Credit Card Penalty Fees (Regulation Z)
| Published date | 15 March 2024 |
| Record Number | 2024-05011 |
| Citation | 89 FR 19128 |
| Court | Consumer Financial Protection Bureau |
| Section | Rules and Regulations |
Federal Register, Volume 89 Issue 52 (Friday, March 15, 2024)
[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 [www.gpo.gov]
[FR Doc No: 2024-05011]
[[Page 19127]]
Vol. 89
Friday,
No. 52
March 15, 2024
Part IIIConsumer Financial Protection Bureau-----------------------------------------------------------------------12 CFR Part 1026Credit Card Penalty Fees (Regulation Z); Final Rule
Federal Register / Vol. 89 , No. 52 / Friday, March 15, 2024 / Rules
and Regulations
[[Page 19128]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
[Docket No. CFPB-2023-0010]
RIN 3170-AB15
Credit Card Penalty Fees (Regulation Z)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Final rule; official interpretation.
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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 [email protected].
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.
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\1\ When amending commentary, the Office of the Federal Register
(OFR) requires reprinting of certain subsections being amended in
their entirety rather than providing more targeted amendatory
instructions. The sections of regulatory text and commentary
included in this document show the language of those sections 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, https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_credit-card-penalty-fees_final-rule_2024-01.pdf. 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.
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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.
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\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.
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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.
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\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).
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[[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\
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\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)).
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At the time of its passage, the CARD Act required the Board of
Governors of the Federal Reserve System (Board) to issue rules
establishing standards for assessing the reasonableness and
proportionality of such penalty fees.\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.
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\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)).
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B. The Board's Implementing Rule
On June 29, 2010, the Board issued a final rule implementing new
TILA section 149 in its Regulation Z, 12 CFR 226.52(b) (2010 Final
Rule).\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\
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\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).
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The Board's Regulation Z, Sec. 226.52(b)(2) also contained other
restrictions on card issuers for imposing penalty fees. Specifically,
Sec. 226.52(b)(2)(i) prohibited issuers from imposing penalty fees
that exceed the dollar amount associated with the violation.\18\ In
addition, Sec. 226.52(b)(2)(ii) prohibited issuers from imposing
multiple penalty fees based on a single event or transaction.\19\
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\18\ 12 CFR 226.52(b)(2)(i).
\19\ 12 CFR 226.52(b)(2)(ii).
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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\
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\20\ 75 FR 37526 at 37526.
\21\ Public Law 111-203, 124 Stat. 1376, 1955-2113 (2010).
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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\
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\22\ 76 FR 79768 (Dec. 22, 2011); see also 81 FR 25323 (Apr. 28,
2016).
\23\ 76 FR 79768 at 79822.
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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\
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\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.
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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\
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\26\ Consumer Fin. Prot. Bureau (CFPB), The Consumer Credit Card
Market, at 62-67 (Oct. 2023) (2023 Report), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf. See part V for a description of the Y-14+
data.
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Prior to the passage of the CARD Act in 2009, the average late fee
was $33 for issuers in the 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\
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\27\ CFPB, Card Act Report, at 23 (Oct. 2013) (2013 Report),
https://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf.
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.
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However, from 2010 through the onset of the COVID-19 pandemic,
issuers had steadily been charging consumers more in credit card late
fees each year--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\
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\29\ CFPB, Credit Card Late Fees, at 4 (Mar. 2022) (Late Fee
Report), https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf.
\30\ 2013 Report, at 23.
\31\ CFPB, The Consumer Credit Card Market, at 69 (Dec. 2019)
(2019 Report), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf.
\32\ Late Fee Report, at 6.
\33\ Late Fee Report, at 5; CFPB, The Consumer Credit Card
Market, at 55 (Sept. 2021) (2021 Report), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf.
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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\
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\34\ 2021 Report, at 117; 2023 Report, at 65.
\35\ 2023 Report, at 65.
\36\ Id.
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E. Credit Card Issuers' Use of the Late Fee Safe Harbor
Currently, Sec. 1026.52(b)(1)(ii) sets forth a safe harbor of $30
generally for a late payment, except that it sets forth a safe harbor
of $41 for each subsequent late payment within the next six billing
cycles. A card issuer is not required to use the cost analysis
provisions in Sec. 1026.52(b)(1)(i) to determine the amount of late
fees if it complies with these safe harbor amounts.\37\
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\37\ See comment 52(b)(1)-1.i.A.
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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\
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\38\ Late Fee Report, at 14.
\39\ Id.
\40\ Id. The Credit Card Agreement Database is available at
https://www.consumerfinance.gov/credit-cards/agreements.
\41\ Late Fee Report, at 14.
\42\ Id. at 15.
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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\
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\43\ Id. at 13.
\44\ Id. at 14.
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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\
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\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, https://ssrn.com/abstract=3549532.
\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).
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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\
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\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.
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Credit card accounts in the Y-14 data held by cardholders living in
the U.S.' poorest neighborhoods paid twice as much on average in total
late fees than those in the richest areas.\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\
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\57\ Id. at 9.
\58\ Id. at 10.
\59\ Id. at 11.
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G. Other Consequences to Consumers of Late Payment
When a consumer does not make at least the minimum payment by the
periodic statement due date, a late fee may not be the only
consequence. However, the effect of a missed payment depends on
cardholder conduct both prior to and after the due date.
For cardholders who typically pay their balance in full every month
(so-called transactors), a late payment generally means both a late fee
and new interest incurred for carrying or revolving a balance. For the
cardholders who do not roll over a balance in the month before or after
a late fee is assessed, the loss of a grace period \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.
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\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.
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However, if a consumer does not make at least the minimum payment
due for more than one billing cycle, non-payment may carry more severe
consequences. After approximately 30 days, consumers' credit scores may
decline after issuers report the delinquency to credit bureaus. A card
issuer also may take actions to reprice new transactions on the account
according to a penalty rate, if permitted under Sec.
1026.55(b)(3).\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.
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\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.
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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.
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\62\ 87 FR 38679 (June 29, 2022).
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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.
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\63\ 88 FR 18906 (Mar. 29, 2023).
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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.
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\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.
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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.
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\65\ 15 U.S.C. 1665d(b) and 1665d(e).
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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.
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\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).
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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.
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\68\ 15 U.S.C. 1604(a).
\69\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
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As described above, the CARD Act was signed into law on May 22,
2009,\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\
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\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)).
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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)).
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\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)).
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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\
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\76\ Public Law 111-203, 124 Stat. 1376 (2010).
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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.
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\77\ 15 U.S.C. 1604(a).
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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.
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\78\ See Bd. of Governors of the Fed. Rsrv. Sys., Report Forms
FR Y-14M, https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV (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.
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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:
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\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.
https://www.federalreserve.gov/apps/reportingforms/Download/DownloadAttachment?guid=dce3da6a-55b4-4fb4-8730-3fec04d32627.
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Late Fee Income: Reported net fee income assessed for late or
nonpayment accounts in a given domestic credit card portfolio by card
type (e.g., general purpose or private label). This is late fee income
for the 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\
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\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.
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Late Fee Amount: Reported amount of the late fee charged on a
particular account in a particular month.
Total Required Payments: Reported total payment amount on a
particular account in a particular month, including any missed payments
or fees that were required to be paid in a particular billing cycle.
This typically includes the minimum payment due, past due payments, and
any amount reported as over the credit limit.
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\
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\83\ 75 FR 37526 at 37538.
\84\ Id.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\89\ CFPB, Credit Card Late Fees: Revenue and Collection Costs
at Large Bank Holding Companies (Revenue-Costs Report) (Feb. 2023),
https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-collection-costs-large-bank_2023-01.pdf.
\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.
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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\
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\91\ 5 U.S.C. 553(b), (c).
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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.
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\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).
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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\
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\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.
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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.
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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.
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\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.
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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\
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\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).
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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.
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\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.
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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.
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\103\ See supra note 5.
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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.
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\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), https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/permissible-loan-interest-rate-ceiling-extended-2. A January 2023
NCUA Board action established a temporary 18 percent interest rate
ceiling through September 10, 2024. See id.
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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.
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\105\ See supra note 5.
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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.
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\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.
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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.
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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).
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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.
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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\
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\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.
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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\
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\113\ 75 FR 37526 at 37538.
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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.''
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\114\ 75 FR 37526 at 37538-9.
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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.
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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), https://ssrn.com/abstract=1091623 or http://dx.doi.org/10.2139/ssrn.1091623. 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.
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[[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 particular, the CFPB
sought 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
[[Page 19152]]
date within a certain number of days prior to the due date, or both.
The CFPB also invited comment on all aspects on the proposed
amendments to the commentary to Sec. 1026.52(b)(1)(ii), including
comment on what additional amendments may be needed to help ensure
clarity and compliance certainty.
In addition, the CFPB also sought comment on whether to eliminate
the safe harbor provisions for late fees, rather than lowering the safe
harbor amounts to a fee amount of $8 for the first and subsequent
violations as proposed.
The CFPB further sought comment on whether and why to lower the
safe harbor amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) (including
whether and why to eliminate the higher safe harbor amount for
subsequent violations that occur during the same billing cycle or in
one of the next six billing cycles) for all other credit card penalty
fees, including fees for returned payments, over-the-limit
transactions, and when payment on a check that accesses a credit card
account is declined. In particular, the CFPB sought comment on what the
safe harbor amounts for such fees should be, including any relevant
data and information on the costs of such violations to card issuers.
In the alternative, the CFPB sought comment on whether to finalize the
proposed safe harbor for late fees and eliminate the safe harbors for
other penalty fees.
Comments Received
General. The CFPB received approximately 100 comment letters from
industry participants. These industry commenters generally opposed the
proposal to lower the late fee safe harbor amount to $8 amount for the
first and subsequent late payments, including the proposal to eliminate
the higher safe harbor amount, irrespective of the specific dollar
amount. A substantial number of consumers, including approximately
53,600 who submitted comments as part of letter-writing campaign,
expressed support for the proposed $8 safe harbor amount. A large but
significantly lower number of consumers, including approximately 170
who identified themselves as ``bankers'' and submitted comments as part
of a letter-writing campaign, opposed the proposed $8 safe harbor
amount. Consumer groups generally supported the proposed amount.
The comments on the proposed $8 safe harbor amount are discussed in
further detail below, first in relation to the statutory factors of
costs, deterrence, and consumer conduct, then in relation to other
issues and concerns addressed by commenters.
Costs. As noted, most industry commenters opposed the proposed $8
safe harbor amount partly on the grounds that it would not cover card
issuer's costs associated with late payments. These commenters
generally took issue with what they viewed as flaws in the CFPB's
analysis of issuers' costs, as discussed in the proposal.
As discussed in more detail in part V, larger issuers and their
trade associations criticized the CFPB's analysis of the Y-14 data to
determine the proposed $8 amount. These commenters argued, among other
things, that the Y-14 data are underinclusive of the actual costs that
card issuers incur as a result of late payments. For the reasons
discussed in part V, the CFPB has determined that it is appropriate to
consider and rely upon the Y-14 data for the Larger Card Issuers that
are covered by the changes to Regulation Z contained in this final
rule.
As noted in part V, one trade association commenter provided
specific data related to costs of late payments. While the commenter
did not provide data for the costs associated with all late payments,
the commenter 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.
As discussed in more detail in part VI, many smaller issuers,
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. These comments are discussed in more detail in part
VI.
In support of the proposal, several consumer groups noted that it
is important to recognize that the $8 amount is a discretionary safe
harbor, and if $8 does not adequately compensate an issuer for its
costs in dealing with late payments, the issuer can charge more if they
can justify the amount under the cost analysis provisions in Sec.
1026.52(b)(1)(i). These commenters also recommended that card issuers
be required to publicly disclose the data to support any late fee
amounts they impose pursuant to the cost analysis provisions that are
greater than the safe harbor.
For the reasons discussed below, the CFPB is adopting the proposed
$8 safe harbor for late fee amounts for Larger Card Issuers.
Nonetheless, the CFPB is not requiring in this final rule that card
issuers that use the cost analysis provisions in Sec. 1026.52(b)(1)(i)
to set the late fee amount to publicly disclose the data to support any
late fee amounts they impose pursuant to the cost analysis provisions
that are greater than the safe harbor. The CFPB is concerned that card
issuers may consider some of the supporting data that would be required
to be released publicly under such a requirement to be confidential.
The CFPB also notes that the CARD Act does not specifically require
card issuers to disclose to the public their underlying costs data. A
card issuer that chooses to base its penalty fees on its own
determination (rather than on the safe harbors) must be able to
demonstrate to the regulator responsible for enforcing compliance with
TILA and Regulation Z that its determination is consistent with Sec.
1026.52(b)(1)(i).
Deterrence. Many industry commenters expressed concern that the
proposed $8 safe harbor amount was too low to deter late payments and
would thus result in an increase in late payments and cause harm to
consumers and the credit card market. Several individual consumer
commenters expressed similar concerns. In a representative comment, a
credit union averred that late fees, when set fairly and appropriately,
encourage consumers to pay on time, which protects their credit score
and helps them develop positive financial habits. If late fees are too
low, the commenter stated, consumers are more likely to pay the fee
without considering the long-term consequence of lowering their credit
scores, higher borrowing costs, reduced ability to access credit, and
ultimately less disposable income. A substantial number of other
industry commenters also cited lower credit scores and reduced access
to credit as likely outcomes of the proposed safe harbor amount. Some
of these commenters noted that if the safe harbor is reduced to only
$8, consumers may end up paying more late fees over time than they
otherwise would. A credit union posited that because $8 is roughly
comparable to the price of common items such as a cup of coffee or
movie ticket, more consumers may view the amount as a reasonable price
to pay in exchange for postponing making their credit card payments.
Similarly, an academic commenter asserted that the ability to pay late
can be viewed as a typical product, the quantity demanded
[[Page 19153]]
of which increases when its price decreases. If the price of paying
late becomes cheaper, this commenter reasoned, more borrowers will opt
to pay late. One bank criticized the CFPB for positing that even if the
proposed amount leads to more late payments, some borrowers may benefit
in terms of greater ability to pay revolving debt. Potential consumer
benefit, the commenter asserted, is irrelevant to the CFPB's
statutorily mandated consideration of whether a penalty fee has a
deterrent effect.
Several industry commenters asserted that the CFPB lacked
sufficient evidence that the reduced safe harbor amount would have a
deterrent effect. Some industry commenters criticized what they viewed
as flaws in the CFPB's deterrence analysis, including misreading or
failing to give proper weight to existing literature on the deterrence
effect of late fees. In particular, one credit union trade association
noted that the CFPB failed to present an analysis of the tradeoff
between late fees and late payments. This commenter asserted that a
consumer is deterred from being late on a payment if the late fee is
greater than the net benefit of missing the payment. This commenter
also asserted that the CFPB failed to consider in its analysis a study
that the Board relied on in its 2010 Final Rule--Agarwal et al.--that
found that fees cause a reduction in the probability of a late fee the
following month. In addition, this commenter cities another study--
Grodzicki (2023)--that equally concludes that late payment would be
more likely when the fees are less costly. This commenter stated that
the CFPB's rationale for rejecting this conclusion--the time period the
study covers--is unsatisfactory. Another industry trade association
noted that the CFPB's analysis did not adequately weigh the increase in
servicing costs as a result of the decreased deterrent effect of late
fees.
Furthermore, one bank commenter suggested that the CFPB use
reasonable proxies to determine the deterrence effect on the amount of
a late fee. Such proxies suggested by the commenter include return
check penalties as determined by States, late fees charged on utility
bills and student loan late fees. The commenter asserted that these
proxies could have been used by the CFPB to determine whether the
proposed late fee penalty is reasonable, proportional and would have a
deterrent effect.
In addition, one academic commenter and one law firm representing
several card issuers asserted that empirical evidence indicates that
paying a late fee encourages borrowers to opt for automatic payments,
helping borrowers avoid the higher cost of borrowing by avoiding late
fees and decreasing the probability of ultimately defaulting. These
commenters further noted that John Gathergood et al., using U.K. data,
found that late payment fees are front-loaded, peaking in the first
month of card life and declining sharply over the following months.
Specifically, one of these commenters noted the study's finding that
the share of credit card accounts incurring late payment fees in the
study's sample fells from 6 percent in the first month to 2.5 percent
by the 23rd month, mainly because the payment of an initial late fee
prompted consumers to set up automatic payments.
One trade association commenter, as another example, criticized the
CFPB for suggesting--by comparing the effective APR a consumer might
incur as a result of late payments in a series of hypothetical
situations--that the deterrent effect of an $8 late fee would be
similar to the deterrent effect of the current rate structure. The
commenter asserted that high APRs may not adequately deter borrowers
for ultra-short-term borrowing periods--such as the 10-30 days in the
CFPB's hypotheticals--where the absolute dollar amounts are relatively
small. This commenter also stated that the CFPB offered no analysis as
to whether those APRs would have the presumed deterrent effect and
noted that effective APRs may not have the meaningful deterrent effect
of late fees because they are a more complicated, nebulous concept for
consumers to understand.
Some industry commenters asserted that the proposed $8 safe harbor
amount, due to its lack of a deterrence effect, would make it difficult
for card issuers to identify riskier consumers and manage for that
risk. In this vein, one industry trade association noted that when a
consumer pays late, the issuer can incur unanticipated additional
interest expense on that balance. This commenter further noted that
during the underwriting process for a new consumer, an issuer cannot
determine with complete certainty whether the consumer may become
chronically delinquent, occasionally delinquent, or always current, and
that the consumer's subsequent behavior in using the card determines if
they are riskier than average for the cohort. According to this
commenter, the late fee is an automatic ``stabilizer'' that adjusts
pricing for riskier consumers based on their actual post-account
opening behavior (i.e., a form of implicit risk-based pricing). This
commenter expressed concern that without this stabilizer, a credit card
company may need to raise the price of credit to all consumers to cover
the additional, unacceptable risk.
A few industry commenters submitted their own data on the purported
deterrence effect of late payments in response to the CFPB's request.
Those comments along with the data provided are discussed in the
deterrence analysis below.
Several industry commenters noted that the CFPB failed to use
studies cited by the Board in their 2010 Final Rule. One credit union
trade association commenter asserted that the CFPB cherry picked
studies that supported its position, rejected older data as no longer
relevant when they did not support their position, but accepted even
older data when the conclusion was favorable to the CFPB's position.
Furthermore, this commenter asserted that the CFPB failed to
appropriately consider the role of risk in finance but rather relied on
theories of behavioral biases that cannot be applied generally. This
commenter also asserted that the CFPB's analysis was not conducted in a
transparent and consistent manner.
Consumer conduct. Several industry commenters expressed concern
that the proposed $8 safe harbor amount would have a negative impact on
consumer conduct and result in harm to consumers and the credit card
market. Several of these commenters stated that the proposal to
eliminate the higher safe harbor amount for subsequent violations would
exacerbate these harms, including shifting the costs of late payments
from late payers to timely payers. One industry trade association, for
example, asserted that the CFPB disregarded differences in consumer
behavior that would warrant a higher safe harbor amount and a higher
fee for subsequent missed payments--an approach, the commenter
reasoned, that would avoid shifting costs to consumers who pay on time.
In addition, several of these commenters asserted that the CFPB did not
adequately consider the statutory factor of consumer conduct or
criticized the CFPB for basing the proposed amount on insufficient
evidence of its potential effects on consumer conduct.
In criticizing the CFPB's consideration of consumer conduct in the
context of proposing to eliminate the higher safe harbor amount, a bank
commenter sought to distinguish the factor from the deterrence effect
of late fees. Whereas deterrence requires consideration of what size
and type of late fee would deter late payment, the commenter averred,
consumer conduct
[[Page 19154]]
focuses on the increased risk presented to the issuer by a cardholder
who has already paid late at least once. The commenter asserted that
because such a cardholder is demonstrably more apt than others to
default, a reasonable consideration of the consumer conduct factor
would counsel the issuer to appropriately price the cardholder's
augmented risk. In addition, this commenter stated that the CFPB's
analysis downplays the linkage between incurring a late fee and the
increased risk of default by attempting to explain away certain
delinquent account behavior as a product of consumer cash flow issues.
This commenter further noted that the credit risk posed by consumers
who incur a late fee is particularly high for private label-focused
issuers due to the higher likelihood of late payment and default
occurrences for such portfolios.
In a similar vein, a law firm representing several card issuers
asserted that the CFPB's analysis of when consumers make late payments
is inapposite to the specific issue of cardholder conduct. The
commenter noted that if the problem is with consumer cash flow timing,
as the CFPB hypothesizes, most major credit card issuers have
mechanisms in place to allow customers to change the due date on their
account in order to account for their own paycheck or earning
schedules. This commenter further stated that the CFPB's analysis does
nothing to address the reality that multiple late payments demonstrate
an increased credit risk and reflect a more serious violation of the
account terms--even if those payments occur before the account would be
reported as late under credit reporting guidelines. In addition, this
commenter noted that the existence of an adequate late fee creates an
incentive for customers who may experience financial difficulties to
call in and discuss the availability of hardship and other programs
with their lender.
A bank commenter also noted that late fees prompt numerous
consumers to call to discuss the delinquency after billing, giving card
issuers the ability to assist consumers. This commenter expressed
concern that if the fee is only $8, consumers may not bother to call,
and the card issuer will lose an opportunity to provide financial
assistance. According to data submitted by the commenter, its contact
rate for outbound collection calls is 2 percent to 4 percent, whereas
the inbound call rate (the percentage of delinquent accounts who call
the bank) for collections is 13 percent to 14 percent. Of the
commenter's inbound calls, 27 percent to 28 percent received one or
more late fee credits. This commenter further noted virtually all such
calls had a payment or other payment arrangements made.
A financial regulatory advocacy group commented specifically on
consumer conduct. In supporting the proposed $8 safe harbor amount, the
commenter considered the effects of late fees on consumer conduct in
conjunction with their effects on consumers' financial health. The
commenter noted that because payments are applied first to cover
finance charges and fees, when late fees are tacked on, less of a
consumer's payment goes towards reducing the principal balance, thereby
adding to the duration and cost of revolving. Viewed from this lens,
this commenter asserted, it would seem almost self-evident that
reducing the size of late fees would have a positive impact on the
financial health of those bearing those fees.
