delinquent credit card account
(including costs related to salaries, vendor costs, notifications, and
alerts) to be $53 per credit card and $105,442 per year, and noted
these costs exceed the current safe harbor amounts. This commenter also
indicated that credit cards consist of 10 percent of its loan portfolio
but 27 percent of the accounts it collects.
Additional issue. In addition to the comments on the proposed
clarifications of the commentary to Sec. 1026.52(b)(1)(i), consumer
groups recommended in a joint letter that the CFPB revise the examples
in comment 52(b)(1)(i)-6.ii to lower the late fee amounts closer to the
proposed $8 safe harbor amount, because otherwise, the commentary could
be read to provide that significantly higher late fees based on the
cost analysis provisions would be reasonable and proportional.
The Final Rule
For the reasons stated herein, the CFPB is adopting the amendment
to clarify comment 52(b)(1)(i)-2.i as proposed and therefore this
amendment applies to both Larger Card Issuers and Smaller Card Issuers.
This final rule also makes technical changes to cross references in
comments 52(b)(1)(i)-6.ii.B and C, 52(b)(1)(i)-7.ii.B and C, and
52(b)(1)(i)-8.iii.B and C to conform to OFR style requirements.
With respect to the comments that post-charge-off costs are related
to the cost of a late fee violation and should not be distinguished
from pre-charge-off costs, comment 52(b)(1)(i)-2.i explains that card
issuers may not consider ``losses and associated costs'' as costs
incurred for purposes of the cost analysis provisions found in Sec.
1026.52(b)(1)(i) and provides examples of what constitutes losses
including the cost of holding reserves against potential losses and the
cost of funding delinquent accounts. The Board's 2010 Final Rule does
not characterize these specific examples as to what constitutes a
``loss'' as exhaustive. Instead, these examples were added into comment
52(b)(1)(i)-2.i to address specific comments received in its rulemaking
process.\114\ The amendment adopted here, like the examples implemented
in the Board's 2010 Final Rule, provides further clarification on what
constitutes a ``loss.''
---------------------------------------------------------------------------
\114\ 75 FR 37526 at 37538-9.
---------------------------------------------------------------------------
As discussed in the 2023 Proposal, even if ``loss'' is an
accounting term, the purpose of excluding post-charge off costs is to
exclude those costs that are not directly linked to the violation of
the late payment, and indeed, where in the vast majority of instances,
the consumer who pays late may never be subject to post-charge off
collection or written off as a loss. As the CFPB explained in the
proposal, the costs in collecting amounts owed to a card issuer that
are incurred post-charge-off are substantially related to mitigating a
loss as opposed to the cost of a violation of the account terms.
With respect to comments that the amendment is not supported by the
CARD Act, the Board in its 2010 Final Rule received similar comments
including that `` `costs incurred by the creditor from [an] omission or
violation' does not expressly exclude losses and that definitions of
`cost' typically include `loss.' '' \115\ The CFPB agrees with the
Board when it noted that ``Section 149(c)(1) refers to `costs incurred
by the creditor from [an] omission or violation,' which could be
construed to mean that it is appropriate to exclude losses where--as
here--card issuers do not incur losses as a result of the overwhelming
majority of violations.'' \116\ If losses and post-charge off costs
were included in the late fee amount calculation, the majority of
consumers who pay late fees--whose accounts were merely delinquent and
not written off--would be compensating issuers for losses that have
nothing to do with their own late payment violations, but rather result
from the small minority of delinquent accounts that might be written
off. The Board explained, and the CFPB agrees, that this is contrary to
the statutory requirement that late fees be related to the cost of the
omission or violation, here the cost of paying late,
[[Page 19149]]
rather than the cost of writing off certain accounts.
---------------------------------------------------------------------------
\115\ Id. at 37538.
\116\ Id.
---------------------------------------------------------------------------
Further, the Board noted in its 2010 Final Rule that, if losses
were included, it could result in obscuring the cost of credit, which
was contrary to an express purpose of the CARD Act. As explained in the
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.'' \117\ The CARD Act was enacted to ``establish fair and
transparent practices relating to the extension of credit.'' \118\ The
Board recognized in its 2010 Final Rule that ``if card issuers were
permitted to begin recovering losses and associated costs through
penalty fees rather than upfront rates'' then ``transparency in credit
card pricing would be reduced because some consumers overestimate their
ability to avoid violations and therefore may discount upfront penalty
fee disclosures.'' \119\
---------------------------------------------------------------------------
\117\ Id.
\118\ Pub. L. 111-24, 123 Stat. 1734 (2009).
\119\ 75 FR 37526 at 37538.
---------------------------------------------------------------------------
The CFPB notes that issuers have other mechanisms to recover costs
associated with post-charge off accounts, like the APR. To that extent,
the CFPB acknowledges commenters who provided specific data on
financial institutions whose non-interest income like annual fees and
late fees are not enough to cover charge-offs. However, as noted above,
card issuers use periodic rates to account for losses, and in fact,
this is the justification for risk-based pricing that is the norm in
the market. Permitting issuers to recover losses, like post-charge-off
costs, through late fees is not the intent of the CARD Act; issuers
have other means to recover such costs such as through upfront rates.
With respect to comments that certain costs associated with pre-
charge-off customer service, commissions, grants, program development,
collection strategies, and credit bureau disputes should be considered
as collection costs, the purpose of this amendment is not to create an
exhaustive list of what card issuers can consider as collection costs
but to clarify what is already in the text of the commentary. The CFPB
here has determined that there is a need to clarify that for card
issuers using the cost analysis provisions in Sec. 1026.52(b)(1)(i) to
determine penalty fees post-charge-off collection costs are losses and
therefore cannot be used in the analysis.