Other factors cited by commenters. In addition to addressing the
statutory factors, numerous industry commenters expressed concern that
the loss of late fee revenue that would result from the proposed $8
late fee safe harbor amount would adversely affect card issuers and
consumers. Credit union commenters in particular expressed this
concern. As a representative example, around 20 credit unions and 20
individuals noted, as part of a letter-writing campaign, that when
credit unions do charge late fees, the revenue from the fees covers
pre-charge off collection costs but also subsidizes products and
services that members demand and need, including programs targeted
toward consumers with thin credit files. Many credit union and
individual commenters cautioned that the loss in late fee revenue would
require credit unions and other card issuers to tighten credit
standards and consider harmful tradeoffs involving the very consumers
who are most at risk of paying late fees. Specifically, these
commenters asserted that credit unions will need to recoup lost late
fee revenue through higher interest rates (while still complying with
the Federal Credit Union Act's interest rate cap, a consideration banks
do not face) \144\ or broad-based fees, such as maintenance fees, on
other credit card services.
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\144\ See supra note 104.
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In the same vein, many credit union commenters asserted that
additional fees and higher rates would have a negative impact on all
credit union members and potential members, including those unbanked
and underbanked communities where credit unions are seeking to expand
access to financial services. Some noted that credit unions may need to
balance reduced fee revenue by cutting spending on branch expansion and
staff to serve their membership. Other commenters noted that these
losses, and thus the adverse consequences, would be magnified in the
current inflationary environment. A State credit union trade
association stated that banks and other financial institutions that
generally are not subject to statutory rate caps will simply keep
raising their interest rates to make up for lost fee revenue and thus
the rule, if finalized, would have little to no effect on protecting
consumers from high-cost rate or fee practices.
In discussing the potential consequences resulting from lost late
fee revenue, some industry commenters expressed concerns related to
risk management and safety and soundness. For example, one bank
commenter asserted that the CFPB's proposed late fee safe harbor amount
fails to take into account that card issuers set fees, including late
fees, on a risk-adjusted basis, whereby fees applied to cardholders who
do not pay in a timely manner are set so as to compensate for
additional financing cost, cost of collection, funding cost, and--most
of all--higher rates of loss on amounts borrowed so that, together,
interest plus fees minus losses and costs make for a viable business.
This commenter further asserted that setting fees on a risk-adjusted
basis is essential to running a safe and sound credit card business,
and to providing credit to customers who would not otherwise get it. A
State bank trade association commenter noted that when its member banks
establish terms and conditions for their credit plans, the late fee
safe harbor weighs heavily in assuring that the bank's cost of credit
match the higher costs of delinquency to targeted revenue and asking
those who create such higher costs to bear those costs directly is
necessary to maintain safety and soundness in the sub-prime space. In
addition, a credit union commenter noted that the disruption of cash
flows resulting from a higher frequency of late payments under the
proposal could necessitate the acquisition of replacement dollars to
meet the credit union's cash obligations, such as by accessing its
lines of credit or issuing a certificate of deposit (CD) to members.
This commenter further noted that such efforts to ensure that its cash
flow obligations are met would impose additional administrative and
finance costs on the institution.
The Final Rule
For card issuers that are not Smaller Card Issuers (namely, Larger
Card
[[Page 19155]]
Issuers as that term is used in this document), this final rule revises
Sec. 1026.52(b)(1)(ii) to (1) repeal the current safe harbor threshold
amounts in Sec. 1026.52(b)(1)(ii)(A) and (B), (2) adopt in Sec.
1026.52(b)(1)(ii) a late fee safe harbor dollar amount of $8, and
eliminate 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 \145\ and (3)
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 will not apply to the $8 safe harbor amount
for those late fees, as discussed in more detail in the section-by-
section analysis of Sec. 1026.52(b)(1)(ii)(D).
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\145\ This final rule does not amend the safe harbor set forth
in Sec. 1026.52(b)(1)(ii)(C) applicable to charge card accounts.
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For the reasons discussed in part VI, the CFPB is not adopting at
this time the changes discussed above for Smaller Card Issuers that are
defined 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''
as defined in Sec. 1026.58(b)(6) for the entire preceding calendar
year.\146\ For Smaller Card Issuers, the safe harbor thresholds set
forth in Sec. 1026.52(b)(1)(ii)(A) through (C) still will apply to
late fees charged by Smaller Card Issuers.\147\ In addition, the annual
adjustments for the safe harbor thresholds to reflect changes in the
CPI in Sec. 1026.52(b)(1)(ii)(D) still will continue to apply to late
fees imposed by Smaller Card Issuers.
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\146\ See supra note 5. 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 at this time with respect to any
card issuers, including Smaller Card Issuers. Nonetheless, the
clarification in comment 52(b)(1)(i)-2.i that the collection costs
for calculating the late fee amount 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.
\147\ This final rule revises the safe harbor threshold amounts
in Sec. 1026.52(b)(1)(ii)(A) and (B) as discussed in more detail
below in the section-by-section of Sec. 1026.52(b)(1)(ii)(A) and
(B).
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Pursuant to the annual adjustments for safe harbor dollar amounts
to reflect changes in the CPI 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. As discussed in more detail in the section-by-section analysis
of Sec. 1026.52(b)(1)(ii)(A) and (B), 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.
Repeal of Current Late Fee Safe Harbor Threshold Amounts and Adoption
of $8 Late Fee Safe Harbor Threshold for Larger Card Issuers
In adopting this final rule, the CFPB has determined that the
existing safe harbors in Sec. 1026.52(b)(1)(ii), as applicable to late
fees charged by Larger Card Issuers, are too high to be ``reasonable
and proportional'' to a consumer's late payment. The CFPB therefore is
repealing the existing safe harbors in Sec. 1026.52(b)(1)(ii)(A) and
(B) with respect to late fees charged by Larger Card Issuers.
In the 2023 Proposal, the CFPB proposed to replace the existing
safe harbors of $30 for the first violation and $41 for subsequent
violations, but it also requested comment on whether to eliminate the
safe harbor provisions.\148\ The CFPB proposed a replacement safe
harbor of $8 based on a conservative estimate that $8 would, on
average, be at or higher than a late fee amount calculated by the
average card issuer using the cost analysis provisions in existing
Sec. 1026.52(b)(1)(i), which the CFPB did not propose to change.
---------------------------------------------------------------------------
\148\ See 88 FR 18906 at 18924.
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This final rule adopts the $8 safe harbor threshold for late fees
charged by Larger Card Issuers, in part, based on the Y-14 data
collected from certain Larger Card Issuers from 2013 up to September
2022 which show that late fee revenue is at least five times higher
than relevant costs since August 2021. The $8 late fee safe harbor
threshold for Larger Card Issuers is conservative because, instead of
dividing the average late fee per incident for Y-14+ issuers ($31 in
2020) by five or dividing the current lower regulatory threshold ($30)
by five, it divides the highest safe harbor late fee of $41 by five to
reach the $8 safe harbor threshold amount.\149\
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\149\ Were the CFPB to take the less conservative approach, it
would divide the average late fee per incident for Y-14+ issuers
($31 in 2020) by five, to reach a final rule of roughly $6, which is
likely closer to the market average cost-per-late-payment incident
for Larger Card Issuers. This conclusion is also consistent with
subsequent data collected by the CFPB after issuance of the 2023
Proposal, which showed that the average late fee per incident for Y-
14+ issuers in 2022 was $32.
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In other words, in adopting this final rule, the CFPB has
determined that the existing safe harbors of $30 and $41 are too high
with respect to late fees charged by Larger Card Issuers and should be
replaced with respect to late fees charged by those issuers. As
discussed above, the Board set the original safe harbors based on very
limited cost-related data as compared to what the CFPB has available to
it now.\150\ Because the Board had no data directly related to issuers'
costs of collecting late payments, it set the safe harbor dollar
amounts based on indirect considerations of costs, including the
following: (1) dollar amount of late fees charged on credit cards at
the time; (2) dollar amount of late fees on other products, (3) State
and local laws regulating late fees; (4) safe harbor thresholds used in
the United Kingdom; (5) data relating to deterrence; and (6) data
submitted by one card issuer.\151\ The Board admitted that ``it is not
possible based on the available information to set safe harbor amounts
that precisely reflect the costs incurred by a widely diverse group of
card issuers and that deter the optimal number of consumers from future
violations.'' \152\
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\150\ 75 FR 37526 at 37541.
\151\ Id. at 37540-43.
\152\ Id. at 37542.
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The CFPB now has an extensive dataset, which relates to collection
costs of certain Larger Card Issuers, that allows it to judge whether
the original safe harbors are adequately tailored to reflect the
average outcome of the cost analysis provisions in Sec.
1026.52(b)(1)(i) with respect to late fees charged by Larger Card
Issuers. As discussed in part V and below, the CFPB has data from the
16 largest card issuers, in the Y-14 dataset, showing that the total
late fee income from the first three quarters in 2022 was $4.46
billion, while estimated pre-charge off collection costs amounted to
only $896 million.\153\ As discussed below, this ratio has been five or
above from August 2021 through March 2022 (based on data used in the
2023 Proposal) and has increased considerably since the preparation of
the 2023 Proposal.
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\153\ Based on data collected after the 2023 Proposal was
issued, the CFPB has data from the 20 card issuers in the Y-14+,
showing that the total late fee income between October 2021 and
September 2022 was $11 billion, while estimated pre-charge off
collection costs amounted to only $2.16 billion.
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In addition, as noted in part II.E, the CFPB has observed in its
2022 survey of credit card agreements that it appears there are no
Larger Card Issuers who set their late fees based on the cost analysis
provisions in Sec. 1026.52(b)(1)(i), suggesting that the safe harbor
is set so high that there is no issuer, even outlier
[[Page 19156]]
issuers with higher than average costs for Larger Card Issuers, who
would generate more revenue through that method.\154\ This suggests
that the discretionary safe harbor, which protects issuers from needing
to show that fees are reasonable and proportional, is set at a level
that is too high for Larger Card Issuers and may, therefore, allow them
to charge late fees that are not consistent with the statutory
protections.
---------------------------------------------------------------------------
\154\ This conclusion also is consistent with the review of
credit card agreements that the CFPB conducted in 2023, as discussed
in more detail in part II.E.
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Furthermore, the safe harbor thresholds have increased by $5-6 due
to annual adjustments to reflect changes in the CPI made pursuant to
Sec. 1026.52(b)(1)(ii)(D) since the thresholds were first adopted in
2010, and thus, for this reason, the threshold amounts warranted
independent reconsideration. As the CFPB notes in the section-by-
section analysis of Sec. 1026.52(b)(1)(ii)(D), collection costs
observed in Y-14 data from certain Larger Card Issuers do not appear to
be rising lockstep with inflation particularly when considering the
month-to-month changes in inflation versus those costs.
Additionally, the Board's conclusion with regard to the original
safe harbor threshold amounts did not appear to consider whether it
could have been too high, only that it was ``generally sufficient to
cover issuer's costs and to deter future violations.'' \155\ The Board
did not appear to consider whether the safe harbor was so high as to do
more than just cover costs and deter future violations. In other words,
the Board failed to consider whether the discretionary safe harbor
might be set at an amount that permitted issuers to recover late fees
that were too high, and thus, were not reasonable and proportional to
the violation and, therefore, were inconsistent with the statute. The
Board's failure to consider both whether the safe harbor was high
enough and whether it was too high is an independent reason to repeal
the existing late fee safe harbor threshold amount in Sec.
1026.52(b)(1)(ii)(A) and (B) with respect to late fees charged by
Larger Card Issuers.
---------------------------------------------------------------------------
\155\ 75 FR 37526 at 37542.
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And lastly, much of the evidence used originally by the Board was
not relevant to the question of whether the safe harbor was set at an
appropriate level. For example, evidence of State, local, or
international government approaches reflects the policy decisions of
those legislative bodies. Such evidence is not determinative of whether
the safe harbor appropriately meets the applicable standards in the
CARD Act. In addition, setting the thresholds based on then existing
late fee amounts, set by issuers before the CARD Act passed, assumes
that Congress merely intended to curtail further increases, rather than
lower late fees from the then-existing baseline. The CFPB sees no
evidence in the legislative history to justify this assumption, and
rather, concludes that the safe harbor threshold amount should be set
based on the cost-analysis provisions.\156\ The safe harbor is a
discretionary option, and therefore, it should not be so high that it
allows fees that are contrary to the statutory standard. Without the
safe harbor, card issuers can rely on the cost analysis provisions to
ensure they are charging individually calculated fees that comply with
the statute.
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\156\ In fact, the legislative history suggests that Congress
intended to lower late fees. 155 Cong. Rec. 5314, 5315, 5319 (2009).
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In addition, the CFPB received around 56,800 comments letters from
consumers that generally supported the proposed $8 late fee safe harbor
threshold. Many consumers indicated that they thought the current late
fees charged by issuers are too high, and some consumers indicated they
had limited income and that even a small late fee can impact consumers
on a tight budget.
Thus, for the reasons discussed above including the CFPB's analysis
of the Y-14 data, in this final rule, the CFPB repeals the existing
safe harbor threshold amounts in Sec. 1026.52(b)(1)(ii)(A) and (B)
with respect to late fees charged by Larger Card Issuers.\157\
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\157\ The CFPB recognizes that it is repealing the existing safe
harbor solely as to late fees charged by Larger Card Issuers. As
described in detail in part VI, the CFPB has determined it is
appropriate to limit this repeal with respect to late fees charged
by Larger Card Issuers.
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As a result, the CFPB has determined that, at this time and based
on current data and commenter feedback, it is appropriate to revisit
and amend the safe harbor as applied to Larger Card Issuers.
Establishing a safe harbor is an exercise of discretionary rulemaking
authority, and thus, a safe harbor need not exist.\158\ Moreover, the
existence of a safe harbor means that card issuers are deemed to be
presumptively in compliance with the CARD Act. As a result, a safe
harbor has the potential to enable card issuers to charge amounts that
would otherwise not be in compliance with the Act.
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\158\ See 15 U.S.C. 1665d(e) (unlike a required rulemaking to
define ``reasonable and proportional'' as prescribed in 15 U.S.C.
1665d(b), Congress indicated that the CFPB ``may'' issue a safe
harbor and is merely ``authorized'' to issue a safe harbor but is
not required to do so).
---------------------------------------------------------------------------
Given this, the CFPB has determined that, in light of its data and
analysis, it is appropriate to repeal the existing safe harbor
threshold amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) with respect to
late fees charged by Larger Card Issuers, and then to amend the safe
harbor to the lower $8 amount. The decision to repeal of the safe
harbor is independent of, and severable from, the decision below that
$8 is an appropriate safe harbor threshold amount with respect to late
fees charged by Larger Card Issuers. Accordingly, if the $8 safe harbor
for Larger Card Issuers were stayed or determined to be invalid, the
remainder of the regulation shall continue in effect without a safe
harbor for late fees charged by Larger Card Issuers.
The CFPB's Analysis of Data and Consideration of Statutory Factors
Related to the $8 Late Fee Safe Harbor Threshold for Larger Card
Issuers
As an initial matter, the CFPB is not statutorily required to
consider the statutory factors of costs, deterrence, and consumer
conduct in setting the discretionary safe harbor amounts under TILA
section 149(e). Instead, in setting discretionary safe harbor amounts,
TILA section 149(e) specifies that the CFPB may issue rules to provide
an amount for any penalty fee or charge that is presumed to be
reasonable and proportional to the omission or violation to which the
fee or charge relates. As discussed below, the CFPB 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 looked to whether the threshold is a
reasonable proxy for the definition of a ``reasonable and
proportional'' fee such that any fee under the threshold should be
presumed to have met that standard.
In implementing this standard, the CFPB primarily focused on
whether a particular late safe harbor amount would cover the pre-
charge-off collection costs of the average Larger Card Issuer. The CFPB
has determined that it is appropriate to focus on the pre-charge-off
collection costs of the average Larger Card Issuer to determine a
reasonable proxy for the definition of a ``reasonable and
proportional'' because this allows the average Larger Card Issuer to
obtain the benefits of relying on the safe harbor without having to
incur the compliance burden of conducting the cost analysis set forth
in
[[Page 19157]]
Sec. 1026.52(b)(1)(i) but does not allow these Larger Card Issuers to
charge an amount that exceeds the costs for most Larger Card Issuers.
Costs. As discussed below, the CFPB analyzed the Y-14 data and
other information in considering the pre-charge-off collection costs of
a late payment violation to Larger Card Issuers.\159\ Based on that
analysis, the CFPB has determined that for Larger Card Issuers a late
fee safe harbor amount of $8 for the first and subsequent violations
would cover the average Larger Card Issuers' costs from late payments
while providing those card issuers with compliance certainty and
administrative simplicity and, therefore, reduce their compliance costs
and burden.
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\159\ See part V for the CFPB's determination that it is
appropriate to consider the Y-14 data in adopting the changes to
Regulation Z contained in this final rule.
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In considering the costs of late payments to Larger Card Issuers,
the CFPB considered only those (estimated) pre-charge-off collection
costs that card issuers are permitted to consider for purposes of
determining the amount of a late fee under the cost analysis provisions
in Sec. 1026.52(b)(1)(i) and related commentary. As provided in the
commentary to Sec. 1026.52(b)(1)(i), such costs for late fees (1)
include the costs associated with the collection of late payments, such
as the costs associated with notifying consumers of delinquencies and
resolving delinquencies (including the establishment of workout and
temporary hardship arrangements); and (2) exclude losses and associated
costs (including the cost of holding reserves against potential losses
and the cost of funding delinquent accounts). As discussed in the
section-by-section analysis of Sec. 1026.52(b)(1)(i), consistent with
the Board's 2010 Final Rule, the CFPB in this final rule makes 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 has
determined that considering pre-charge-off collection costs as the
``costs'' of a late payment is consistent with Congress' intent to: (1)
allow card issuers generally to use late fees to pass on to consumers
the costs issuers incur to collect late payments or missed payments;
(2) ensure that those costs are spread among consumers and that no
individual consumer bears an unreasonable or disproportionate share;
and (3) prevent card issuers from recovering losses and associated
costs through late fees rather than through upfront rates.
As discussed in part V, the reported collection costs in the Y-14
data include costs incurred to collect problem credits that includes
the total collection cost of delinquent, recovery, and bankrupt
accounts. The CFPB concludes that the collection costs data in the Y-14
are consistent with the costs included for the cost analysis provisions
in Sec. 1026.52(b)(1)(i) except that the collection costs in the Y-14
data include post-charge-off collection costs. As discussed in part V,
in the 2023 Proposal, the CFPB estimated that approximately 75 percent
of collection costs incurred by card issuers are incurred pre-charge-
off. Thus, the CFPB's estimate of pre-charge-off collection costs is
based on only 75 percent of the collection costs in the Y-14 data for
purposes of its analysis related to the final changes to the safe
harbor thresholds in Sec. 1026.52(b)(1)(ii), as discussed in more
detail below. However, as discussed below, the conclusions are similar
even if the CFPB assumes that pre-charged-off collection costs are 80
percent of total collection costs incurred by card issuers, consistent
with the estimated post-charge-off commission rates for 2021 and 2022,
as discussed in more detail in part V.
In developing the $8 late fee safe harbor amount adopted in this
final rule, the CFPB carefully considered several sources of data and
other information to determine the amount that would cover the average
Larger Card Issuer's pre-charge-off collection costs. As discussed in
part V, and described in detail below, the CFPB reviewed and analyzed
major issuers' late fee income, collection costs, late fee amounts, and
required payment information contained in the Y-14 data, a source that
was not available when the Board set the initial safe harbor amounts in
2010. That analysis indicates that late fees generally generate revenue
that is multiple times higher than the Y-14 issuers' collection costs.
As discussed in more detail in part II.E, in 2022, the CFPB also
reviewed issuers' stated late fee amounts in card agreements that
issuers are required by the CARD Act to submit quarterly to the CFPB.
Based on these data, the CFPB expects that even if late fees were
reduced to one-fifth of current levels (implying late fees of $8 or
less), most Y-14 issuers would recover pre-charge-off collection costs.
Using this one-fifth estimate, the CFPB calculated the $8 fee by
dividing $41 by five and rounding to the nearest dollar. The CFPB
conservatively chose to use $41, the highest late fee charged in the
market, in the interest of caution. A less conservative approach would
have used $30 (the safe harbor for the first fee) or $31 (the average
late fee per incident for Y-14+ issuers in 2020), resulting in a $6
safe harbor.
To estimate the fee income to collection cost ratio for Larger Card
Issuers, the CFPB used the late fee income data and 75 percent of the
collection costs contained in the Y-14 data (referred to below as
``estimated pre-charge-off collection costs''). Using the Y-14 data,
the CFPB analyzed monthly late fee income and estimated pre-charge-off
collection costs for the consumer segments of major issuers' credit
card portfolios, namely the consumer general purpose and private label
portfolios. For the 16 consumer portfolios with continuous cost data
for the first three quarters of 2022 (adding up to about 73 percent of
total consumer credit card balances at the end of September 2022),
total late fee income in the first three quarters added up to $4.46
billion, while total collection costs added up to $1.19 billion with
pre-charge-off collection costs estimated to be $896 million (where the
pre-charge off collection costs are estimated to be 75 percent of the
total collection costs).\160\
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\160\ Based on data collected after the 2023 Proposal was
issued, the CFPB has data from 20 card issuers in the Y-14+ data.
For these Larger Card Issuers, total late fee income added up to $11
billion between October 2021 and September 2022, while total
collection costs added up to $2.7 billion with pre-charge-off
collection costs estimated to be $2.16 billion (where pre-charge-off
collection costs are estimated to be 80 percent of the total
collection costs).
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In reviewing the monthly data, the CFPB observed that late payments
exhibit seasonal patterns. The CFPB also considered that there may be a
delay between when a late fee was assessed and when the issuer incurs
substantial collection costs associated with the account. For these
reasons, the CFPB compared each month's late fee income for a
particular portfolio to the portfolio's average estimated pre-charge-
off collection costs for that month, where that estimate was based on
estimated pre-charge-off collection costs that occurred two through six
months later.\161\ Consistent with the data used
[[Page 19158]]
for the 2023 Proposal, the CFPB developed monthly estimates of this
late fee income-to-cost ratio for each year from 2013 up to September
2022. The analysis showed that an average of this ratio across issuers
and market segments, weighted by the number of accounts reported in the
Y-14 data, has been fairly stable since early 2019 (and was higher
before 2019). As shown in Figure 1 below, late fee income has always
been higher than three times subsequent estimated pre-charge-off
collection costs, and more than four times as high in all but seven
pandemic months (April-June 2020 and February-May 2021, coinciding with
pandemic stimulus payments, when there was a reduction in late fee
income without a corresponding decline in average collection costs in
subsequent months). Since August 2021, late fee income has exceeded the
relevant estimated pre-charge-off costs more than fivefold, which
resembles the period before the pandemic.
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\161\ For example, if an issuer were to report late fee income
of $24 million in January for a portfolio and total collection costs
for that portfolio of $25 million in March through July, the CFPB
estimated $20 million in pre-charge-off collection costs in March
through July and calculated an average monthly collection cost of $4
million for purposes of this analysis--resulting in a ratio of late
fee income of $24 million to collection cost of $4 million for this
portfolio for the month of January. The CFPB found that its findings
based on the weighted average of this ratio across issuers and
market segments as discussed in the analysis below are robust to
shifting, expanding, or shortening the time period of delay in
collection costs as they relate to late fee income.
[GRAPHIC] [TIFF OMITTED] TR15MR24.000
Based on this analysis, the CFPB expects 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. In the 2022
survey of credit card agreements discussed in part II.E, all but one
issuer among those in the Y-14 data (representing the majority of
balances in the credit card market) disclosed late fees ``up to'' $40
or $41 (the current maximum safe harbor amount) in their most recent
card agreements submitted to the CFPB. Given the finding that, in the
most recent data, late fee income is greater than five times estimated
pre-charge-off collection costs, the CFPB expects that an $8 late fee
would still recover the average Larger Card Issuer's pre-charge-off
collection costs, as that fee represents one-fifth of the maximum late
fee amount, which is necessarily greater than average fee income per
late payment. This conclusion is also consistent with additional
information from the CFPB's 2023 survey of credit card agreements in
the CFPB's Credit Card Agreement Database, which the CFPB conducted
after it issued the 2023 Proposal. As discussed in more detail in part
II.E, of the 30-35 submitters the CFPB would expect to be Larger Card
Issuers, 13 issuers charged at maximum late fee in their submitted
agreements of $40 and 11 charged $41 with the minority charging between
$35 and $39 and only two charging a maximum late fee below $35.
As discussed in part V, since issuing the 2023 Proposal, the CFPB
obtained Y-14 data for 14 more months than were available for the
analysis in the 2023 Proposal. In addition, the CFPB obtained updated
data related to post-charge-off commission rates for 2021 and 2022, and
based on that data estimated that pre-charged-off collection costs were
80 percent of collection costs incurred by Y-14 issuers for those
years. Figure 2a below shows the ratio of fee income to collection cost
ratio for Y-14 issuers, using the late fee income data and 80 percent
of the collection costs contained in the Y-14 data, including the 14
more months of Y-14 data.
[[Page 19159]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.001
The CFPB has determined that these updated Y-14 data yield a ratio
that is consistent with the determination that a $8 late fee safe
harbor threshold would recover the average Larger Card Issuer's pre-
charge-off collection costs. As shown in Figure 2a above, the ratio has
been above five for those additional 14 months and above six for the
last 11 months.
In addition, as discussed in part V, after issuing the 2023
Proposal, the CFPB obtained total collection costs and late fee income
data from specialized issuers that are included in the Y-14+ data but
do not report under the Y-14. The CFPB collected confidential quarterly
data from the five specialized issuers that are included in the Y-14+
data for their consumer cards in all quarters in 2019 through 2022,
split by whether the accounts in a given portfolio are general purpose
or private label cards, through an information order pursuant to
section 1022(c)(4) of the CFPA.\162\ Respondents were instructed to
provide the amounts of non-interest expense in costs incurred to
collect problem credits, defined as total collection cost for
delinquent, recovery, and bankrupt accounts, and net late fee income.
These definitions are identical to those provided in the Y-14
collection for collections expense and late fee income. Four issuers
provided timely and verifiable collections costs and late fee income
data, and those four issuers represented over one-third of late fee
volume for the Y-14+ in 2022.\163\
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\162\ See part V for a description of the Y-14+ data.
\163\ One specialized issuer's submissions were not provided on
the same timeline and did not align with data from previous
submissions, as such, those data are not used for the purpose of
this analysis using the specialized issuer's submissions.
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As the responses to the information order described above yielded
quarterly data, the CFPB is not able to calculate the same ratio of
late fee income to estimate pre-charge-off collection costs two-to-six
months later for each portfolio as it did for the weighted average in
Figure 1 above from the Y-14 data alone. To make use of the most widely
available data from certain Larger Card Issuers but treat them
consistently, the CFPB calculated a similar ratio but of a quarter's
total late fee income to the same quarter's estimated pre-charge-off
collection costs (where pre-charge-off costs are estimated to be 80
percent of the total collection costs) for each portfolio in the above
information order or in the Y-14 data with three months of non-zero
collection costs reported for that quarter. Figure 2b below shows the
market-wide weighted average of these ratios from 2019 to 2022,
weighted by the number of accounts. This calculation also suggests that
late fee incomes recently are so far above pre-charge-off collection
costs (using 80 percent of total collection costs) that a five-fold
decrease in the safe harbor is reasonable.
[[Page 19160]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.002
As discussed in part VI, the CFPB recognizes that the new $8 safe
harbor amount will apply to approximately a dozen issuers for which the
CFPB does not have total collections data and late fee revenue data.
The CFPB has determined that it is appropriate to apply this new safe
harbor amount to those issuers because they together with their
affiliates have at least one million open credit card accounts which
result in economies of scale similar to Y-14+issuers. Specifically, and
based on the CFPB's expertise and markets research, the CFPB expects
that these issuers have similar mechanisms to more efficiently collect
late payments and to do so at a lower cost than for Smaller Card
Issuers, and thus would have similar pre-charge off collection costs to
the Y-14+ issuers. Further, unlike Smaller Card Issuers, these Larger
Card Issuers derive substantial revenue from credit card portfolios,
and therefore, are more likely to have resources that would allow them
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.
Since the issuance of the proposal, the CFPB also obtained some
additional data through an information order pursuant to section
1022(c)(4) of the CFPA as part of its statutorily required, bi-annual
CARD Markets Report.\164\ In gathering the data for this report, one
question related to the average monthly all-in cost of pre-charge-off
collections. Based on these data, the average monthly all-in cost of
pre-charge off collections related to the ``delinquent inventory'' was
$18.61 for eight Larger Card Issuers in 2021 and $14.58 in 2022. These
data ranged from a high of over $40 to a low of $2, but most were
between $10 and $20. Although these data relate to pre-charge-off
collection cost from the ``delinquent inventory'' of the month, the
CFPB has determined they are not an accurate representation of pre-
charge off collection costs for late payments because the data
potentially exclude those consumers who pay almost immediately, and
this is a significant number of consumers. In 12 months of account-
level Y-14 data (the second half of calendar year 2022 and the first
half of 2023), most portfolios have 20-30 percent as many accounts with
month-end delinquency noted than how many accounts saw late fees
assessed. The CFPB would expect that the average pre-charge off
collection costs per month-end delinquent account would be higher than
the average pre-charge-off collection costs per late payment because
late payments where consumers pay almost immediately are less costly to
collect then those accounts with month-end delinquencies.
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\164\ In 2009, Congress passed the CARD Act. Among the CARD
Act's provisions was a requirement that the Board report every two
years on the state of the consumer credit card market. With the
passage of the CFPA in 2010, that requirement transferred to CFPB
alongside broader responsibility for administering most of the CARD
Act's provisions.
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In addition, as discussed above, an industry trade association
commenter also provided information on costs for accounts that are at
least 60 days late, which again is a subgroup of all late payment
incidents. This trade association asserted that the average costs per
delinquent account that is at least 60 days late is $46.30, including
$33.00 in direct expenses, $9.00 in attributable expenses, and $4.30 in
funding costs. The CFPB has determined that these cost data for
delinquent accounts that are at least 60 days late are not as relevant
as the Y-14 data in understanding Larger Card Issuers' average pre-
charge-off collection costs with respect to all late payments, as
opposed to a certain subset of late payments (i.e., at least 60 days
late). The CFPB expects that accounts that are more than 60 days late
likely represent a minority of late fee incidences but may generate
most of the collection costs. In addition, the trade association's cost
data includes some costs that are not permitted to be considered under
the cost analysis provisions in Sec. 1026.52(b)(1)(i). For example,
current comment 52(b)(1)(i)-2.i provides that amounts 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
[[Page 19161]]
holding reserves against potential losses and the cost of funding
delinquent accounts). The commenter also indicated that the direct
expenses include post-charge-off collection costs, which this final
rule makes explicitly clear are not included in the costs that are
permitted to be considered for purposes of Sec. 1026.52(b)(1)(i).
Also, it is unclear whether the attributable expenses would be costs
permitted to be considered for purposes of Sec. 1026.52(b)(1)(i)
without knowing the facts and circumstances surrounding those expenses.
The CFPB also notes that average late fees for Y-14+ issuers are
lower than the disclosed maximum late fees. As discussed in part II.D,
in 2020, the average late fee charged by issuers in the Y-14+ data was
$31.\165\ Reasoning that the average late fees are lower than the
current maximum safe harbor of $41 and yet still generate late fee
income that is again more than five times the ensuing (estimated) pre-
charge-off collection costs since August 2021, the CFPB concludes that
$8 is likely to recover the average Larger Card Issuer's pre-charge-off
collection costs.\166\
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\165\ Late Fee Report, at 6. To gain further insights into how
the average late fee compares to the disclosed maximum late fee in
the agreements, the CFPB analyzed a 40 percent random subsample of
tradelines of Y-14 data from 2019 to observe the incidence of late
fees and the fee amounts assessed. The CFPB observed that the
average late fees have been lower than the amounts in the card
agreements for several reasons, including (1) some late fees did not
occur within six months of an earlier late fee and thus are set at
the lower safe harbor amount; and (2) some late fees reflect the
current limitation in Sec. 1026.52(b)(2)(i)(A) and related
commentary that prohibits late fees from exceeding the minimum
payment amount that is due. The CFPB also observed that some late
fees are imposed but later reversed and that some late fees are
charged to accounts that never make another payment.
\166\ This conclusion is also consistent with subsequent data
collected by the CFPB after issuance of the 2023 Proposal, which
showed that the average late fee per incident for Y-14+ issuers in
2022 was $32.
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The CFPB acknowledges that not all issuers in the Y-14+ data incur
the average pre-charge-off collection costs. By using estimates of pre-
charge-off collection costs per paid incident using the Y-14 data from
September 2021 to August 2022 (consistent with the data used in the
2023 Proposal), the CFPB estimates that fewer than four of the 12 card
issuers in the Y-14 data have estimated pre-charge-off collection costs
that are significantly higher than one-fifth of their late fee income.
For these issuers, the proposed $8 safe harbor amount may not have been
enough to fully recover estimated pre-charge-off collection costs, such
that the benefits of using the cost analysis provisions may outweigh
the administrative simplicity of using the safe harbor.
This result is also consistent when the CFPB considers the
additional data it obtained since the publication of the 2023 Proposal,
namely (1) using 14 additional months of Y-14 data; (2) estimating the
pre-charge-off costs are 80 percent of the total collections costs in
the Y-14 data; and (3) considering data submitted by the specialized
card issuers in the Y-14+.
By using estimates of pre-charge-off collection costs (80 percent
of total collection costs) per paid incident using the Y-14+ data from
calendar year 2022, the CFPB estimates that fewer than six of the 16
issuers with a continuous history of non-zero collection costs had
estimated pre-charge-off collection costs that were significantly
higher than one-fifth of their late fee income. For the remaining
issuers, who represent less than 30 percent of accounts and around a
fourth of late fee income in this set, the proposed $8 safe harbor
amount may not have been enough to fully recover estimated pre-charge-
off collection costs in 2022, such that the benefits of using the cost
analysis provisions may outweigh the administrative simplicity of using
the safe harbor. While both the data considered for the proposal and
this more recent, supplementary data suggest that the $8 late fee safe
harbor amount adopted in this final rule would cover pre-charge-off
collection costs for most Y-14+ issuers in years resembling 2022, the
CFPB acknowledged in the 2023 Proposal and continues to recognize that
some Larger Card Issuers may not recover pre-charge off collection
costs for all portfolios at all times under the lower safe harbor. The
CFPB, however, notes that the safe harbor is discretionary, and these
issuers can choose to determine the late fee amount using the cost
analysis provisions in Sec. 1026.52(b)(1)(i), rather than using the
proposed $8 safe harbor amount, if $8 is insufficient to recover their
pre-charge-off collection costs. Larger Card Issuers also may undertake
efforts to reduce collection costs or use interest rates or other
charges to recover some of the costs of collecting late payments.
Building those costs into upfront rates would provide consumers greater
understanding regarding the cost of using their credit card accounts.
The CFPB notes that the CARD Act does not require the CFPB to
establish a late fee safe harbor amount that covers the costs for all
issuers or the entire costs of the omission or violation in all
instances. Instead, TILA section 149(e) authorizes the CFPB to issue
rules to provide, for any penalty fee or charge, a safe harbor amount
that is presumed to be reasonable and proportional to the omission or
violation to which the fee or charge relates. The CFPB is concerned
that setting a higher safe harbor amount for late fees in order to
cover the pre-charge-off collection costs of all Larger Card Issuers
could result in an amount that exceeds the costs for most Larger Card
Issuers. As discussed in part II.E the CFPB also is concerned that
Larger Card Issuers may have a disincentive to charge a lower fee
amount than the safe harbor amount, even if their average collection
costs are less than the safe harbor amount, given the industry's
reliance on late fees as a source of revenue and that many consumers
may not shop for credit cards based on the amount of the late fee.
The CFPB notes that the analysis based on the Y-14 data discussed
above does not consider any potential changes in consumer behavior in
response to the change in the late fee safe harbor amount in this final
rule for Larger Card Issuers. In particular, the discussion does not
take into account the possibility that reduced late fees will lead to
more late payments at Larger Card Issuers. However, the CFPB also
expects that any increase in the frequency of late payments, if any, as
a result of the reduced late fee safe harbor amount, would increase
both fee income and collection costs at Larger Card Issuers. Even if
more consumers pay late at Larger Card Issuers because of the decreased
amount, the CFPB concludes that the increased number of late payments
are unlikely to be more costly, on average, to administer and collect
than the current number of late payments. Therefore, the CFPB expects
that collection costs to Larger Card Issuers would not increase by more
than fee income. Further, as discussed below, the CFPB's analysis of Y-
14 data and other information suggests that the proposed $8 safe harbor
amount for the first and subsequent late payments would still have a
deterrent effect on late payments.
In addition, the CFPB has determined that the $8 late fee safe
harbor provision in Sec. 1026.52(b)(1)(ii) adopted as part of this
final rule would continue to save costs for Larger Card Issuers that
use the safe harbor. As discussed above, in considering the appropriate
safe harbor amount for late fees, the CFPB is guided by the factors in
TILA section 149(c), which provides that the CFPB can consider such
other factors that the CFPB deems necessary or appropriate. The CFPB
finds that it is both necessary and appropriate, when considering the
portion of Larger Card Issuers' pre-charge-off costs that a late fee
safe
[[Page 19162]]
harbor amount would cover, to consider the benefits to Larger Card
Issuers from use of the safe harbor, including compliance certainty,
administrative simplicity, and reduced litigation risk. The CFPB also
finds that for Larger Card Issuers, a late fee safe harbor amount of $8
for the first and subsequent late payments would cover the average
Larger Card Issuers' costs from late payments while providing those
card issuers with compliance certainty and administrative simplicity
and, therefore, reduce their compliance costs and burden.
For the foregoing reasons, the CFPB determines that a late fee of
$8 for the first and subsequent violations is appropriate to cover pre-
charge-off collection costs for Larger Card Issuers on average while
providing those issuers compliance certainty and administrative
simplicity.
Even if the CFPB were required to consider the statutory factors of
costs, deterrence, and consumer conduct in setting the discretionary
safe harbor amounts, the CFPB has determined that TILA section 149(e)
does not require that the CFPB weigh all of the factors equally in
determining what safe harbor amount is a reasonable proxy for the
definition of a ``reasonable and proportional'' fee. In this regard,
the CFPB has determined that the cost factor deserves the most weight
of these factors in setting the precise late fee safe harbor amount
because it is most closely correlated to the consequences to the issuer
of a consumer's late payment. In other words, costs are the best guide
to what constitutes a ``reasonable and proportional'' fee. The CFPB has
determined that the data described above allows the CFPB to quantify
the pre-charge-off collection costs of Larger Card Issuers and set a
late fee safe harbor amount that will allow the average Larger Card
Issuer to recover its pre-charge-off collection costs. By contrast, the
CFPB has determined that deterrence and consumer conduct--while
important--are less determinative than costs in setting a precise late
fee safe harbor amount. Not only are deterrence or consumer conduct
harder to quantify, but the link between the late fee amount and
deterrence or consumer conduct is more tenuous. For instance, as noted
by consumer commenters on the 2023 Proposal, consumers indicated that
there were various reasons why they incurred a late fee in the past,
including (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.
Thus, while deterrence and consumer conduct can help corroborate a safe
harbor amount set based on costs, the CFPB believes that the deterrence
and consumer conduct factors could not justify a safe harbor amount
that is disproportionate to costs.
Nonetheless, while the CFPB has determined that deterrence or
consumer conduct should not be the primary factors in deciding the
precise late fee safe harbor amount for Larger Card Issuers, the CFPB
has determined based on the analysis discussed below that the $8 late
fee safe harbor amount will still have a deterrent effect on late
payments, and that the $8 late fee safe harbor amount better reflects a
consideration of consumer conduct than do the higher safe harbor
amounts set by the Board.
Deterrence. After careful consideration of the comments, the CFPB
determines that the available evidence for Larger Card Issuers suggests
that an $8 safe harbor amount will have a deterrent effect on late
payments. The CFPB also determines that some cardholders may benefit
from the $8 safe harbor threshold amount in terms of a greater ability
to repay revolving debt, including some cardholders who may experience
an increase in late payments under the lower safe harbor amount. The
CFPB also notes that card issuers have methods other than higher late
fees to deter late payment behavior and to facilitate timely payments.
For example, card issuers may decrease the cardholder's credit line,
limit their earning or redemption of rewards, or impose penalty rates
in certain circumstances. Card issuers also may offer automatic payment
and provide notification within a certain number of days prior to the
payment due date. The CFPB's reasons for making these determinations,
including its analysis of available evidence, are discussed below.
As a threshold matter, the CFPB acknowledges, as it acknowledged in
the 2023 Proposal, that a late fee of any dollar amount has some
deterrent effect that is more than no late fee at all. Some of the
comments received, as discussed above, support the CFPB's determination
by noting that a safe harbor late fee amount of $8 would have a lesser
deterrent effect than the current amounts, rather than no deterrent
effect. The CFPB also recognizes, as it recognized in the 2023
Proposal, that generally a lower late fee amount has less theoretical
deterrence than a higher amount, though whether that will manifest in
lower repayment rates in light of the other salient factors is
uncertain. As such, the many comments asserting that a late fee amount
of $8 may result in a higher frequency of late payments, as discussed
above, are consistent with the assumptions in the CFPB's deterrence
analysis. The CFPB rejects the notion, implicit in many comments
opposing the $8 late fee amount, that consideration of deterrence
necessitates, as a matter of law or policy, setting a safe harbor
amount that will have the maximum theoretical deterrence effect. In
addition, the CFPB recognizes, as it recognized in the 2023 Proposal,
that it does not have direct evidence concerning what consumers would
do in response to a fee reduction similar to the one in this final
rule. The CFPB notes, however, that the Y-14 data and other information
on which its deterrence analysis is based, as discussed below, have
become available since the Board issued its 2010 Final Rule and
constitute a far richer body of evidence than that on which the Board
relied. It should be noted that by the same logic, those commenters
expressing concern regarding the potential deterrence effect of a lower
late fee likewise had no direct evidence to proffer in support.
As discussed in the 2023 Proposal, for purposes of considering the
deterrence effect of the $8 safe harbor amount, the CFPB analyzed
available data from certain Larger Card Issuers to consider the extent
to which lower late fees for both the first and subsequent late
payments could potentially lessen deterrence. Specifically, in making
its determination that the $8 safe harbor amount will still have a
deterrent effect on late payments, the CFPB considered (1) a comparison
of the $8 late payment safe harbor amount to minimum payment amounts on
accounts in the Y-14 data; and (2) available empirical evidence on the
effects of credit card late fees on the prevalence of late payments.
The CFPB notes that whether a consumer is late in making a required
payment depends in part on the consequences of paying late, including
penalty fees for late payments and other consequences such as increased
interest charges and potential credit reporting consequences (as
discussed in part II.G and in more detail below). From the point of
view of a rational consumer faced with the decision of whether to make
a minimum balance payment on time or to put off the payment until
later, the decision represents a tradeoff weighing the value to the
consumer of retaining the money for longer against the total costs of
paying late. For the median minimum payment amount of
[[Page 19163]]
approximately $100 for accounts that paid late in the Y-14 data from
October 2021 through September 2022, the CFPB's analysis found that the
costs of paying late are quite steep both under current late payment
fee amounts and under the $8 safe harbor amount.\167\ For example, a
consumer who effectively borrows a minimum payment amount of $100 until
the next due date (that is, who makes a payment one month late) and
pays a $8 late fee would be incurring an effective APR of 96 percent,
even ignoring other consequences. In addition, a consumer who
effectively borrows a minimum payment amount of $40 for 10 days (past
due) and pays a $8 late fee would be incurring an effective APR of 730
percent. As the median minimum due was $39 for all cardholders between
October 2021 and September 2022 in the Y-14 data,\168\ and around half
of late payers made a payment in less than 10 days past the due date,
the effective APR could be higher than 730 percent for some consumers.
Based on that analysis, the CFPB determines that an $8 late fee safe
harbor amount for Larger Card Issuers will still serve as a powerful
deterrent to those consumers who pay attention to financial penalties.
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\167\ For more information about the distribution of minimum
payment amounts for late accounts in the Y-14 data, see Figure 5 and
related discussion in the section-by-section analysis of Sec.
1026.52(b)(2)(i).
\168\ For purposes of the calculations of the distribution of
the minimum payment amounts in the Y-14 data, the calculations do
not include account-months where a late fee was charged but the
minimum due was reported to be $0.