With respect to comments that excluding post-charge-off collection
costs would reduce the funds available for other products and services
and that it would hinder the ability to improve mobile and online
platforms, the CFPB notes that pursuant to the CARD Act, the amount of
any penalty fee, including any late payment fee, must be ``reasonable
and proportional'' to any omission with respect to, or violation of,
the cardholder agreement.\120\ Therefore, in considering which costs
should be considered for purposes of setting an amount for penalty fees
pursuant to the cost analysis provisions, it would be inappropriate to
consider penalty fees' subsidization of other products and services
that card issuers may offer.
---------------------------------------------------------------------------
\120\ CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).
---------------------------------------------------------------------------
In adopting the amendment to comment 52(b)(1)(i)-2.i, the CFPB also
rejects the notion raised by commenters that it is in violation of the
Due Process and Takings Clauses of the Fifth Amendment. There is no
public taking, and further, the discretionary $8 safe harbor is set at
a threshold that will likely enable the average Larger Card Issuer to
continue to recover pre-charge-off collection costs, and Larger Card
Issuers can elect to use the cost analysis provisions if the safe
harbor amount is insufficient for recovery of their pre-charge-off
collection costs. In addition, as described above, Larger Card Issuers
generally can adjust other fees or interest rates in order to recover
any lost revenue.
Additionally, the CFPB declines to revise the examples in comment
52(b)(1)(i)-6 to lower the late fee amounts closer to the $8 safe
harbor amount, as recommended. The CFPB views the revision as
unnecessary and notes that an illustrative example is neither
representative nor determinative of a reasonable and proportional late
fee amount determined pursuant to the cost analysis provisions.
52(b)(1)(ii) Safe Harbors
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.'' \121\ 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.'' \122\
---------------------------------------------------------------------------
\121\ 75 FR 37526 at 37527.
\122\ Id. at 37532.
---------------------------------------------------------------------------
The Board's Consideration of Costs. The cost-related data on which
the Board relied were 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.\123\ 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.\124\
---------------------------------------------------------------------------
\123\ Id. at 37541.
\124\ 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 provide 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.\125\
---------------------------------------------------------------------------
\125\ Id. at 37540-43.
---------------------------------------------------------------------------
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
[[Page 19150]]
issuers and that deter the optimal number of consumers from future
violations,'' \126\ 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.'' \127\ 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.\128\
---------------------------------------------------------------------------
\126\ Id. at 37544.
\127\ Id.
\128\ 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.\129\ 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.\130\
---------------------------------------------------------------------------
\129\ Id.
\130\ 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.\131\ 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 \132\ and was consistent with the consumer's conduct in
engaging in multiple violations of the same type within six billing
cycles.\133\
---------------------------------------------------------------------------
\131\ Id.
\132\ Id.
\133\ 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.\134\
---------------------------------------------------------------------------
\134\ 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 six billing
cycles, the Board explained its belief that a higher penalty fee amount
is consistent with the deterrence factor set forth in TILA section
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.\135\ 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.'' \136\ 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.\137\ 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.\138\
---------------------------------------------------------------------------
\135\ Id. at 37533.
\136\ Id.
\137\ 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.
\138\ 75 FR 37526 at 37533 n.24.
---------------------------------------------------------------------------
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.\139\ 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.'' \140\ 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 these data also
indicate 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.
---------------------------------------------------------------------------
\139\ The Board did not refer to consumer conduct in setting the
$25 safe harbor amount. See id. at 37527.
\140\ 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.\141\ 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).\142\ The Board did not, however,
explain why this is relevant to the question of penalty fees.
---------------------------------------------------------------------------
\141\ Id. at 37534.
\142\ Id.
---------------------------------------------------------------------------
[[Page 19151]]
The CFPB's Proposal
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 CFPB proposed 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.\143\ The CFPB further proposed 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 have been a
single fee amount; it would have applied 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).
---------------------------------------------------------------------------
\143\ As discussed in more detail below, there was 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 CFPB
stated its recognition that the fee described in Sec.
1026.52(b)(1)(ii)(C) is a form of late fee but, for the reasons
discussed below, did not propose 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
CFPB proposed 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 CFPB emphasized 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).
In addition to the proposed amendments to the late fee safe harbor
amounts in Sec. 1026.52(b)(1)(ii), the CFPB proposed amendments to the
provision's commentary. The CFPB proposed 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 have no longer applied under
the CFPB's proposal to limit the late fee safe harbor amounts to a fee
amount of $8 for the first and subsequent violations, the CFPB proposed
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 CFPB
also proposed 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 CFPB's proposed amendments to
Sec. 1026.52(b)(1)(ii). In addition, the CFPB proposed 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.
In considering all statutory factors, the CFPB preliminarily found
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 CFPB preliminarily found that this
amount is supported by analysis of the Y-14 data. Finally, the CFPB
noted that it took 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 CFPB preliminarily determined 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 CFPB sought 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 CFPB sought comment on whether to set a
different amount and, if so, what amount and why, including any
relevant data or other information. The CFPB also sought comment on
whether to retain the higher safe harbor amount and, if so, 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 CFPB sought 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. The CFPB sought comment on
what small dollar amount and maximum dollar amount cap may be
appropriate and why, including any relevant data or other information.
The CFPB also sought 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
CFPB sought 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 particu
[…truncated; see source link]Indexed from Federal Register on March 15, 2024.
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.