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In addition to the analysis discussed above, the CFPB considered
available empirical evidence on the effects of credit card late fees on
the prevalence of late payments. In particular, the CFPB considered (1)
a 2023 paper analyzing the effect of the reduction of late fee amounts
that became effective as a result of the CARD Act in 2010; (2) analysis
by the CFPB using Y-14 data of how the prevalence of late payments is
affected by increases in late fee amounts during the six months
following a violation; and (3) other empirical investigations into the
correlates of late fee amounts and late fee incidence as discussed
below.
As discussed in the 2023 Proposal, in analyzing the available data,
the CFPB notes a 2023 paper by Grodzicki et al., which contains an
empirical analysis that concluded that a decrease in the late fee
amount stemming from the Board's 2010 Final Rule raised the likelihood
of a cardholder paying late.\169\ The CFPB rejects the notion, advanced
by one commenter, that it cherrypicked evidence to support its
deterrence analysis, or even ignored evidence that may be viewed as
conflicting with its conclusion. To the contrary, the CFPB recognizes
that the 2023 paper suggests that consumers may engage in more late
payments when they are less costly to consumers. However, as noted in
the 2023 Proposal, the CFPB does not consider this to be robust
evidence that the $8 safe harbor late fee amount would not have a
deterrent effect. As discussed in the 2023 Proposal, the CFPB also
notes that the paper focused on the late fee variations resulting from
the limitations on penalty fee amounts in the Board's 2010 Final Rule
and thus could be confounded by other market changes coinciding with
the rule going into effect. In particular, the late fee provisions in
the Board's 2010 Final Rule were implemented in August 2010, as the
U.S. economy was still dealing with the aftermath of the Great
Recession,\170\ and thus it was difficult to attribute consumer finance
statistical trends to particular events. Moreover, the Board's 2010
Final Rule affected all consumers and all issuers, so there was no
suitable control group of consumers that were charged the same amount
of late fees before and after the implementation of the Board's 2010
Final Rule. Thus, the 2023 paper compared consumer behavior in the year
before and the year after August 2010, and the causal attribution of an
increase in late payments to a reduction of the late fee amount is hard
to prove due to the general economic uncertainty around that time. As
discussed above, a credit union trade association took issue with the
CFPB's questioning the 2023 paper's findings based on the time period
studied. The CFPB emphasizes that the chief problem with the study is
that its authors could not convincingly distinguish the effects of the
financial crisis and other regulatory reforms under the CARD Act from
the effects of lowering late fees. The CFPB also notes that the 2023
paper relied on an older and smaller version of the Y-14 data than that
on which the CFPB's analysis is based.
---------------------------------------------------------------------------
\169\ Daniel Grodzicki, et al., Consumer Demand for Credit Card
Services, Journal of Financial Services Research 63, 272-311 (2023),
https://doi.org/10.1007/s10693-022-00381-4.
\170\ The Great Recession began in the fourth quarter of 2007
and ended in the second quarter of 2009. See generally Nat'l Bureau
of Econ. Res., Business Cycle Dating Committee Announcement (Sept.
20, 2010), https://www.nber.org/cycles/sept2010.html.
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In developing the deterrence analysis, the CFPB also analyzed Y-14
data from 2019, where the variation in late fees does not correspond to
other big changes or differences that might plausibly affect late
payment. As discussed above, the current rule sets a higher late fee
safe harbor amount for instances where another late payment occurred
over the course of the preceding six billing cycles. The CFPB conducted
statistical analysis to investigate whether the lower late fee amount
in month seven leads to a distinct rise in late payments (Y-14 seventh-
month analysis). Specifically, the CFPB estimated whether there is a
discontinuous jump in late payments in the seventh month after the last
late payment.\171\ This analysis focused on this potential jump to
isolate the potential impact that the lower late fee that would apply
in month seven might have on late payment rates, given that month seven
is generally comparable to month six other than the lower late fee
amount. In a random subsample from account-level data available in 2019
from the Y-14 data, this statistical analysis did not support that the
lower late fees in month seven have an effect on the late payment rate,
at conventional confidence levels. In addition, as a separate
observation, the CFPB observed that for consumers that incurred a
higher fee for a late payment during the six months after the initial
late payment, the payment of that higher late fee did not lead to a
discernibly lower chance of late payment for a third time in the future
than for those consumers whose second late fee was lower because they
paid late seven or more months after their first late payment.
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\171\ 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.
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The CFPB acknowledges that the variation in late payments in the Y-
14 seventh-month analysis discussed above is not the same as the
changes that will result from this final rule. Nonetheless, the CFPB
has determined that this evidence suggests the prevalence of late
payments is not highly sensitive to the level of late fees at the
current order of magnitude.
As discussed in the 2023 Proposal, an advantage of the Y-14
seventh-month analysis is that it avoids confounding factors that often
are found in other studies of late fees, including the 2023 paper by
Grodzicki et al., discussed above. Studies that compare behaviors of
consumers facing higher or lower fees (if late) with consumers in a
comparison group are often fraught with multiple confounding factors
that may also vary
[[Page 19164]]
across time periods, issuers, products, or consumer behavior in each
group.
The CFPB notes that the finding from the Y-14 seventh-month
analysis described above is still contingent upon the fact that some
consumers understand that their issuers charge lower late fees starting
the seventh month after an initial violation. The CFPB recognizes that
the higher late fees for subsequent late payments within the next six
billing cycles might be more of a deterrent if consumers understood
them better in 2022 than they did in 2019, but the CFPB has no evidence
to indicate that is the case. However, as discussed in the 2023
Proposal, the CFPB's analysis is not dependent on all issuers charging
the lower late fee safe harbor amount more than six months after a late
payment nor the higher late fee safe harbor amount within the six
billing cycles. As long as some card issuers made use of the higher
safe harbor, as the analysis described above shows that they did, the
CFPB should still have been able to detect an increase in the deterrent
effect of their fee structure.
The CFPB also notes that because the Y-14 seventh-month analysis
discussed above focused on a potential discrete jump in late payments
more than six months after a preceding late payment, it also allowed
for late payments to trend down as more time passed after a late
payment. As described above, the CFPB did not see the lower late fee
amount that could be charged in month seven change this downward trend.
The CFPB also determines that other publicly available studies on
late fees suggest that the $8 safe harbor amount will still have a
deterrent effect on late payments. As discussed in the 2023 Proposal,
empirical investigations into the correlates of late fee amounts \172\
and late fee incidence \173\ have noted that late fee payment can often
be avoided by small and relatively costless changes in behavior. This
suggests that the lower $8 late fee safe harbor amount will still be
higher than the costs of making a timely payment. Further, the CFPB
determines that the triggers that make cardholders avoid the current
prevailing late fees--including notices provided by card issuers--also
will make cardholders avoid a $8 late fee.
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\172\ Nadia Massoud, et al., The Cost of Being Late? The Case of
Credit Card Penalty Fees, 7 Journal of Financial Stability, at 49-59
(2011).
\173\ Sumit Agarwal, et al., The Age of Reason: Financial
Decisions Over the Life Cycle and Implications for Regulation, 2
Brookings Papers on Economic Activity, at 51-117 (2009).
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With respect to other publicly available studies, the CFPB notes
(as it did in the 2023 Proposal) that the Board--in support of setting
higher late fee safe harbor amounts for violations that occur in the
following six billing cycles after a late payment--pointed in its 2010
Final Rule to a 2008 study by Agarwal et al. of four million credit
card statements. That study found that a consumer who incurs a late
payment fee is 40 percent less likely to incur a late payment fee
during the next month, although this effect depreciates approximately
10 percent each month.\174\ As noted above, one credit union trade
association commenter criticized the CFPB for not taking the 2008 study
into account in its deterrence analysis. However, as discussed in the
2023 Proposal, the CFPB in fact consulted the last available revision
of the cited working paper by Agarwal et al., from 2013. Based on that
analysis, the CFPB determines that the study is of limited relevance as
to whether the late fee amount impacts late payment incidence, for two
reasons. First, the study considers the months following any late fee
and compares them to months with no recent late payment. That
comparison is not the same as comparing to months in which a payment
was late, but a lower late fee (or even a $0 late fee) was charged.
Second, even if the study had compared to months in which a payment was
missed but no late fee was charged, that comparison still would not be
relevant to this final rule, in that this final rule reduces the safe
harbor amount to $8; it does not completely eliminate the late fee.
---------------------------------------------------------------------------
\174\ See Agarwal et al., supra note 137.
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In addition, the CFPB notes that the Y-14 seventh-month analysis
discussed above shows that in the surrounding months reoffending rates
trend down with each month after the last late payment. That seventh-
month analysis, however, did not show a jump in late payment rates in
month seven after the last late fee, which suggests that the higher
late fee amount during the prior six months is not contributing to this
downward trend. The CFPB also notes that the 2013 study by Agarwal et
al. did not separate the effects of the late fee itself from other
possible consequences of a late payment, such as additional finance
charges, a lost grace period, penalty rates, and reporting of the late
payment to a credit bureau, which could affect the consumer's credit
score. Given these other consequences of a late payment as discussed in
more detail below and in part II.G, it is not clear that the lower late
fee safe harbor amount would meaningfully affect the decreased chance
that consumers will pay late again after an initial late payment in
ways similar to those established in this 2013 study.
As discussed in the 2023 Proposal, in adopting the safe harbor
amounts in its 2010 Final Rule, the Board also considered the
limitations that the United Kingdom's OFT placed on credit card default
charges in 2006. The CFPB notes that it is not aware of evidence
suggesting that the [pound]12 ($21 on April 5, 2006, $13.40 in November
2022) limit the OFT imposed on default charges (including late fees) in
2006 meaningfully increased late payments in the United Kingdom (U.K.).
The OFT ruled on April 5, 2006, that it would presume default charges
higher than [pound]12 unfair and challenge the company unless
exceptional business factors drove the decision for the company to
charge higher fees. As fees were routinely as high as [pound]25 ($43.75
on April 5, 2006) until that spring, this episode is the closest to
what the CFPB would foresee as the outcome to its proposal: a salient
reduction in late fees impacting a large portion of the marketplace at
once, letting both issuers and cardholders learn and adapt to the lower
later fees. As such, the CFPB has taken it into account in its
deterrence analysis.
As discussed above, two academic commenters suggested that the CFPB
consider for purposes of its deterrence analysis a study by John
Gathergood et al.\175\ The CFPB agrees that the study merits
consideration and thus has taken it into account in developing this
final rule. Using U.K. data, that study found that the occurrence of
late fees incurred by consumers on credit card accounts are front-
loaded, peaking in the first month of card life and declining sharply
over the following months. Specifically, one of the commenters noted
the study's finding that the share of credit card accounts incurring
late payment fees in the study's sample fell from 6 percent in the
first month to 2.5 percent by the 23rd month, mainly because the
payment of an initial late fee prompted consumers to set up automatic
payments. The CFPB notes that, arguably, this work proves again that
many missed payments are often mistakes that can be easily avoided
through a number of means, including autopay. Even if issuers see no
cheaper way to effectively promote autopay than through the imposition
of late fees, that is no reason for issuers to keep the revenue from
late fees above cost or even to cross-subsidize other
[[Page 19165]]
cardholders through the imposition of late fees. Considering the fact
that U.S. late payment rates are higher than the cited 2.5 percent for
cards older than two years in the U.K., the CFPB is not convinced that
charging late fees is even an effective way to promote autopay in the
current American context.
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\175\ John Gathergood et al., ``How Do Consumers Avoid Penalty
Fees? Evidence From Credit Cards'' (Dec. 11, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2960004.
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Some industry commenters submitted additional data on deterrence in
response to the CFPB's request for additional data. The CFPB
appreciates these submissions but does not find the data persuasive. In
particular, one large industry trade association submitted the results
from a survey of 2,000 consumers it conducted for the purpose of
identifying the fee point at which consumers would likely be deterred
from paying their credit card bills late. The commenter reported that,
among other things, the survey found that late fees are more effective
in motivating consumers to pay bills on time than negative credit score
impacts. Almost half of consumers (46 percent) said that avoiding late
fees was the most important reason to pay credit card bills on time,
and 30 percent said that doing the responsible thing was the most
important reason to pay on time. Only 15 percent said that concerns
about credit ratings was the most important reason to pay on time. This
commenter further reported that the survey found that the CFPB's
proposed $8 safe harbor would not motivate many consumers to pay their
credit card bills on time. In the survey, more than 4 in 5 consumers
(83 percent) said that a $10 late fee would be insufficient to deter
them from paying a credit card bill late. Only 6 percent of respondents
said that a fee of $10 would have a deterrent effect. For those who
have paid a late fee in the past year, the deterrence effect of a $10
fee is even lower: only 4.3 percent said that such a fee would deter
them from paying late.
The CFPB notes that the submitted survey asked consumers about the
primary reason they avoid a late fee. As such, it is consistent with
current fees being excessive that 46 percent of consumers pay on time
primarily to avoid late fees, while only 30 percent would do so to do
the responsible thing. The posed question does not shed light on
whether concerns about a credit rating or the other listed reasons (or
other reasons not even listed) in combination with a $8 late fee would
be sufficient for most consumers not to breach a contract. It is
unclear from the results submitted whether the amount of the
hypothetical late fee was meant or understood to be considered in
isolation or alongside the other consequences of a missed payment. For
example, did respondents say that a $10 fee would not deter them
because they thought that the fee would be the only consequence of a
missed payment? Would respondents have said something else had they
known (and understood) the loss of the grace period or larger interest
payments? The survey results leave these questions unanswered.
Although the survey did ask respondents if they would be deterred
by a late fee amount below $5, $10, and $15, the reported ``yes''
response rates in the single digits are missing crucial context--
specifically, whether the respondents would indeed have said they would
be deterred by late fee amounts close to $30 and $41. The survey is
hypothetical. In practice, the vast majority of cardholders pay on time
in the vast majority of months. The survey results submitted to the
CFPB do not show whether respondents, within the hypothetical world
posited by the survey, indicated whether $30 is at or near the price
point at which they would be deterred from making a late payment. In
other words, the results reveal nothing about the extent to which a $30
late fee determines consumers' payment behavior in the real world.
An additional reason why the survey is of limited value is that,
based on the results provided to the CFPB, the survey seems to have
posited a hypothetical world in which it is assumed that respondents
had the money to pay the bill and were aware of the due date. In
practice, consumer commenters indicated that they pay late for a
variety of reasons, including (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. To the extent
consumers are late in paying because of mail delivery issues, they are
inattentive to their account, or they are so cash-constrained that they
are unable to make a minimum payment, the amount of the late fee may
have little effect on whether they pay late.
Further, the appendix to the comment letter mentions that the
contractor used the Van Westendorp's Price Sensitivity Meter \176\ to
``identify the fee point at which consumers would likely be deterred
from paying their credit card bills late,'' indicating the commenter
gathered much more data about purported demand for late fees than the
data related to just three price points that it chose to share. That
type of data might be useful, given that a careful consideration of
deterrence needs to trade off additional deterrence against other cost
and benefits of higher fees. It is crucial to know whether deterrence
would be meaningfully higher at $20, or maybe $50, in order to consider
whether that higher deterrence is indeed worth the harm to consumers
from those higher fee amounts. The survey responses that the commenter
chose to share prove that there is not meaningfully more deterrence at
$15 than at $5, but nothing about the comparative deterrent effect of
$30 or $41. This final rule maintains the stance of the 2023 Proposal
that late fee amounts can have some deterrent effect, and higher
amounts have more, but a $30 or $40 late fee amount would not be
sufficiently more of a deterrent than an $8 late fee amount to justify
late fees far above cost, especially given the other negative
consequences of a late payment. The final rule further maintains the
stance, as supported by consumer commenters, that many late payments
are due to reasons that would not be responsive to any level of
deterrent.
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\176\ The Van Westendorp Price Sensitivity Meter is a
comprehensive, multi-question survey model that indirectly measures
potential buyers' willingness to pay. Instead of asking potential
buyers to identify a single price point, the Van Westendorp model
helps assess willingness across a range of prices. See Rebecca
Shaddix, How To Price Your Product: A Guide To The Van Westendorp
Pricing Model, Forbes (June 22, 2020), at: https://www.forbes.com/sites/rebeccasadwick/2020/06/22/how-to-price-products/?sh=4cbfd2055c75.
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A regulatory advocacy group commenter submitted data from its
recent poll of approximately 1,100 consumers regarding credit card late
fees. The commenter reported the poll shows that by a 21-point margin,
respondents believe that a decrease in the penalty will result in more
people making late payments. Further, 53 percent of those surveyed
believe they will be more likely to make late payments on their credit
cards if the late payment penalty is reduced from $30 to $8. A large
trade association commenter cited the same poll results as direct
evidence of what consumers would do in response to a reduction in late
fee amounts similar to the one proposed.
The CFPB acknowledges that the direction of the response to a fee
change in these results seems correct, and that such a reaction has
never really been in doubt in the CFPB's development of this final
rule. Lower fee amounts would be less deterrent than higher fee
amounts, but this observation provides scant evidence to help the CFPB
ensure that
[[Page 19166]]
late fees are reasonable and proportional, as guided by the factors of
deterrence, cost, and consumer conduct. The CFPB also finds that
responses to questions posed to consumers about hypothetical late
payment amounts are less informative than are the effects of late
payment fees that consumers actually incur, such as those studied in
the seventh-month analysis of certain Larger Card Issuers' Y-14 data
discussed above.
In addition, a bank commenter asserted that it has consistently
found that late fee assessments under the current safe harbor amounts
reduce the incidents of recurring delinquencies and submitted its own
data in support of the statement. According to the commenter, between
2019 and 2021, 43 percent of its 30-day delinquent cardholders did not
subsequently enter a 60-day delinquency after incurring a late fee.
Furthermore, over the same time period, 48 percent of 60-day its
delinquent cardholders who were assessed two late fees did not enter a
90-day delinquency status.
The CFPB notes that the disclosed information does not show the
effects of charging a late fee, let alone the effects of charging the
$41 current safe harbor amount, against the counterfactual of charging
an $8 safe harbor amount. The fact that a decreasing share of late
payers are delinquent for one, two, or three months is fully consistent
with the CFPB's understanding of consumer behavior in this market and
with the CFPB's analysis of the effects of late fee charges and other
consequences of late payments, as discussed herein. The commenter did
not formulate how many more cardholders would be delinquent for 30, 60,
and 90 days or more if no late fee were charged or if a $8 late fee
were assessed after a late payment.
As discussed above, one credit union trade association asserted
that the CFPB failed to present in the 2023 Proposal an analysis of the
tradeoff between late fees and late payments. This commenter asserted
that a consumer is deterred from being late on a payment if the late
fee is greater than the net benefit of missing the payment. Similarly,
one credit union commenter expressed concern that if the late fee
amount is set too low, consumers are more likely to pay the fee without
considering the long-term consequence of lowering their credit scores,
higher borrowing costs, reduced ability to access credit, and
ultimately less disposable income. Many other industry commenters
expressed similar concerns. In response, the CFPB notes that
calculating consumers would trade off the total costs of a missed
payment against the full array of benefits of missing the deadline on
minimum payments. The CFPB notes, however, that the total costs of a
late payment are higher than just the late fee, as the 2023 Proposal
and this final rule have enumerated.\177\ In addition, in practice,
many late payments are due to circumstances beyond consumers' control.
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\177\ The CFPB also notes that the benefits need not be
restricted to the alternative use of funds, such as the opportunity
cost of investing the minimum payment due for a short time. Rather,
they also include the cognitive and other costs of initiating other
transactions in advance of the due date in such a way as to ensure
that the consumer has available funds at the last possible moment at
which they can initiate a payment that the issuer would accept as
timely.
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Also, as discussed above, several commenters posited that because
$8 is roughly comparable to the price of common items such as a cup of
coffee or movie ticket, more consumers may view that amount as a
reasonable price to pay in exchange for postponing making their credit
card payments. The CFPB reiterates that some late payments are the
result of circumstances beyond consumers' control.\178\ Moreover, the
CFPB notes that some consumers pay late simply because they do not have
enough funds to pay the minimum payment. As noted in part III.B, some
consumer commenters indicated that they have limited income and that
even a small late fee can impact their tight budget. For consumers in
these circumstances, a $30 late fee is simply adding to the unpayable
debt amount.
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\178\ As discussed in part III.B, some consumers commenting on
the 2023 Proposal stated that they had incurred late fees 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; or (3) they forgot
to pay on time because of vacations, medical issues, or family
issues.
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For the reasons discussed above, the CFPB finds that the available
evidence and the CFPB's study of the Y-14 data of certain Larger Card
Issuers indicate that the $8 safe harbor amount for the first and
subsequent late payments will still have a deterrent effect on late
payments, although that effect may be lessened to some extent, and
other factors may be more relevant (or may become more relevant) toward
creating deterrence.
In addition, for the reasons discussed herein, the CFPB determines
that some consumers may benefit from the $8 safe harbor threshold
amount, including some consumers who may experience an increase in late
payments under the lower safe harbor amount. With respect to those
consumers, the CFPB notes, as it did in the 2023 Proposal, that for the
more constrained cardholders, like subprime borrowers, who pay a
disproportionate proportion of late fees, the current, higher late fee
may be impacting cardholder repayment conduct--i.e., the higher late
fee amount could have gone toward a payment on the account. As
discussed in part IX, the CFPB estimates that reducing the safe harbor
for late fees to $8 for Larger Card Issuers will likely reduce late fee
revenue by billions of dollars. This expected savings will benefit
consumers. The money saved by cardholders on late fees may go toward
repayment. As discussed in the 2023 Proposal, the 2023 paper by
Grodzicki et al.,\179\ described above, with all the caveats noted
there, found such a pattern for subprime cardholders: A decrease in
late fees after the implementation of the CARD Act increased borrowing
for prime borrowers but triggered repayment for subprime
cardholders.\180\ If this prediction holds true for the late fee safe
harbor amount in this final rule, it would imply that lowering late
fees may provide some benefits to subprime consumers in terms of a
greater ability to repay revolving debt.\181\ This effect might also
lower issuers' losses from delinquencies, as it could subsequently
reduce the likelihood and the severity of default in the population
most prone to default.\182\
---------------------------------------------------------------------------
\179\ Supra note 169.
\180\ Although the paper found that lower late fees may cause
subprime cardholders to pay late more often, it also found that
lower late fees may cause subprime cardholders to make a larger
payment when they ultimately make the payment. This paper explained
that this latter effect on subprime cardholders might result from
the lower late fee amount lessening the need for subprime
cardholders to focus on avoiding late fees and instead allowing some
subprime cardholders to start to pay more attention to the high cost
of their revolving debt.
\181\ As discussed in part V, the Y-14+ data that the CFPB
considered in developing the proposal and this final rule include
data from specialized card issuers. Those issuers make up a majority
of subprime credit card balances.
\182\ Even if lower late fees would decrease losses from
delinquencies, issuers may still prefer higher late fees to maximize
profits. As current late fee levels generally produce profits to
issuers on the average late payment, the CFPB does not take the
prevalence of high fees as strong evidence that lower fees would
raise issuers' losses from delinquency. Even if lowering late fee
amounts reduced delinquency, doing so might not be in issuers'
interest: A $1 reduction in the late fee amount might decrease
delinquency losses by less than $1 per incident, and thus lower
profits.
---------------------------------------------------------------------------
The CFPB rejects the notion, as one commenter asserted, that
potential benefits to the vast majority of consumers (including
subprime consumers) who obtain credit cards through larger issuers are
irrelevant to the analysis because those benefits are not among the
specific statutory factors
[[Page 19167]]
for determining an appropriate safe harbor amount for penalty fees. As
discussed above, while the factors in TILA section 149(c) are not
strictly controlling, that statutory provision includes such other
factors that the CFPB deems necessary or appropriate. In its analysis
of the Y-14 data, the CFPB finds that the combined beneficial effects
for consumers are an appropriate consideration for this rulemaking. The
CFPB also finds that a late fee safe harbor amount of $8 for the first
and subsequent late payments strikes the appropriate balance of
deterrence considerations and considerations of those beneficial
effects.
In addition, as discussed in the 2023 Proposal, the CFPB notes that
card issuers have available methods and tools other than charging
higher late fees to deter late payment behavior, and thereby minimize
the potential frequency and cost to card issuers of late payments. In
particular, as discussed in part II.G, for cardholders who typically
pay their balance in full every month (so-called transactors), a late
fee is in addition to new interest incurred for carrying or revolving a
balance. For these consumers, who do not roll over a balance in the
month before or after a late fee is assessed, the loss of a grace
period and coinciding interest charges may pose a similar or even
greater deterrent effect than the late fee itself. For some consumers,
card issuers may also report the late payment to a credit bureau, which
could affect the consumers' credit scores. The CFPB notes that since
the Board's 2010 Final Rule went into effect, many credit card issuers,
financial institutions, and third parties have begun providing free
credit scores to consumers.\183\ Access to real-time changes in
consumers' credit scores have likely increased their awareness of any
decline related to late payments, contrary to some commenters'
assertions that consumers do not think about such things. Thus, the
deterrent effect of any negative credit score impact is likely greater
than in 2011--and the potential impact encourages payment within one
billing cycle of the due date without the imposition of additional
financial penalties.
---------------------------------------------------------------------------
\183\ CFPB, The Consumer Credit Card Market, at 174-176 (Dec.
2017) (2017 Report), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2017.pdf.
---------------------------------------------------------------------------
Further, as noted, card issuers may decrease the consumer's credit
line, limit the cardholder's earning or redemption of rewards, or
impose penalty rates in certain circumstances--all of which can have a
deterrent effect. For example, if a consumer does not make the required
payment by the due date, Sec. 1026.55(b)(3) permits a card issuer to
take actions to reprice new transactions on the account according to a
penalty rate in certain circumstances. After 60 days, Sec.
1026.55(b)(4) permits issuers to take steps to reprice the entire
outstanding balance on the account according to a penalty rate in
certain circumstances.
As discussed above, several commenters expressed concerns about the
negative consequences that consumers may incur--including higher APRs
and lower credit scores--if a lower late fee safe harbor amount results
in an increase in late payments. Further, as noted in the 2023
Proposal, card issuers have non-punitive methods to facilitate timely
payments, including, for example, automatic payment and notification
within a certain number of days (e.g., five days) prior to the due date
that the payment is coming due. Both the availability and adoption of
these methods have increased since the Board issued its 2010 Final
Rule. In 2013, issuers tracking the number of consumers making payments
online reported that an average of 38 percent of consumers made at
least one non-automatic payment online or through automatic payment;
\184\ in 2022, 61 percent of active accounts made at least one non-
automatic online payment online in the last cycle of the year, and 20
percent of accounts made at least one automatic payment in the last
cycle of the year.\185\ Even in the past few years, digital enrollment
has grown, with 76 percent of active accounts enrolled in an issuer's
online portal in 2022 (a 3 percentage point increase from 2017), 76
percent enrolled in a mobile app (a 25 percentage point increase from
2017), and 67 percent receiving only e-statements (a 23 percentage
point increase from 2017).\186\
---------------------------------------------------------------------------
\184\ 2013 Report, at 68.
\185\ These categories are not mutually exclusive. 2023 Report,
at 131-132.
\186\ Id. at 131.
---------------------------------------------------------------------------
The CFPB expects that these other methods, and the negative
consequences resulting from missed payments, will decrease the
likelihood of late payments not only in cases where card issuers
consider the deterrent effects of lower late fees to be insufficient,
but for other reasons as well. As discussed above, Larger Card Issuers
also may offset lost revenue from lower late fees by increasing
interest rates, which would indirectly make late payments more costly
than without this response. Also, issuers may have less ability to
charge consumers higher late fees to maximize profits and thus may be
more inclined to take other, more efficient steps to deter late
payments, including providing timely reminders of an upcoming due date,
well-chosen due dates aligned with cardholders' cash flow, and
encouraging automatic payments.
Some industry commenters, as discussed above, expressed concern
that a late fee safe harbor amount of $8, due to its diminished
deterrence effect, would make it difficult for card issuers to identify
riskier consumers and manage for that risk, and thus result in higher
costs to card issuers. The CFPB finds these concerns unwarranted. As
discussed above, the CFPB determines that the $8 safe harbor will cover
pre-charge-off collection costs for the average Larger Card Issuer. As
also discussed above, the CFPB determines that this result is the
approach most consistent with the CARD Act's requirements and purpose.
To manage credit risk and post-charge-off collection costs resulting
therefrom, card issuers can continue to customize rates using risk
based-pricing, and to adjust those rates and apply penalty rates--
consistent with limitations in the CARD Act as implemented in
Regulation Z--if they indeed learn something from consumers'
delinquency.
The CFPB also declines to look to proxies, as one commenter
suggested, such as returned-check penalties under State laws, late fees
charged on utility bills, and student loan late fees. The CFPB notes
that those violations do not trigger financial consequences, such as a
missed grace period or a month's worth of interest on the balance and
new purchases that otherwise would not have applied. As such, the
penalty fees for those violations are inapt proxies for purposes of the
CFPB's deterrence analysis.
Consumer conduct. Based on the available evidence and careful
consideration of the comments, with respect to the late fee safe harbor
threshold amount for Larger Card Issuers, the CFPB determines that an
$8 late fee safe harbor amount for the first and subsequent late
payments for Larger Card Issuers better reflects a consideration of the
Y-14 data related to consumer conduct than do the higher amounts set by
the Board. The CFPB is aware that the Board noted in the 2010 Final
Rule noted that ``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.'' \187\ The CFPB is
[[Page 19168]]
also aware that the Board further noted that ``when evaluating the
conduct of consumers . . . it is consistent with other provisions of
the Credit Card Act to distinguish between those who repeat that
conduct during the next six billing cycles and those who do not.''
\188\ However, as discussed in the 2023 Proposal, the CFPB's analysis
of the Y-14 data and other relevant information indicates that it not
clear that multiple violations during a relatively short period are
associated with increased credit risk and thus reflect a more serious
consumer violation. Based on the account-level Y-14 data from October
2021 to September 2022 from certain Larger Card Issuers, the CFPB
estimates that only 13.6 percent of accounts incurred a late fee and
then no additional payments were made on that account. In addition,
based on Y-14 data, for accounts that incurred a late fee, the CFPB
estimates that a third of accounts paid the amount due within five days
of the payment due date, half the accounts paid the amount due within
15 days of the payment due date, and three out of five accounts paid
the amount due within 30 days of the payment due date.
---------------------------------------------------------------------------
\187\ 75 FR 37526 at 37534.
\188\ Id.
---------------------------------------------------------------------------
In addition, as discussed in the 2023 Proposal, the CFPB
understands that the Metro 2 reporting format used by the industry for
reporting information to credit bureaus does not consider a payment to
be late if it is made within 30 days of the due date. Thus, for risk
management purposes, the industry itself does not appear to consider
the consumer's conduct in paying late to be a serious form of consumer
conduct until the consumer is 30 or more days late. As discussed above,
the CFPB estimates that a majority of accounts become current before
card issuers even consider the consumer late for credit reporting
purposes.
An academic commenter, as discussed above, stated that the CFPB's
analysis does nothing to address the reality that multiple late
payments demonstrate an increased credit risk and reflect a more
serious violation of the account terms--even if those payments occur
before the account would be reported as late under credit reporting
guidelines. The CFPB does not accept the notion that a late fee safe
harbor amount should reflect a more expansive idea of what constitutes
an increased credit risk or serious violation than does the credit
reporting format that the credit card industry has adopted. The CFPB
further notes that, for the subset of consumers who do make their
credit card payment 30 or more days late, the consequences of being
reported to a credit bureau are potentially quite costly. In this
respect, reporting late payments to the credit bureaus is just one of
the several other tools and methods that card issuers can employ to
address the conduct of late-paying consumers.
Further, the CFPB has determined that permitting risk-based pricing
in setting the amount of a late fee is generally inconsistent with the
CARD Act's requirement that late fees be reasonable and proportional to
the cost of the omission or violation. This type of pricing would
enable issuers to set late fee amounts based on estimation of risk
among groups of consumers, as compared with the statutory requirement
that late fees be based on the actual violation, rather than the
potential risk of consumers. Moreover, the safe harbor is a
discretionary amount that is presumptively reasonable and proportional,
and use of risk-based pricing could result in a higher late fee amount
than the cost of the omission or violation for many Larger Card
Issuers. Further, the CFPB disagrees that this pricing is necessary to
manage the risk presented by consumers who pay late more than once
within the next six billing cycles. As a basic matter, bona fide late
fees are excluded from the definition of finance charge in Regulation Z
and thus are not reflected in TILA's cost of credit. It is difficult to
square why a fee that is not considered a price component for all other
purposes under TILA and Regulation Z should be treated as one for
purposes of risk management. Indeed, as discussed in the 2023 Proposal,
increasing the APR is among the methods other than late fees that card
issuers have to address credit risk. Specifically, card issuers that
charge an interest rate are permitted by Sec. 1026.55(b)(3) to reprice
new transactions on the account according to a penalty rate in certain
circumstances. In addition, after 60 days, Sec. 1026.55(b)(4) permits
these issuers to take actions to reprice the entire outstanding balance
on the account according to a penalty rate in certain circumstances. In
addition, card issuers may take steps to reduce a cardholder's credit
line.
The CFPB recognizes that a special rule in Sec.
1026.52(b)(1)(ii)(C), as discussed below in the section-by-section
analysis of that provision, permits card issuers to impose a late fee
that does not exceed 3 percent of the delinquent balance on a charge
card account that requires payment of outstanding balances in full at
the end of each billing cycle, when a charge card issuer has not
received the required payment for two or more consecutive billing
cycles. As the Board noted in the 2010 Final Rule, this provision is
intended to provide charge card issuers with more flexibility to charge
higher late fees and thereby manage credit risk when an account becomes
seriously delinquent, because charge card issuers do not apply an APR
to the account balance and therefore cannot respond to serious
delinquencies by increasing that rate. Thus, the Board acknowledged in
its rationale for adopting this special rule that for most card
issuers, increasing the rate is an appropriate tool for managing the
risk resulting from seriously delinquent accounts. As discussed below,
the CFPB is not substantively amending the current safe harbor set
forth in Sec. 1026.52(b)(1)(ii)(C). The CFPB recognizes that card
issuers do not charge interest on charge card accounts, and thus would
not be able to use the interest rate charged on the account to manage
credit risk.
As discussed in the 2023 Proposal, in considering consumer conduct,
the CFPB also recognizes that some consumers may pay late chronically
but otherwise make a payment within 30 days for a number of reasons,
including cash flow issues, that do not necessarily indicate that they
are at significant risk of defaulting on the credit. For example,
consumers may make a credit card payment after the due date from the
next paycheck to smooth out expenses and avoid paying overdraft fees.
As discussed above, some commenters asserted that the CFPB placed too
much emphasis on cash flow issues in its analysis, with one commenter
noting that if the problem is with consumer cash flow timing, as the
CFPB hypothesizes, most major credit card issuers have mechanisms in
place to allow customers to change the due date on their account in
order to account for their own paycheck or earning schedules. The CFPB
encourages the use of such mechanisms. However, even with the
availability of those mechanisms, the CFPB notes, as it did in the 2023
Proposal, that a 2021 study suggests that some consumers who are paid
on a bi-weekly basis may not make the required payment by the due date
but will make the required payment within 30 days after the due date
from their next paycheck. In addition, as discussed in part III.B, some
consumer commenters who supported the proposal indicated that they had
been charged a late fee because they experienced cash flow issues due
to unexpected expenses, such as an illness,
[[Page 19169]]
and in some cases were not able to change the due date for their
payments.
As discussed above, a bank commenter expressed concern that if a
late fee is only $8, consumers may not bother to call, and the card
issuer will lose an opportunity to provide financial assistance. The
CFPB notes that $8 is a significant sum for many consumers,
particularly deep subprime consumers who pay a disproportionately large
share of credit card late fees. Indeed, as discussed part III.B, 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.
The CFPB also notes that card issuers have other options for offering
financial assistance besides waiting for delinquent cardholders to
call. These include proactively contacting such cardholders through
email, letters, and web and mobile notifications. The CFPB encourages
card issuers to use nonintrusive methods of reaching out to
cardholders. The CFPB also notes, as a financial regulatory advocacy
group commented, that because credit card payments are applied first to
cover finance charges and fees, when late fees are tacked on, less of a
consumer's payment goes toward reducing the principal balance. For
consumers, this in turn adds to the duration and cost of revolving an
outstanding balance. The CFPB anticipates, as the commenter asserted,
that the lower safe harbor amount may have a positive impact on the
financial health of consumers who bear late fees, and that it is
necessary and appropriate to take that effect into consideration in
conjunction with safe harbor amount's effects on consumer conduct.
Other factors cited by commenters. As discussed above, many
industry commenters recommended that the CFPB consider certain
additional factors in establishing a safe fee late harbor amount.
Specifically, several industry commenters cited lost late fee revenue
and the resultant negative impacts on card issuers as factors meriting
establishing a safe harbor amount significantly higher than $8 or
leaving the current safe harbor amounts intact. Several credit union
commenters, for example, stated that revenue from late fees covers pre-
charge off collection costs but also subsidizes products and services
that members demand and need, including programs targeted toward
consumers with thin credit files. A dramatic cut in that revenue, these
commenters cautioned, would necessitate cutting or eliminating those
programs. Other commenters expressed concern that it would necessitate
raising rates.
The CFPB notes that to the extent that industry commenters raising
these concerns are Smaller Card Issuers as defined in Sec.
1026.52(b)(3) (i.e., card issuers that together with their affiliates
have fewer than one million open credit card accounts for the entire
preceding calendar year),\189\ they will still be permitted under this
final rule to impose late fees pursuant to the safe harbor provisions
in Sec. 1026.52(b)(1)(ii)(A) and (B) (as revised by this final rule)
for the reasons discussed in part V. However, the CFPB emphasizes, for
all card issuers, that the CARD Act as implemented by Regulation Z
permits card issuers to recover through late fee revenue only pre-
charge-off costs associated with late payments; it does not provide
that card issuers may also fund other programs and services through
excess late fee revenue. Thus, as discussed above, in setting the $8
late fee safe harbor amount, the CFPB has indeed considered late fee
revenue resulting from the imposition of late fees in that amount, but
only in evaluating the extent to which an $8 late fee would cover card
issuers' pre-charge off collection costs. As discussed above, the CFPB
expects that an $8 late fee is sufficient to cover the pre-charge-off
collection costs of the average Larger Card Issuer. Those whose pre-
charge-off collection costs are not fully covered may impose late fees
pursuant to the cost analysis provisions in Sec. 1026.52(b)(1)(i).
---------------------------------------------------------------------------
\189\ See supra note 5.
---------------------------------------------------------------------------
As discussed above, one bank and one State bank trade association
cited safety and soundness concerns as another factor that the CFPB
should consider. One of these commenters asserted that setting fees on
a risk-adjusted basis is essential to running a safe and sound credit
card business, as well as to providing credit to customers who would
not otherwise get it. A State bank trade association commenter noted
that when its member banks establish terms and conditions for their
credit plans, the late fee safe harbor weighs heavily in assuring that
the bank's cost of credit match the higher costs of delinquency to
targeted revenue and asking those who create such higher costs to bear
those costs directly is necessary to maintain safety and soundness in
the sub-prime space. The CFPB notes that, if these banks are Smaller
Card Issuers, they are not covered by the $8 safe harbor threshold
amount adopted in this final rule because it is limited to the Larger
Card Issuers (as that term is used in this document), for the reasons
discussed in part VI.
The CFPB also notes, however, that even if these banks are covered
by this final rule the available evidence does not support the
suggestion that late fees imposed pursuant to the current safe harbor
amounts are adjusted or priced according to risk. In the 2022 survey of
agreements as discussed in part II.E, most of the top 20 card issuers
based on outstanding balances impose late fees at or near the safe
harbor amounts--little to no adjusting or pricing is done at all.
Moreover, none of these top issuers appear to be charging late fee
amounts above the current late fees safe harbor amounts to adjust for
particularly risky consumers. This conclusion also is supported by the
data the CFPB collected through its 2023 survey of agreements discussed
in part II.E, showing that most Larger Card Issuers charged a maximum
late fee at or near the higher safe harbor amount of $41 in 2023 but
did not go beyond that level. Further, as discussed in the analysis of
consumer conduct above, the CFPB notes that card issuers have many
other tools at their disposal for managing the higher risks posed by
cardholders who chronically pay late. These include raising the rates
on those cardholders' accounts, consistent with certain limitations in
the CARD Act. The CFPB also notes that none of the prudential
regulators with which it consulted on this final rule, as discussed in
part III.C, raised safety and soundness concerns.
Additional Issues
As discussed above, the CFPB requested comment on a number of
different issues related to its proposal to lower the late fee safe
harbor amount to $8 for first and subsequent violations, including
eliminating the late fee safe harbor, alternative approaches to
determining the late fee safe harbor amount, or whether to impose
certain conditions on the use of the safe harbor or on assessing late
fees generally. The CFPB also request for comment on a number of issues
related to penalty fees generally, including whether to extend the $8
safe harbor amount to all penalty fees, such as over-the-limit fees,
returned-payment fees, and declined access check fees. The CFPB is not
finalizing any of these alternative approaches or conditions for the
reasons discussed below.
Eliminate the safe harbor for late fees and adopt no replacement
safe harbor. The CFPB received some comments on whether to eliminate
the safe harbor for late fees altogether, i.e., eliminate the existing
safe harbor without adopting a new one. An individual commenter noted
that for simplicity, eliminating the safe harbor altogether might
better
[[Page 19170]]
serve the CFPB's aims. This commenter also noted, however, that the
2023 Proposal would still accomplish the CFPB's goals and would be more
in line with the intent of the law. A few industry commenters responded
in opposition to entirely eliminating the safe harbor for late fees. A
bank, for example, asserted that doing so would lead, among other
things, to a drastic uptick in operational complexity for issuers,
complexity in the CFPB's oversight, and consumer uncertainty. An
industry trade association stated that the CFPB had not provided any
evidence or support for why the late fees safe harbor should be
eliminated altogether. For the reasons discussed above, the CFPB has
made an independent determination to repeal the existing safe harbor
for late fees charged by Larger Card Issuers. Nonetheless, for the
reasons discussed above, the CFPB is also adopting a new $8 safe harbor
for Larger Card Issuers.
The CFPB restates its conclusion, as discussed above, that
establishing a safe harbor amount is an exercise of discretionary
rulemaking authority, and thus, a safe harbor need not exist. The CFPB
also reiterates its expectation that some Larger Card Issuers will opt
to use the cost analysis provisions in Sec. 1026.52(b)(1)(i) to set
the amount of their late fees. The CFPB disagrees that the cost
analysis will be an operational challenge for Larger Card Issuers with
sophisticated businesses. These institutions should be able to track
their pre-charge off collection costs and perform the mathematics
necessary to calculate a cost-basis fee.
Establish a different safe harbor amount for late fees. Although
many commenters implicitly recommended that the CFPB establish a late
fee safe harbor amount higher than $8, only a few commenters responded
to the CFPB's specific request for comment on whether it should
establish a different amount for late fees and, if so, what that amount
would be. A credit union trade association recommended that if the CFPB
determines that current late fee amounts are too high for consumers, it
should reinstate the late fee amount of $25 initially established by
the Board pursuant to the CARD Act. Another credit union commenter,
through its trade association, suggested that the CFPB consider
providing a different safe harbor amount for variable rate credit cards
vs. fixed rate cards. The commenter noted that an $8 late fee may be
appropriate for variable rate cards, given that in the current rising
interest rate environment, minimum payment amounts would continue to
increase, thus offsetting a reduction in late fee amounts for such
cards. A consumer commenter recommended that the CFPB set a minimum
late fee safe harbor amount of $8 and a maximum one of $30, reasoning
that this would help to avoid a high fee for a small balance while
still leaving allowance for the higher fee on large balances. Another
consumer commenter recommended that the late fee safe harbor amount be
set at 8 percent of the balance.
A few commenters responded to the CFPB's request for comment on
whether to adopt a staggered late fee safe harbor 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 a cap is hit.
All opposed the idea, asserting that it would add needless complexity,
be expensive to implement, or would confuse consumers.
For the reasons discussed in detail above, this final rule for
Larger Card Issuers repeals the current safe harbor threshold amounts
in Sec. 1026.52(b)(1)(ii)(A) and (B) as they apply to late fees and
sets late fee safe harbor threshold amount of $8. The CFPB determines
that this approach better ensures that late fees imposed by Larger Card
Issuers for the first and subsequent violations are reasonable and
proportional than do any of the other approaches suggested by
commenters, many of which would result in late fee amounts that are too
high or would add unnecessary complexity to the rule.
Conditions on using safe harbor or on assessing late fees
generally. Several commenters responded to the CFPB's request for
comment on whether to impose certain conditions on using the late fee
safe harbor or on assessing late fees generally, such as requiring card
issuers to offer autopay or provide additional notices to consumers.
Several consumer groups expressed support for imposing both conditions
for late fees generally. These commenters noted that the vast majority
of card issuers, including smaller ones, currently provide an autopay
option. With respect to offering additional notices, these commenters
urged the CFPB to require issuers to provide a notice by postal mail
before imposing a late fee on cardholders who only receive statements
online. They suggested that such notice should include a warning that a
late fee will be imposed if the cardholder does not make a payment
within seven days and should also inform cardholders of their right to
receive paper statements and provide an easy way to exercise this
right. These commenters expressed concern that card issuers' aggressive
pushing of online-only statements has resulted in some consumers paying
late because they have missed an email or other electronic notification
that a statement is available.
Industry commenters generally opposed imposing either condition,
with the exception of at least two card issuers that expressed support
for requiring issuers to offer an autopay option. In opposing both
conditions, one large industry trade association stated its belief that
because the two ideas, along with a 15-day courtesy period, are only
briefly referenced in the proposal, the CFPB cannot move forward on the
matters absent (1) more work on the CFPB's part to understand the
benefits and burdens of this approach; and (2) far more opportunity for
the public to understand the specifics of any proposed approach with an
opportunity to meaningfully comment. Accordingly, the commenter
concluded, a new proposed rule would be required if the CFPB sought to
pursue these ideas. Another industry trade association commenter stated
that TILA does not authorize the CFPB to make the safe harbor subject
to prerequisites or conditions, reasoning that if Congress intended to
so limit card issuers' ability to use the safe harbor, it would have
made any such prerequisites or conditions explicit in the statute or
expressly granted the CFPB the authority to adopt such prerequisites or
conditions. This commenter also expressed concern that a regulatory
requirement that card issuers provide one or both of these options in
order to rely on the safe harbor would limit issuer flexibility and
increase compliance costs.
With respect to autopay, industry commenters noted that most card
issuers already offer an autopay option, as well as the option for
mail-in payments, online payments, and phone payments. Some noted that
many consumers prefer to pay by other means even when autopay is an
option and may be concerned about maintaining control over the timing
and amount of their payments in order to avoid nonsufficient funds
(NSF) or overdraft fees. A credit union commenter expressed concern
that requiring issuers to offer an autopay option could be especially
burdensome for smaller credit unions. This commenter noted that because
some smaller financial institutions must outsource an autopay service
for members who opt in for automatic payments, requiring all credit
unions to employ this service would be an added expense, which would
ultimately force the smaller credit unions to pass these costs on to
their
[[Page 19171]]
members. A card issuer commenter also noted that complying with such a
requirement might well be beyond the capabilities and means of smaller
issuers.
With respect to additional notices, one industry trade association
noted that issuers currently often send multiple proactive payment
reminders prior to the payment due date across multiple channels,
including through email, push notifications in an app, and prompting
users when they log into their online account. Additionally, this
commenter noted that email alerts may be sent each month when a credit
card statement is generated, which includes the statement balance,
minimum payment amount, due date, and links to other resources to
answer questions customers may have related to the credit card program.
This commenter further noted that consumers can also often set their
own alerts, including payment due and credit card past due notices.
While acknowledging that these alerts have had a positive impact on
consumer behavior, this commenter asserted that the CFPB provided no
data or evidence suggesting the effectiveness or ineffectiveness of
these notifications and services; nor did it provide any evidence that
additional notifications or services would reduce late payments or
suggest alternative notifications or services that issuers should be
employing.
A card issuer commenter noted the relatively low take-up rate for
the expanded alert registration system that it rolled out a part of the
online account opening process a few years ago, whereby consumers are
prompted to enroll and select which types of alerts they want to
receive, if any. This commenter reported that even with all of those
processes, reminders and ease of registration, the percentage of
accounts that have selected payment alerts by type are 14.9 percent by
text, 13.4 percent by email, and 1.5 percent by push notification
(through mobile app). This commenter further stated that as it does not
want to harass or create dissatisfaction for its customers, it is
incredibly important to engage them when and how they want to be
engaged. In addition, this commenter noted that each alert delivery
method has its own legal implications as a result of Federal laws--such
as the Telephone Consumer Protection Act (TCPA)--designed to protect
consumers from unwanted communications. This commenter suggested that
if the CFPB has determined that additional notifications are warranted,
it should seek Congressional exceptions to the TCPA and other
applicable laws, as well as the preemption of any applicable State
laws.
The CFPB declines to impose conditions on using the late fee safe
harbor or on assessing late fees generally. The CFPB will continue to
consider whether these additional regulatory requirements are
appropriate.
Extend $8 safe harbor amount to all penalty fees. Five industry
commenters responded to the CFPB's request for comment on whether to
extend the $8 safe harbor amount to all penalty fees, such as over-the-
limit fees, returned-payment fees, and declined access check fees. All
opposed such an extension. None provided data on other penalty fees in
response to the CFPB's request. In opposing the idea, industry
commenters generally asserted that the 2023 Proposal lacked sufficient
empirical evidence or legal justification for lowering the safe harbor
amounts of all penalty fees. An industry trade association, for
example, asserted that because the CFPB had not provided any reasoned
justification for adjusting any other penalty fees, changes to other
fees related to a credit card account would not be a logical outgrowth
of the proposal and thus could not be finalized without notice and
comment.
Several consumer groups in a joint letter supported lowering the
safe harbor amount for all penalty fees, expressing particular concern
that card issuers will try to push cardholders into over-the-limit
transactions. These commenters posited that while over-the-limit fees
virtually disappeared because of the CARD Act's requirement that
issuers must obtain the consumer's consent or opt in for over-the-limit
transactions, that might not be a permanent condition. These commenters
further noted that as can be seen from the experience for overdrafts in
the early 2010s, banks are very good at overcoming the stickiness of
defaults and getting consumers to opt in to a harmful product.
The CFPB declines to extend the $8 safe harbor amount to all
penalty fees or otherwise lower the safe harbor amounts of those fees.
As discussed in part II.D, late fees are by far the most prevalent
penalty fees charged by card issuers and as such pose the greatest
consumer protection concerns at this time. Moreover, the CFPB's current
data and other evidence primarily relate to late fees charged by Larger
Card Issuers. For these reasons, the CFPB is not adopting the $8 late
fee safe harbor amount to all penalty fees or otherwise lower the safe
harbor amounts of those fees. As discussed in more details in the
section-by-section analysis of Sec. 1026.52(b)(1)(ii)(A) and (B), this
final rule adjusts the safe harbor threshold amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) for penalty fees other than late fees
imposed by Larger Card Issuers pursuant to the annual adjustment
provisions in Sec. 1026.52(b)(1)(ii)(D). The CFPB will monitor the
market for any notable increases in the prevalence of other types of
penalty fees, including over-the-limit fees.
52(b)(1)(ii)(A) and (B)
The CFPB did not include in its 2023 Proposal the annually adjusted
amounts for 2023 (effective for the year 2024) for Sec.
1026.52(b)(1)(ii)(A) and (B) pursuant to Sec. 1026.52(b)(1)(ii)(D).
The APA does not require notice and opportunity for public comment if
an agency finds that notice and public comment are impracticable,
unnecessary, or contrary to the public interest.\190\ Pursuant to this
final rule, as discussed in more detail below, Sec.
1026.52(b)(1)(ii)(A) and (B) and comment 52(b)(1)(ii)-2.i.J is added to
update the threshold amounts. The amendments in this final rule
adjusting the amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) are
technical and non-discretionary, as they merely apply the method
previously established in Regulation Z for determining adjustments to
the thresholds. For these reasons, the CFPB has determined that
publishing a notice of proposed rulemaking and providing opportunity
for public comment are unnecessary. The amendments adjusting the
amounts in Sec. 1026.52(b)(1)(ii)(A) and (B), discussed in more detail
below, are adopted in final form.
---------------------------------------------------------------------------
\190\ 5 U.S.C. 553(b)(B).
---------------------------------------------------------------------------
The Final Rule
Section 1026.52(b)(1)(ii)(D) provides that amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) will be re-calculated annually using the
CPI that was in effect on the preceding June 1; the CFPB uses the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-
W) for this adjustment. If the cumulative change in the adjusted value
derived from applying the annual CPI-W to the current amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) has risen by a whole dollar, those amounts
will be increased by $1.00. Similarly, if the cumulative change in the
adjusted value derived from applying the annual CPI-W level to the
current amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) has decreased by
a whole dollar, those amounts will be decreased by $1.00.\191\
---------------------------------------------------------------------------
\191\ See comment 52(b)(1)(ii)-2.
---------------------------------------------------------------------------
The CFPB did not issue a final rule adjusting the amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) in 2022 for
[[Page 19172]]
adjustments with an effective date of January 1, 2023. This adjustment
analysis therefore considers both the percentage change from April 2021
to April 2022 and from April 2022 to April 2023 as reflected in the
CPI-W index, which was reported by the Bureau of Labor Statistics on
May 11, 2022, and May 10, 2023, respectively. The adjustment to the
permissible fee thresholds of $32 for a first violation penalty fee and
$43 for a subsequent violation being adopted in this final rule
reflects an 8.9 percent increase in the CPI-W from April 2021 to April
2022 and a 4.6 percent increase in the CPI-W from April 2022 to April
2023. Accordingly, the CFPB is revising Sec. 1026.52(b)(1)(ii)(A) and
(B) to state that the fee imposed for violating the terms or other
requirements of an account shall not exceed $32 and $43, respectively.
The CFPB is also amending comment 52(b)(1)(ii)-2.i to preserve a list
of the historical thresholds for this provision. This final rule also
makes technical changes to cross references in the heading for and
lead-in paragraph in comment 52(b)(1)(ii)-2 to conform to OFR style
requirements.
52(b)(1)(ii)(C)
As noted above, the CFPB did not propose to lower the safe harbor
amount of a late fee that card issuers may impose under the special
rule in Sec. 1026.52(b)(1)(ii)(C) when a charge card account becomes
seriously delinquent. For the reasons discussed below, the CFPB is not
finalizing any substantive changes to the special rule, but it is
finalizing certain technical changes to the provision and its
commentary.
The CFPB's Proposal
Under the special rule Sec. 1026.52(b)(1)(ii)(C), a card issuer
may impose a fee of 3 percent of the delinquent balance on a charge
card account that requires payment of outstanding balances in full at
the end of each billing cycle if the card issuer has not received the
required payment for two or more consecutive billing cycles. This safe
harbor provision, as discussed above, is intended to provide charge
card issuers with more flexibility to charge higher late fees and
thereby manage credit risk when an account becomes seriously
delinquent, because charge card issuers do not apply an APR to the
account balance and therefore cannot respond to serious delinquencies
by increasing that rate, as other card issuers can. For clarity, the
CFPB proposed to amend the special rule to provide that card issuers
may impose a fee on a charge card account in those circumstances
notwithstanding the limitation on the amount of a late payment fee in
proposed Sec. 1026.52(b)(1)(ii). In addition, the CFPB proposed to
amend comment 52(b)(1)(ii)-3, which provides illustrative examples of
the application of Sec. 1026.52(b)(1)(ii)(C). The 2023 Proposal would
have amended these examples to use a $8 late fee amount, consistent
with the proposed changes to the late fee safe harbor amount in
proposed Sec. 1026.52(b)(1)(ii). The 2023 Proposal also would have
amended a cross reference contained in comment 52(b)(1)(ii)-3.iii so
that it would correctly reference paragraph i.
Comments Received
The CFPB received one comment on its preliminary decision not to
propose lowering the safe harbor amount of a late fee that card issuers
may impose under the special rule in Sec. 1026.52(b)(1)(ii)(C). In
that comment, several consumer groups jointly urged the CFPB to revise
the special rule to explicitly state that it is only applicable if
there is no possibility of interest being charged on a balance for the
account, given that the lack of interest rate applied to charge card
balances is the rationale for the special rule. The commenters noted
that there appear to be no traditional charge cards left on the market
that do not charge interest at all. The commenters further noted their
concern that without the suggested revision, issuers will start
offering a ``charge card balance'' feature on credit cards in order to
take advantage of the ability to impose late fees of three percent of
the balance. The CFPB declines to adopt the recommended clarification
because it is unnecessary. Section 1026.2(a)(15)(iii) defines a charge
card as a credit card on an account for which not periodic rate (i.e.,
interest) is used to compute a finance charge. Thus, a credit card that
charges interest on balances is not a charge card by definition--and
therefore does not qualify for the special rule in Sec.
1026.52(b)(1)(ii)(C)--regardless of how the card issuer labels or
markets that card.
The Final Rule
For the reasons discussed above and below, the CFPB is adopting as
proposed revisions to the special rule Sec. 1026.52(b)(1)(ii)(C)
regarding the safe harbor amount that card issuers may impose when a
charge card account becomes seriously delinquent. Accordingly, the CFPB
has determined not to lower that particular late fee amount.
Specifically, the revisions clarify that card issuers may impose a fee
on a seriously delinquent charge card account notwithstanding the
limitation on the amount of a late payment fee in Sec.
1026.52(b)(1)(ii). This clarification is necessary because, as
discussed above, the CFPB is finalizing amendments to Sec.
1026.52(b)(1)(ii) for Larger Card Issuers that repeal the current safe
harbor threshold amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) as they
apply to late fees charged by Larger Card Issuers and set a late fee
safe harbor threshold amount of $8 for the first and subsequent
violations for Larger Card Issuers. As noted in the proposal, charge
card issuers do not apply an APR to the account balance and therefore
cannot respond to serious delinquencies by increasing that rate, as
other card issuers can. The CFPB determines that preserving the special
rule's current safe harbor amounts is necessary and appropriate to
provide charge card issuers with more flexibility to charge higher late
fees and thereby manage credit risk resulting from seriously delinquent
accounts.
The CFPB also is adopting amendments to comment 52(b)(1)(ii)-3,
which provides illustrative examples of the application of Sec.
1026.52(b)(1)(ii)(C), substantially as proposed. Specifically, an
amendment to comment 52(b)(1)(ii)-3 clarifies that the card issuer in
the examples is not a Smaller Card Issuer as defined in Sec.
1026.52(b)(3). This final rule also amends the examples to use a $8
late fee amount, consistent with the changes to the late fee safe
harbor amount in Sec. 1026.52(b)(1)(ii). In addition, this final rule
amends the cross reference in comment 52(b)(1)(ii)-3.iii so that it
correctly references paragraph i. This final rule also makes a
technical change to a cross reference in comment 52(b)(1)(ii)-3.ii to
conform to OFR style requirements.
52(b)(1)(ii)(D)
Section 1026.52(b)(1)(ii)(D) provides that the dollar safe harbor
amounts for penalty fees set forth in Sec. 1026.52(b)(1)(ii)(A) and
(B) will be adjusted annually by the CFPB to reflect the changes in the
CPI. The Board included this provision in its Regulation Z, Sec.
226.52(b)(1)(ii)(D) as part of its 2010 Final Rule where it determined
that changes in the CPI, while not a perfect substitute, would be
``sufficiently similar to changes in issuers' costs and the deterrent
effect of the safe harbor amounts.'' \192\ In reaching this
determination, the Board rejected commentators' arguments that the
Board should adjust the safe harbor amounts as appropriate through
rulemaking
[[Page 19173]]
because the Board believed that this approach would be
inefficient.\193\
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\192\ 75 FR 37526 at 37543.
\193\ Id.
---------------------------------------------------------------------------
The CFPB's Proposal
The CFPB proposed to no longer apply the annual adjustments to the
safe harbor amount for late fees. The 2023 Proposal would have
accomplished this by including the $8 proposed late fee safe harbor
amount in the lead in text to Sec. 1026.52(b)(1)(ii), instead of
including it in Sec. 1026.52(b)(1)(ii)(A) or (B). Thus, Sec.
1026.52(b)(1)(ii)(D), which only applies the annual adjustments to the
dollar safe harbor amounts in Sec. 1026.52(b)(1)(ii)(A) and (B), would
have no longer applied to the late fee safe harbor amount. The CFPB
proposed one technical change to the cross reference to Sec.
1026.52(b)(1)(ii)(A) and (B) used in Sec. 1026.52(b)(1)(ii)(D) to
conform to OFR style requirements. In addition, for clarity, the 2023
Proposal would have amended the lead-in paragraph in comment
52(b)(1)(ii)-2 to indicate that the annual adjustments in Sec.
1026.52(b)(1)(ii)(D) do not apply to late fees. Under the proposal,
Sec. 1026.52(b)(1)(ii)(D) would have continued to apply to the dollar
amount safe harbor amounts that apply to other penalty fees, such as
over-the-limit fees, and returned-payment fees. With respect to the
dollar amount of the late fee safe harbor, the CFPB would have then
monitored the safe harbor amount for late fees for potential
adjustments as necessary.
The CFPB noted that to reflect changes in the CPI, annual or
otherwise, are not statutorily required. TILA section 149, however,
does statutorily require that any late payment fee or any other penalty
fee or charge, must be ``reasonable and proportional'' to such omission
or violation. When the Board determined that the dollar safe harbor
amounts for penalty fees should be subjected to annual adjustments, it
did not expressly consider the effect such adjustments may have on the
reasonableness and proportionality of the late payment fee (or any
other penalty fee). The Board also did not provide any other data or
evidence to support these adjustments as necessary. Instead, the Board
summarily stated that annual adjustments would be ``sufficiently
similar to changes in issuers' costs and the deterrent effect of the
safe harbor amounts'' \194\ and also considered efficiency, which is
not statutorily required. The Board did not go into further details on
why annual adjustments would be similar to changes in issuers' costs
and the deterrent effect of the safe harbor amounts.
---------------------------------------------------------------------------
\194\ Id.
---------------------------------------------------------------------------
In the proposal, the CFPB analyzed relevant data from certain
Larger Card Issuers that were not available to the Board to take into
consideration the statutorily mandated reasonable and proportional
standard by considering the costs incurred as a result of the violation
in determining whether a fee amount is reasonable and proportional. The
CFPB, based on these data, preliminarily determined that annual
adjustments based on the CPI are not necessarily reflective of how the
cost of late payment to issuers changes over time and, therefore, may
not reflect the ``reasonable and proportional'' standard in the
statute. The proposal stated that while Larger Card Issuers' costs do
appear to be trending up, it does not appear that they are doing so
lockstep with inflation particularly when considering the month-to-
month changes in inflation versus costs. Additionally, there are
factors outside of inflation that may impact when issuers' cost goes up
and by how much. Figure 3 below shows monthly per-account collection
costs in the Y-14 collection (for all consumer portfolios with positive
costs that month, solid line) and the Consumer Price Index for all
Urban Consumers (CPI-U) price index since 2013 (dashed). Given that the
costs fluctuate more than the price level, the CFPB preliminarily
determined that any overarching trend in costs is better dealt with
through ad hoc adjustments when the safe harbor amounts are revisited.
[GRAPHIC] [TIFF OMITTED] TR15MR24.003
Thus, in the 2023 Proposal, the CFPB considered the cost incurred
as a result of a late payment violation and preliminarily determined
that the proposal was more aligned with Congress' intent for late fees
to be reasonable and proportional than the current provision which
requires the CFPB to adjust the safe harbor amounts to reflect changes
in the CPI regardless of what the exact changes are, if any, in actual
costs incurred by the card issuer.
As noted above, the Board also briefly considered deterrence and
efficiency when making the determination to implement annual
adjustments to reflect changes in the CPI. In the 2023 Proposal, the
CFPB preliminarily determined that deterrence should not be the driving
factor in whether the late fee safe harbor amount should be adjusted
annually according to the CPI, nor should it outweigh considerations of
issuers' costs. The CFPB noted while it
[[Page 19174]]
is possible for the deterrent effect of the safe harbor amount to be
eroded year-to-year with inflation, there are three overriding
considerations as to why that does not necessarily mean there should be
annual adjustments to reflect changes in the CPI. First, the CFPB
preliminarily determined that it does not intend to tightly peg the
deterrent effect to a specific value and recognizes there may be a
range of values under which the deterrent effect would be suitable. The
CFPB preliminarily determined that the deterrence of the proposed safe
harbor amount was sufficiently high so that the CFPB was not concerned
by the lesser deterrence of a potentially eroded real value under
realistic trajectories for medium-term inflation before any potential
readjustment could be put in effect. Second, similar to the analysis of
collection costs above, the CFPB preliminarily found that the deterrent
effect does not move in lockstep with the CPI. Third, the CFPB
preliminarily determined that the CFPB monitors the market so, under
the proposal, the CFPB would have been able to adjust the safe harbor
amount on an ad hoc basis based on this monitoring, at which point the
CFPB would have again considered the deterrent effect when promulgating
a new safe harbor amount. While TILA section 149 authorizes the CFPB to
consider other factors that the CFPB deems necessary and appropriate in
issuing rules to establish standards for assessing whether the amount
of any penalty fee is reasonable and proportional, the CFPB
preliminarily determined that consideration of costs incurred, and the
deterrent effect, outweigh consideration of efficiency to help ensure
that late fee amounts are reasonable and proportional.
The CFPB solicited comment on the proposal to eliminate the annual
adjustments to reflect changes in the CPI for the late fee safe harbor
amount, including data and evidence as to why the adjustment may or may
not reflect the reasonable and proportional standard. The CFPB also
sought comment on potential future monitoring or other approaches to
ensure that the late fee amount is consistent with the reasonable and
proportional standard. The CFPB also solicited comments on whether
annual adjustments to reflect changes in the CPI should be eliminated
for all other penalty fees subject to Sec. 1026.52(b), including over-
the-limit fees, returned-payment fees, and declined access check fees.
Comments Received
A few individual commenters, a credit union, and two financial
regulatory advocacy groups expressed support for the CFPB's proposal to
no longer apply the annual adjustments to the safe harbor amount for
late fees. Both the regulatory advocacy groups along with one
individual supported the CFPB's analysis that collection costs do not
increase in lockstep with the cost of living. One of the regulatory
advocacy groups did, however, urge the CFPB to consider that reducing
the safe harbor amount to $8 and eliminating future annual adjustments
for late fees could cause card issuers to reduce their minimum payment
formula or maintain minimum payments at a lower amount than would
otherwise be expected.
As discussed in more detail below, many banks and credit unions, a
few industry trade associations, and a few individuals expressed
concerns with the CFPB's proposal to no longer apply the annual
adjustments to the safe harbor amount for late fees.
Relationship to costs incurred by financial institutions. Several
banks and credit unions and industry trade associations, and a few
individual commenters, expressed concerns that elimination of annual
adjustments to reflect changes in the CPI for late fees would
eventually cause card issuers' costs to outpace the safe harbor amount.
One industry trade association explained that this in turn would
effectively reduce the safe harbor amount over time and, as a few
commenters indicated, ``quickly'' reduce the real value of the safe
harbor amount to $0. A credit union and several industry trade
associations specifically indicated that costs associated with
collection (e.g., wage and utility increases and postage costs) will
rise due to inflation and if the safe harbor is not annually adjusted
for inflation, then the safe harbor amount will no longer be reasonable
and proportional to costs incurred by card issuers from consumers
paying late.
A bank and two trade associations argued that if the late fee is no
longer reasonable and proportional to costs due to the elimination of
annual adjustments then card issuers would experience financial strain
which could lead to increased consumer fees and reductions in customer
service, technology, and access to credit for lower income consumers.
Inflation adjustments used in other financial regulations. A few
banks and credit unions and several industry trade associations
highlighted that annual inflation adjustments are commonly used in
other financial regulations under the authority of the CFPB. For
example, a few of the trade associations pointed out that the Federal
Civil Penalties Inflation Adjustment Act of 1990 requires the CFPB to
adjust for inflation the maximum amount of each civil penalty within
the CFPB's jurisdiction. One trade association also specifically
highlighted the CFPB's recent regulation implementing section 1071 of
the Dodd-Frank Act contained an inflation adjustment, which will occur
every five years, for the revenue threshold for covered small
businesses.
Monitoring for adjustments. A few individual commenters and trade
associations cautioned the CFPB against manually monitoring the market
for adjustments as it would be time-consuming for the CFPB, burdensome
for both the CFPB and the financial industry, create uncertainty, and
provides little consolation for eliminating the annual adjustments.
Alternative suggestions. A bank and a few industry trade
associations provided the CFPB with alternative suggestions to
eliminating the annual adjustment. One bank commenter urged the CFPB to
consider providing for an inflation adjustment that takes place every
few years, instead of annually, similar to Regulation CC, 12 CFR part
229. A credit union trade association requested that the CFPB consider
a required reevaluation of the safe harbor amounts every two years to
determine whether an increase is appropriate. Finally, another industry
trade association further urged, if the final rule included the
elimination of the annual adjustment, that the CFPB consider clarifying
how it would address adjustments and provide a date by which the annual
adjustments would no longer be in effect, preferably two years after
the implementation of the final rule.
Specific data provided. Two individuals and a law firm representing
several card issuers provided the CFPB with specific data related to
the CFPB's proposal to no longer apply the annual adjustments to the
safe harbor amount for late fees. The law firm adjusted the proposed $8
to reflect the amount it would have been in 2010 and states that the
late fee would be approximately $5.74 which is substantially less than
what consumer groups were proposing to the Board in its 2010
rulemaking. One individual commenter provided the CFPB with a chart
showing that the real value of the CFPB's $8 proposed late fee amount
would be cut in half in 10 years at the current inflation rate. The
other individual commenter indicated that holding safe harbor steady
would have resulted in the safe harbor declining by 15 percent in real
terms since the beginning of 2020.
Two bank commenters and an industry trade association commenter
[[Page 19175]]
expressed concerns in response to the CFPB's solicitation of comments
on whether the CFPB's proposal to no longer apply the annual
adjustments to the safe harbor amount for late fees should apply to all
other credit card penalty fees. One bank and one industry trade
association were generally concerned that extending the proposal to
other penalty fees was not adequately addressed or analyzed in the
CFPB's 2023 Proposal and therefore should not be considered as a part
of the final rule. Another bank commenter indicated that, just like
late fees, the elimination of annual adjustments to reflect changes in
the CPI should not apply to other credit card penalty fees because the
cost of everything goes up with time.
The Final Rule
For reasons set forth herein, the CFPB is adopting the amendment as
proposed for Larger Card Issuers as that term is used in this document
(i.e., card issuers except Smaller Card Issuers as defined in Sec.
1026.52(b)(3)). The CFPB is effectuating this in this final rule by
including the $8 late fee safe harbor amount in the lead in text to
Sec. 1026.52(b)(1)(ii), instead of including it in Sec.
1026.52(b)(1)(ii)(A) or (B). With respect to Smaller Card Issuers, this
final rule is adding Sec. 1026.52(b)(1)(ii)(E) to provide that a
Smaller Card Issuer, as defined in Sec. 1026.52(b)(3), may impose a
fee for a late payment on an account if the dollar amount of the fee
does not exceed the amount in Sec. 1026.52(b)(1)(ii)(A) or (B), as
applicable, notwithstanding the limitation on the amount of a late
payment fee in the lead-in text to Sec. 1026.52(b)(1)(ii). The CFPB is
retaining Sec. 1026.52(b)(1)(ii)(D), with one technical change to the
cross reference to Sec. 1026.52(b)(1)(ii)(A) and (B) used in Sec.
1026.52(b)(1)(ii)(D) to conform to OFR style requirements. As such, it
still provides that the amounts in Sec. 1026.52(b)(1)(ii)(A) and (B)
will be adjusted annually by the CFPB to reflect changes in the CPI.
Therefore, with regard to late fees, the amounts in Sec.
1026.52(b)(1)(ii)(A) and (B), which are subject to the annual
adjustments found in Sec. 1026.52(b)(1)(ii)(D), apply only to Smaller
Card Issuers. The CFPB is not adopting the proposed amendment to the
lead-in paragraph in comment 52(b)(1)(ii)-2 to indicate that the annual
adjustments in Sec. 1026.52(b)(1)(ii)(D) do not apply to late fees
because under this final rule annual adjustments in Sec.
1026.52(b)(1)(ii)(D) are still applicable to late fees for Smaller Card
Issuers.
In eliminating the annual adjustments for Larger Card Issuers, the
CFPB is not persuaded by the commenters who expressed concerns that by
doing so card issuer costs would outpace the safe harbor amount and
late fees assessed at the safe harbor would not be reasonable and
proportional to card issuers' costs. The CFPB understands that Larger
Card Issuers' costs do not appear to be rising lockstep with inflation
particularly when considering the month-to-month changes in inflation
versus costs based on the Y-14 data. Figure 3 above, which was also
provided in the 2023 Proposal, illustrates that monthly per-account
collection costs in the Y-14 collection (for all consumer portfolios
with positive costs that month) and the CPI-U price index since at
least 2013 have not fluctuated at the same rate. The CFPB has also
included Figure 4 below demonstrating that, like the CPI-U, monthly
per-account collection costs in the Y-14 collection (for all consumer
portfolios with positive costs that month) and the CPI-W price index
since at least 2013 have not fluctuated at the same rate.\195\ The CFPB
is also not persuaded by commenters who suggested alternatives to the
2023 Proposal including that the CFPB adjust the safe harbor amounts in
different increments of time such as every 2 or 5 years. The CFPB has
determined that just like annual adjustments, issuers' costs do not
trend up in lockstep with inflation even if the adjustments occurred in
different increments of time.
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\195\ In the 2023 Proposal, the CFPB incorrectly compared
monthly per-account collection costs in the Y-14 collection to the
CPI-U price index. The CFPB adjust the amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) to the CPI-W not the CPI-U. However,
the discrepancy does not impact the CFPB's overall analysis because,
as shown in Figure 4, like Figure 3, the monthly per-account
collection costs do not move in lockstep with the CPI-W price index.
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[[Page 19176]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.004
The CFPB has further considered and determined that deterrence is
not a driving factor in whether the late fee safe harbor amount should
be annually adjusted according to the CPI, nor should it outweigh
considerations of issuers' costs. The CFPB acknowledges that it is
possible for the deterrent effect of the safe harbor amount to be
eroded year-to-year with inflation. However, the CFPB has determined
that (1) it does not intend to tightly peg the deterrent effect to a
specific value and recognizes there may be a range of values under
which the deterrent effect would be suitable; further, the deterrence
of the $8 safe harbor amount is sufficiently high so that the CFPB is
not concerned by the lesser deterrence of a potentially eroded real
value under realistic trajectories for medium-term inflation before any
potential readjustment could be put in effect; (2) the deterrent effect
does not move in lockstep with the CPI; and (3) the CFPB monitors this
market and will continue to do so in order to, among other things,
consider the deterrent effect when promulgating a new safe harbor
amount when making adjustments to the safe harbor amount on an ad hoc
basis. The CFPB acknowledges commenters who highlighted that the CFPB
adjusts for inflation in other regulations, but here, the CFPB is not
statutorily required to make annual adjustments like it is in certain
other statutes such as the Federal Civil Penalties Inflation Adjustment
Act of 1990 and the Fair Credit Reporting Act. Instead, when
considering the appropriate safe harbor amount the CFPB is guided by
certain statutory factors it has considered here such as costs to
issuers and deterrence.
Given that the costs fluctuate more than the price level and any
erosion in deterrence should not outweigh consideration of issuers'
costs, that CFPB has determined that any overarching trend in costs and
other factors that affect whether the late fee safe harbor amount is
reasonable and proportional for Larger Card Issuers is better dealt
with through ad hoc adjustments when the safe harbor amounts are
revisited.
The CFPB also acknowledges commenters who provided concerns and
specific data about the effect eliminating the annual adjustments could
have on the real value of the safe harbor amount. For example, some
industry commenters expressed concerns that the real value of the safe
harbor amount would ``quickly'' be reduced to $0. A law firm
representing several card issuers adjusted the $8 safe harbor to
reflect the amount it would have been in 2010 which would have been
approximately $5.74. An individual commenter showed that the $8 amount
would be cut in half in 10 years at the current inflation rate. A
different individual commenter indicated that holding the safe harbor
steady would have resulted in the safe-harbor cap declining by 15
percent in real terms since the beginning of 2020. Although the CFPB
acknowledges the real value of the safe harbor could decline with time
(1) it would not happen as quickly as commenters suggested; for
example, it would have taken 53 years to erode a nominal $8 set over
the summer of 1970 to $1 and (2) because erosion would not occur
quickly, the CFPB maintains that monitoring the market for any such
erosion and making ad hoc adjustments as needed is appropriate.
The CFPB further acknowledges comments that expressed concerns that
manually monitoring the market and making ad hoc adjustments would be
burdensome to the CFPB and card issuers. The CFPB is obligated to
monitor \196\ and report \197\ on the credit card market and any ad hoc
adjustments would necessarily be implemented in a way that provide
notice to card issuers of any changes.
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\196\ 12 U.S.C. 5512(c).
\197\ 15 U.S.C. 1616(a).
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As discussed in more detail in part VI, the CFPB acknowledges
commenters that expressed concerns surrounding the impact eliminating
the annual adjustments may have on credit unions and small card
issuers. Also as discussed in more detail in part VI, the CFPB is not
amending Sec. 1026.52(b) in this final rule to eliminate annual
adjustments to the safe harbor threshold
[[Page 19177]]
amounts available to Smaller Card Issuers.
The CFPB received only a few responses to its request for comment
on whether the elimination of the annual adjustments should be applied
to all penalty fees covered by Sec. 1026.52(b). The few commenters
that did express concern highlighted that they were generally concerned
extending the proposal to other penalty fees was not adequately
addressed or analyzed in the CFPB's 2023 Proposal and that, just like
late fees, the elimination of annual adjustments to reflect changes in
the CPI should not apply to other credit card penalty fees because the
cost of everything goes up with time. Although the CFPB rejects the
broad notion that the cost of everything goes up with time, it has
declined to adopt the elimination of the annual adjustments for all
other credit card penalty fees covered by Sec. 1026.52(b) because at
this time the CFPB does not have the same in-depth data to base its
decision as it does with late fees.
52(b)(1)(ii)(E)
As discussed in part VI, with respect to Smaller Card Issuers as
defined in Sec. 1026.52(b)(3), the CFPB is not adopting at this time
the $8 late fee safe harbor threshold and the elimination of the higher
late fee safe harbor amount for subsequent violations. In addition, as
discussed in part VI and in the section-by section analysis of Sec.
1026.52(b)(1)(ii)(D), with respect to Smaller Card Issuers, the CFPB
also is not adopting the proposed elimination of the annual adjustments
for the late fee safe harbor threshold.
Accordingly, the CFPB is adopting a new Sec. 1026.52(b)(1)(ii)(E)
to implement those decisions. Specifically, Sec. 1026.52(b)(1)(ii)(E)
provides that a Smaller Card Issuer, as defined in Sec. 1026.52(b)(3),
may impose a fee for a late payment on an account if the dollar amount
of the fee does not exceed the safe harbor amount in Sec.
1026.52(b)(1)(ii)(A) or (B), as applicable, notwithstanding the $8
limitation on the amount of a late fee in the lead-in text to Sec.
1026.52(b)(1)(ii). Thus, Smaller Card Issuers as defined in this final
rule may continue imposing a late fee pursuant to the safe harbor in an
amount that does not exceed the amount in Sec. 1026.52(b)(1)(ii)(A)
for a first violation or the amount in Sec. 1026.52(b)(1)(ii)(B) for a
late payment violation that occurs during the same billing cycle or one
of the next six billing cycles. Further, because the penalty fee dollar
amounts in Sec. 1026.52(b)(1)(ii)(A) and (B) are adjusted annually to
reflect changes in the CPI as described in Sec. 1026.52(b)(1)(ii)(D),
late fees imposed by Smaller Card Issuers pursuant to Sec.
1026.52(b)(1)(ii)(A) and (B) also will be adjusted annually. The CFPB
determines that adopting these separate late fee safe harbor provisions
for Smaller Card Issuers is necessary and appropriate for the reasons
set forth in part VI.
The CFPB also is adopting a new comment 52(b)(1)(ii)-4 explaining
the late fee safe harbor provision for Smaller Card Issuers in Sec.
1026.52(b)(1)(ii)(E). The comment explains that pursuant to the
provision, and assuming that the original historical safe harbor
threshold amounts apply, a Smaller Card Issuer may impose a late fee of
$25 for a first late payment violation under Sec. 1026.52(b)(1)(ii)(A)
and a late fee of $35 for a late payment violation that occurs during
the same billing cycle or one of the next six billing cycles under
Sec. 1026.52(b)(1)(ii)(B), provided that those amounts are consistent
with the prohibitions in Sec. 1026.52(b)(2). The CFPB is adopting
comment 52(b)(1)(ii)-4 to facilitate compliance.
52(b)(2) Prohibited Fees
As previously discussed, a card issuer must not impose a fee for
violating the terms or other requirements of a credit card account
under an open-end (not home-secured) consumer credit plan unless the
dollar amount of the fee is consistent with Sec. 1026.52(b)(1) and
(2). Section 1026.52(b)(2) provides certain circumstances where fees
are prohibited. Specifically, Sec. 1026.52(b)(2) prohibits (1) fees
that exceed the dollar amount associated with the violation; and (2)
multiple fees based on a single event or transaction.
In the 2023 Proposal, the CFPB considered whether to require a
courtesy period, which would have prohibited late fees imposed within
15 calendar days after each payment due date and be applicable only to
late fees assessed if the card issuer uses the safe harbor or
alternatively, applicable to all late fees generally (regardless of
whether the card issuer assesses late fees pursuant to the safe harbor
amount set forth in Sec. 1026.52(b)(1)(ii) or the cost analysis
provisions set forth in Sec. 1026.52(b)(1)(i)). The CFPB had
preliminary determined that it may be appropriate that the late fee
amount essentially be $0 during the courtesy period because card
issuers may not incur significant costs to collect late payments
immediately after a late payment violation.
Further, the 2023 Proposal noted that given that the late payments
may be caused by problems with unavoidable processing delays, the
implementation of a courtesy period also would be consistent with
considerations of consumer conduct and deterrence, since, in these
circumstances, the consumer attempted to pay timely. To the extent card
issuers face increased cost from this 15-day courtesy period, the CFPB
also noted that issuers have options that may not have been as readily
available at the time of the Board's 2010 Final Rule to encourage
timely payment, like sending notifications to consumers to warn them of
payment due dates or facilitating automatic payment.
The CFPB solicited comments on whether Sec. 1026.52(b)(2) should
be amended to provide for a courtesy period which would prohibit late
fees imposed within 15 calendar days after each payment due date. The
CFPB additionally solicited comment on whether, if a 15-day courtesy
period was required, the courtesy period should be applicable only to
late fees assessed if the card issuer is using the late fee safe harbor
amount (in which case Sec. 1026.52(b)(1)(ii) would have been amended
instead of Sec. 1026.52(b)(2)) or alternatively, if the courtesy
period should be applicable generally (regardless of whether the card
issuer assesses late fees pursuant to the safe harbor amount set forth
in Sec. 1026.52(b)(1)(ii) or the cost analysis provisions set forth in
Sec. 1026.52(b)(1)(i)). The CFPB also solicited comment, as well as
data, on whether a courtesy period of fewer or greater than 15 days may
have been appropriate.
The CFPB noted that the alternative of applying a 15-day courtesy
period only to use of the safe harbor late fee amount may have certain
unintended effects on the possible late fee amounts assessed under the
cost analysis provisions. To illustrate, using the Y-14 data, the CFPB
estimated that a 15-day courtesy period tied to the proposed $8 safe
harbor would cut the incidence of consumers charged the proposed $8
safe harbor amount by as much as half. This would have caused card
issuers who use the proposed $8 safe harbor amount to recover as much
as half of what they would have recovered if a 15-day courtesy period
was not required. Card issuers who use the proposed $8 safe harbor
amount, therefore, would have recovered an average of $4 in late fees
per late payment. On the other hand, card issuers that opted to use the
cost analysis provisions to assess late fees would not have been
required to provide a 15-day courtesy period. This could have resulted
in an outcome where card issuers who used the cost
[[Page 19178]]
analysis provisions to determine the late fee amount could charge a
late fee that is less than the proposed $8 safe harbor amount, for
example $6, but still, on average, collect more in total late fees than
if they had charged the proposed $8 late fee amount. In this example,
card issuers could have charged $6 on 100 percent of incidences,
whereas if they had used the proposed $8 safe harbor amount, they could
have only charged the proposed $8 on approximately half of the
incidences. This could have led to a scenario where consumers who are
subject to late fees determined by the cost analysis provisions may
have been assessed a lower late fee amount than the proposed $8 late
fee safe harbor amount but would have been charged a late fee more
frequently than consumers who were subject to the late fee safe harbor
amount.
The CFPB additionally solicited comments on whether a 15-day
courtesy period should apply to the other penalty fees that are subject
to Sec. 1026.52(b), including over-the-limit fees and returned-payment
fees, and if so, why it would be appropriate to apply a 15-day courtesy
period to these other penalty fees. The proposal inquired, for example,
should the CFPB provide consumers with (1) 15 calendar days after the
billing cycle ends to bring the balance below the credit limit to avoid
being charged an over-the-limit fee; and (2) 15 calendar days after
each due date to make the required periodic payment to avoid a
returned-payment fee if a payment has been returned. With respect to
declined access checks, the CFPB solicitated comment on whether a 15-
day courtesy period is appropriate and if so, how should it be
structured.
Comment Received
Support for late fee courtesy period. Many consumer groups in a
joint letter, two credit union commenters, two individual commenters,
and an industry trade association expressed support in response to the
CFPB's solicitation of comments on whether Sec. 1026.52(b)(2) should
be amended to provide for a courtesy period which would prohibit late
fees imposed within 15 calendar days after each payment due date. The
consumer groups provided the CFPB with multiple reasons why it would
support a 15-day courtesy period including it would prevent abuses that
cause consumers from being trapped into incurring late fees, other
payment obligations require a courtesy period before late fees can be
imposed, and industry convention shows that, with regards to risk
management, payments within 30 days of a due date should not be
considered late. The consumer groups urged the CFPB to apply a 15-day
courtesy period to when card issuers use the safe harbor amount or the
cost analysis provision. The consumer groups indicated that late fees
imposed using the cost analysis provision are likely to be higher than
the safe harbor amount and thus card issuers may be inclined to trigger
late fees more frequently.
An individual commenter indicated that a courtesy period for
payments would help consumers who mail in their payments to not be
penalized for any payment that is late due to issues with mail
delivery.
Two credit unions and a trade association highlighted that many
credit unions and other card issuers currently offer consumers a
courtesy period. The trade association specifically noted that courtesy
periods more appropriately help consumers who may barely miss the
minimum payment due date than a staggered late fee schedule. A credit
union commenter specifically noted that a 15-day-or-less courtesy
period was preferable to any additional notification requirements
because notifications run the risk of confusing consumers.
Opposition to late fee courtesy period. Several banks and credit
unions, several trade associations, and two individual commenters
expressed opposition to the CFPB's solicitation for comments on whether
Sec. 1026.52(b)(2) should be amended to provide for a courtesy period
which would prohibit late fees imposed within 15 calendar days after
each payment due date.
Several banks and credit unions, an industry trade association, and
an individual commenter indicated that a 15-day courtesy period was not
necessary because card issuers are already required to provide
consumers with a periodic statement at least 21 days prior to the
payment due date disclosed on the statement which puts consumers on
notice when the payment is due and gives consumers enough time to then
timely make the required payment. Many of these commenters indicated
that this 21-day timeframe is akin to a courtesy period.
Two industry trade associations indicated that a courtesy period
would contradict, and thus could not be implemented by a card issuer,
Sec. 1026.5(b)(2)(ii)(A)'s requirement that periodic statement be
mailed or delivered at least 21 days prior to the payment due date
disclosed on the statement. The commenters noted that statutorily a
card issuer is permitted to treat payments not received by the due date
as late immediately so long as the consumer was sent a periodic
statement at least 21 days before the payment is due. The commenters
believe that a courtesy period runs in contradiction to the ability to
treat a payment late immediately.
A bank and a credit union indicated that available payment methods
provided by card issuers aid and ensure consumers make timely payments.
Many banks and credit unions and industry trade associations, a law
firm representing several card issuers, and a financial regulatory
advocacy group expressed concerns about the potential negative impacts
a 15-day courtesy period may have on consumers.
Many of these commenters indicated that a 15-day courtesy period
would generally cause consumer confusion because there would now be a
minimum payment due date and a date by which a late fee may be
incurred. Many of these commenters further specified that consumers
would be confused about when their payment was actually due or that
consumers may be confused by what consequences are triggered by missing
the minimum payment on the due date versus paying it within the 15-day
courtesy period. For example, one credit union expressed concern that a
consumer may not be aware that making a payment within the 15-day
courtesy period but after the minimum payment due date could still
negatively impact the consumer's credit score. An industry trade
association indicated that consumers may not be aware that they could
lose the grace period on purchases by not making a payment by the
minimum payment due date but within the 15-day courtesy period.
Two trade associations and a financial regulatory advocacy group
specifically expressed concerns about the potential confusion
surrounding the principal payment and interest accrual. These
commenters generally indicated that consumers may not be aware that
their payment is actually due on the payment due date and not 15 days
thereafter and that interest may continue to accrue between the due
date and the end of the courtesy period. An industry trade association
indicated it would be difficult to develop a disclosure that accurately
informs consumers that the courtesy period applies to a late fee but
other negative consequences, like interest accrual, would still occur
even if the consumer paid within the 15-day period. A financial
regulatory advocacy group also expressed concerns that disclosures
would be more confusing because it would include both a minimum payment
due date and a different date to avoid incurring a late fee.
Several of these industry commenters cautioned the CFPB that a 15-
day
[[Page 19179]]
courtesy period would lessen the deterrence effect and negatively alter
consumers' payment habits by encouraging late payments. However, a bank
did indicate that there is little evidence proving that a courtesy
period would alter consumer payment habits.
Several industry trade associations, two banks, and one financial
regulatory advocacy group expressed concerns that a 15-day courtesy
period would cause negative impacts for card issuers. Many of these
commenters indicated that a 15-day courtesy period would generally
increase delinquencies thereby decreasing card issuers' revenue and
negatively impacting card issuers' costs. These commenters collectively
noted that an impact on card issuers' cost could raise significant
safety and soundness risks; impact card issuers' cash flow and thus
affect their liquidity and financial management; impact a card issuers'
ability to absorb losses associated with riskier accounts; and cause
card issuers to spend more on monitoring and managing delinquent
accounts. The financial regulatory advocacy group also noted that it
believed the safe harbor amount would need to be as much as double the
proposed $8 in order for card issuers to recover their collection
costs. A credit union trade association cautioned the CFPB that card
issuers may compensate for reduced revenue by raising interest rates or
other fees associated with their credit card products. This trade
association warned that due to increases in interest rates cardholders
may face higher borrowing costs and credit unions may be less
competitive in the market.
A few industry trade associations additionally expressed concerns
that a 15-day courtesy period would create a substantial credit risk to
card issuers. One of the industry trade associations specifically noted
that a courtesy period would make underwriting more difficult because
card issuers would have to evaluate whether a cardholder is likely to
take advantage of a courtesy period. This commenter indicated that this
would cause card issuers to take a more conservative approach to ensure
they are not exposed to undue financial risk.
An individual commenter and an industry trade association indicated
that courtesy periods provided for mortgage payments are not an
applicable comparison to courtesy periods for credit card payments. The
individual commenter indicated that for mortgage payments the monthly
statement does not provide as much advance notice as is required for
credit cards. Further, this individual commenter expressed concern
about the comparison between mortgages and credit cards because the
risks in mortgage transactions are different in that the mortgages have
collateral to offset losses whereas credit cards are unsecured credit.
Similarly, the trade association indicated that the CFPB did not
adequately explain why mortgages, which are a form of secured lending,
are compared to credit cards, a form of unsecured lending.
A few trade associations and one law firm representing several card
issuers expressed concerns that the CFPB does not have the authority
under TILA to implement a courtesy period. One of these industry trade
associations specifically indicated that the CARD Act authorizes the
CFPB to regulate only the amount of penalty fees in connection with a
violation of a cardholder agreement and not when a violation of such an
agreement occurs. The law firm described above specifically expressed
concerns that a 15-day courtesy period would redefine when an issuer
can consider a payment to be late and this would run contrary to
congressional intent and would eliminate limitations created by other
statutory provisions.
Several industry trade associations expressed concerns that the
proposal lacked data or an overall explanation when the CFPB sought
comments on whether Sec. 1026.52(b)(2) should be amended to provide
for a courtesy period which would prohibit late fees imposed within 15
calendar days after each payment due date. The trade association
indicated that the CFPB did not provide quantification of consumer
benefits or harm for the 15-day courtesy period or a courtesy period of
any other length. One of the industry trade association commenters
indicated that the CFPB, absent a new proposed rule with more
specificity, could not implement the 15-day courtesy period because it
was not detailed or formally proposed. Another of the trade association
commenter indicated that the 15-day courtesy period did not include
research specifically on any unintended negative consequences on
consumers and credit access.
Alternative suggestions to late fee courtesy period. Many consumer
groups in a joint letter, one bank and one credit union, and an
individual commenter provided the CFPB with alternative suggestions to
a 15-day courtesy period. The individual commenter suggested that if a
courtesy period was provided than the card issuer should be able to
back-date the late fee to the original due date if the payment was not
made by the end of the courtesy period. Alternatively, the individual
commenter suggested that the card issuer could charge the late fee if
the payment was not made by the due date; however, if the payment was
made by the end of the courtesy period, then the fee could be
automatically reversed on the next statement. The credit union
suggested that a 15-day courtesy period in conjunction with maintaining
the safe harbor fee at $30 would provide sufficient guardrails for card
issuers who may be abusing late payment fees for profit. The bank
indicated that there was not enough statistical evidence to support a
15-day courtesy period and that a 10-day courtesy period may be more
reasonable as it aligns with other industries, such as mortgages and
other consumer products.
Specific data provided on late fee courtesy periods. Many credit
unions provided the CFPB with the number of days they currently offer
consumers as a courtesy period. The number of days ranged from 4 days
to 25 days.
Courtesy period for penalty fees generally. Many consumer groups in
a joint letter expressed support in response to the CFPB's solicitation
of comments on whether Sec. 1026.52(b)(2) should be amended to provide
for a courtesy period for all penalty fees. The consumer groups
specifically expressed concerns that card issuers will engage in
tactics that generate more of these credit card penalty fees.
One bank and one industry trade association indicated they would
not be supportive of extending the 15-day courtesy period to all other
credit card penalty fees. These two commenters were generally concerned
that extending the proposal to other penalty fees was not adequately
addressed or analyzed in the CFPB's proposal and therefore should not
be considered as a part of the final rule.
The Final Rule
For the reasons stated below, the CFPB has determined it will not
be implementing any courtesy period for late fees or other penalty fees
at this time. In doing so, the CFPB acknowledges commenters who
expressed concerns about the impact a 15-day courtesy period may have
on consumers and issuers' costs. Specifically, commenters expressed
concerns that a courtesy period would raise issuers' costs and create a
substantial credit risk to card issuers including by making
underwriting more difficult. Commenters also raised concerns that a
courtesy period could cause consumer confusion about when a payment was
actually due or that consumers may be confused by what consequences are
triggered by missing the minimum payment on the due date versus paying
it within the 15-day
[[Page 19180]]
courtesy period (e.g., when interest starts accumulating). The CFPB has
determined that, absent additional evidence, the potential impacts to
card issuers' costs and consumers outweigh the benefits of a mandatory
15-day courtesy period. In addition to the concerns highlighted by
commenters, the CFPB previously noted in the 2023 Proposal that a 15-
day courtesy period could cut the incidence of consumers charged the
proposed $8 safe harbor amount by as much as half and, therefore, card
issuers who use the safe harbor amount would have recovered an average
of $4 in late fees per late payment. While the CFPB acknowledges the
possible benefits raised by commenters, such as helping consumers who
mail in their late payments avoid a penalty fee for any mail delivery
issues, the potential for card issuers to recoup costs at half the safe
harbor amount per late payment combined with other concerns about
consumer confusion outweighs the possible benefits to consumers.
Additionally, the CFPB understands that consumers who wish to have a
courtesy period have that option available to them as some card
issuers, primarily credit unions, currently offer courtesy periods for
late payments. Based on comments received, the CFPB further
acknowledges that some credit unions may offer courtesy periods that
are more than 15 days.
In recognizing the availability of courtesy periods, the CFPB
acknowledges commenters who discussed the interaction between a
courtesy period and Sec. 1026.5(b)(2)(ii)(A)'s requirement that a
periodic statement be mailed or delivered at least 21 days prior to the
payment due date disclosed on the statement. Specifically, many
commenters believed that the 21-day notification of a payment due date
was akin to providing a courtesy period. Other commenters noted that
comparing courtesy periods for credit cards and mortgages was not an
accurate comparison because the 21-day periodic statement provides a
longer advance notice, and the risks are different. However, the CFPB
notes that the requirement to provide a periodic statement at least 21
days prior to the payment due date is not the same as a courtesy
period. Further, although the CFPB is not implementing a 15-day
courtesy period, it does reject the notion that it does not have the
authority to do so.
The CFPB also acknowledges commenters who provided alternative
suggestions including (1) allowing card issuers to back-date late fees
to the original due date if the payment was not made by the end of the
courtesy period, (2) allowing card issuers to charge the late fee if
the payment was not made by the due date but requiring a reversal of
the charge if the payment was made within the courtesy period, (3)
providing a courtesy period but maintaining a $30 safe harbor amount,
and (4) providing for a 10-day courtesy period and not a 15-day period.
The CFPB declines to adopt any of the alternative suggestions for the
same reasons it is declining to adopt the courtesy period that the CFPB
put forth in the 2023 Proposal. Absent additional evidence, the
potential impacts to consumers and card issuers' costs outweigh the
benefits at this time.
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
Section 1026.52(b)(2)(i)(A) provides that a card issuer must not
impose a fee for violating the terms or other requirements of a credit
card account under an open-end (not home-secured) consumer credit plan
that exceeds the dollar amount associated with the violation. For late
fees, accompanying comment 52(b)(2)(i)-1 provides that the dollar
amount associated with a late payment is the full amount of the
required minimum periodic payment due immediately prior to assessment
of the late payment. Thus, Sec. 1026.52(b)(2)(i)(A) prohibits a card
issuer from imposing a late payment fee that exceeds the full amount of
the required minimum periodic payment.
In implementing TILA section 149, the Board noted that the
prohibition of fees based on violations of the terms or other
requirements of an account that exceed the dollar amount associated
with the violation as set forth in its Regulation Z, Sec.
226.52(b)(2)(i)(A) would be consistent with Congress' intent to
prohibit penalty fees that are not reasonable and proportional to the
violation.\198\ The Board in its reasoning addressed issuers' concerns
that when the dollar amount associated with a violation is small, Sec.
226.52(b)(2)(i)(A) could limit the penalty fee to an amount that is
neither sufficient to cover the issuer's costs nor to deter future
violations.\199\ The Board explained that while it is possible that an
issuer could incur costs as a result of a violation that exceed the
dollar amount associated with that violation, this would not be the
case for most violations.\200\ Additionally, the Board noted that if
card issuers could not recover all of their costs when a violation
involves a small dollar amount, prohibiting late fees that exceed the
full amount of the required minimum periodic payment would encourage
them either to undertake efforts to reduce the costs incurred as a
result of violations that involve small dollar amounts or to build
those costs into upfront rates, which would result in greater
transparency for consumers regarding the cost of using their credit
card accounts.\201\ Furthermore, the Board considered the deterrent
effect and believed that violations involving small dollar amounts are
more likely to be inadvertent and therefore the need for deterrence is
less pronounced.\202\
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\198\ 75 FR 37526 at 37544.
\199\ Id. at 37545.
\200\ Id.
\201\ Id.
\202\ Id.
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The Board also considered whether compliance with its Regulation Z,
Sec. 226.52(b)(2)(i)(A) would be burdensome on card issuers and
concluded that it would not be overly burdensome.\203\ The Board
explained that, although card issuers may incur substantial costs at
the outset, because Sec. 226.52(b)(2)(i)(A) required a mathematical
determination, issuers should generally be able to program their
systems to perform the determination automatically.\204\
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\203\ Id.
\204\ Id.
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When implementing comment 52(b)(2)(i)-1, the Board clarified that
the dollar amount associated with a late payment is the full amount of
the required minimum periodic payment due immediately prior to the
assessment of the late payment. Industry commenters had argued that the
dollar amount associated with a late payment should be the outstanding
balance on the account because that is the amount the issuer stands to
lose if the delinquency continues and the account eventually becomes a
loss.\205\ However, the Board explained that relatively few
delinquencies result in losses, and the violation giving rise to a late
payment fee is the consumer's failure to make the required minimum
periodic payment by the payment due date.
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\205\ Id.
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The CFPB's Proposal
The CFPB proposed to amend Sec. 1026.52(b)(2)(i)(A) to limit the
dollar amount associated with a late payment to 25 percent of the
required minimum periodic payment due immediately prior to assessment
of the late payment. The CFPB also proposed to revise comment
52(b)(2)(i)-1 in the following two ways: (1) to clarify that the
required minimum periodic payment due immediately prior to assessment
of the
[[Page 19181]]
late payment is the amount that the consumer is required to pay to
avoid the late payment fee, including as applicable any missed payments
and fees assessed from prior billing cycles; and (2) to revise several
examples consistent with the proposed 25 percent limitation.
Like the Board's reasoning in the 2010 Final Rule, the proposal
intended to ensure that late fees are reasonable and proportional, even
late fees that are imposed when consumers are late in paying small
minimum payments. However, the CFPB preliminarily determined that
restricting the late fee to 25 percent of the minimum payment is more
consistent with Congress' intent to prohibit penalty fees that are not
reasonable and proportional to the violation than the current rule that
allows for a card issuer to potentially charge a late fee that is 100
percent of the minimum payment.
For example, the proposal stated that when considering collection
costs incurred by card issuers, it is likely that allowing a late fee
that is 100 percent of the minimum payment is not reasonable and
proportional to such costs. Generally, most card issuers do not incur
collection costs that are 100 percent of the amount they are trying to
collect. The CFPB preliminarily determined that lowering the limitation
on late fees to 25 percent of the minimum payment due would still
likely allow card issuers to cover contingency fees paid to third-party
agencies for collecting the amount of the minimum payment prior to
account charge-off. The CFPB understood, based on information obtained
through orders pursuant to section 1022(c)(4) of the CFPA for purposes
of compiling the CFPB's periodic CARD Act reports to Congress, that
card issuers that contract with third-party agencies for pre-charge-off
collections pay a contingency fee that is a percentage of the amount
collected, which may include an amount (if collected) exceeding the
minimum payment. These contingency fees can range from 9.5 percent to
23 percent, further supporting that the proposed 25 percent of minimum
payment due is more reasonable and proportional than permitting 100
percent of the minimum payment.\206\ It appears that the Board did not
consider or have access to such figures when it limited the dollar
amount associated with a late payment to 100 percent of the required
minimum periodic payment. With these additional data, the CFPB proposed
a limitation on late fees that it preliminarily determined would be
more reasonable and proportional than what was set forth in the Board's
2010 Final Rule.
---------------------------------------------------------------------------
\206\ 2021 Report, at 137.
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The CFPB recognized that the proposed 25 percent limitation would
most likely impact the amount of the late fee a card issuer can charge
when (1) the minimum payment is small, and (2) the card issuer is using
the cost analysis provisions in Sec. 1026.52(b)(1)(i) generally to set
the late fee amount. Based on the distribution of minimum payments in
the Y-14 data, the CFPB estimated that this may occur infrequently. Y-
14 data from October 2021 to September 2022 show that for those months
in which an account was late, only 12.7 percent of accounts had a
minimum payment of $40 or less. Additionally for those months in which
an account was late, at least 48.5 percent of accounts had a minimum
payment above $100. If a card issuer had used the proposed late fee
safe harbor of $8, however, the instances where 25 percent of the
minimum payment may be less than the proposed $8 safe harbor appeared
to have been even less frequent. For instance, based on the
distribution of minimum payments due in the Y-14 on a monthly basis
from October 2021 to September 2022, if card issuers could have only
charged up to 25 percent of the minimum payment, only 7.7 percent of
accounts would have been charged a late fee of less than $8. Figure 5
below, which was provided in the 2023 Proposal, plots the cumulative
distribution function \207\ of total payments due in the range of $1 to
$100 in the account-level Y-14 data, for all months that payments were
late between October 2021 and September 2022.
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\207\ The values plotted vertically are the shares of account-
months that paid late with minimum payments at or below the integer
dollar amounts shown on the horizontal axis.
[GRAPHIC] [TIFF OMITTED] TR15MR24.005
Additionally, when the dollar amount associated with the late
payment is small, the CFPB recognized that the proposal could have had
the potential to limit the late fee to an amount that is insufficient
to cover a card issuer's costs
[[Page 19182]]
in collecting the late payment. However, permitting a late fee that is
100 percent of the minimum payment did not appear to be reasonable and
proportional to the consumer's conduct of paying late when the minimum
payment is small. For instance, the proposal stated that in situations
where the dollar amount associated with the late payment is small and
the card issuer is permitted to charge a late fee that is 100 percent
of the minimum payment then a consumer is essentially required to pay
double the amount of a missed payment in the next billing cycle in
addition to the minimum payment due for that next billing cycle. The
CFPB preliminarily determined that this result would have been neither
reasonable nor proportional to the consumer's conduct in paying late.
Furthermore, as the Board noted in its 2010 Final Rule and which
the CFPB preliminarily determined was still relevant in the 2023
Proposal, to the extent card issuers cannot recover all of their costs
through a late fee when a late payment involves a small dollar amount,
the proposed limitation would have likely encouraged card issuers to
undertake efforts to either reduce costs incurred as a result of
violations that involve small dollar amounts or to build those costs
into upfront rates, which had the additional benefit of resulting in
greater transparency for consumers regarding the cost of using credit
card accounts. Finally, in the 2023 Proposal, the CFPB preliminarily
determined that the Board's explanation that compliance would not be
overly burdensome also remained applicable to the CFPB's proposal. The
proposal would have similarly required a mathematical determination
that issuers should generally be able to program their systems to
perform automatically.
In addition, as discussed above, the CFPB proposed to revise
comment 52(b)(2)(i)-1 to clarify that the required minimum periodic
payment due immediately prior to assessment of the late payment is the
amount that the consumer is required to pay to avoid the late payment
fee, including as applicable any missed payments and fees assessed from
prior billing cycles. The CFPB understood that card issuers report two
payment amounts when responding to Y-14 collection efforts, a minimum
payment calculated just for that billing cycle and the total amount
that is required to be paid that billing cycle which includes missed
payment amounts or fees assessed. The CFPB proposed this revision to
comment 52(b)(2)(i)-1 to address any potential confusion about the
payment amount to which the proposed 25 percent limitation would apply.
The CFPB solicited comment on the proposed 25 percent limitation
discussed above. The CFPB also solicited comment on whether the dollar
amount associated with the other penalty fees covered by Sec.
1026.52(b) should be limited to 25 percent of the dollar amount
associated with the violation. The proposal inquired, for example, (1)
should over-the-limit fees be limited to 25 percent of the amount of
credit extended by the card issuer in excess of the credit limit during
the billing cycle in which the over-the-limit fee is imposed; \208\ (2)
should the returned-payment fee be limited to 25 percent of the amount
of the required minimum periodic payment due immediately prior to the
date on which the payment is returned to the card issuer; \209\ and (3)
should the declined access check fee be limited to 25 percent of the
amount of the check.\210\
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\208\ See comment 52(b)(2)(i)-3 for an explanation of the dollar
amount associated with an over-the-limit violation.
\209\ See comment 52(b)(2)(i)-2 for an explanation of the dollar
amount associated with a returned-payment violation.
\210\ See comment 52(b)(2)(i)-4 for an explanation of the dollar
amount associated with a declined access check violation.
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Comments Received
Support for 25 percent restriction. Many individual commenters and
many consumer groups expressed support for 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. Many consumer groups and an individual commenter
highlighted that, in particular, this proposal would prevent excessive
late fees on small remaining balances. The consumer groups also
commented that card issuers may raise minimum payments due as a result
of the 25 percent limitation, but expressed to the CFPB that this would
be a positive outcome because current minimum payments due result in
long repayment periods and higher finance charges for consumers who
only pay the minimum each billing cycle.
Opposition to 25 percent restriction. As discussed below, many
industry commenters, and a few individuals, urged the CFPB to
reconsider implementing the 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.
Several trade associations, a few banks and credit unions, and an
individual commenter urged the CFPB to consider the impact the 25
percent limitation would have on card issuers' costs. Commenters
expressed concerns that the 25 percent limitation would be an
impediment to card issuers' ability to cover current or future
increased costs associated with late payments. Two commenters
specifically highlighted that many costs associated with a late payment
are fixed and do not depend on the minimum payment due. A few of the
trade associations urged the CFPB to consider the upfront costs card
issuers could incur due to a change in the minimum payment requirement,
namely that applications, solicitations, and initial disclosures would
need to be amended along with the issuance of a change in terms notice
to reflect the new minimum payment calculation. Another trade
association reported that one of its credit union members indicated
that for certain balances, its current minimum payment due is $40 so
with the 25 percent limitation the late fee would be $10 which would
not cover its costs (and it would be $2 higher than the proposed safe
harbor amount). One bank highlighted that the CFPB indicated 7.7
percent of accounts would have been charged a late fee of less than $8
if card issuers could only charge up to 25 percent between October 2021
to September 2022. This commenter indicated that the CFPB failed to
explain why $8 would be a reasonable estimate of costs incurred if
nearly 8 percent of late payment incidents would be subject to a fee
lower than the proposed safe harbor due to the 25 percent limitation.
A law firm representing several card issuers, an individual
commenter, and two trade associations expressed concerns that the 25
percent limitation would lead to a late fee amount that is not
reasonable or proportional to a cardholder's omission or violation or
otherwise did not properly consider the factors the CFPB is guided by
when considering the appropriate safe harbor amount.\211\ One industry
trade association and the law firm described above broadly indicated
the CFPB did not acknowledge any of the guiding factors. A few banks
and one industry trade association indicated that the CFPB did not
consider the deterrent
[[Page 19183]]
effect in the 25 percent limitation proposal and a research group
further indicated that the deterrent effect was not considered for a
safe harbor amount below $8, to the extent that is a possibility due to
the 25 percent limitation. One industry trade group and the law firm
described above also indicated that the CFPB did not provide the
underlying raw data it relied on, and therefore, they could not be sure
that the analysis undertaken with respect to the 25 percent limitation
set forth in the 2023 Proposal was accurate. An individual commenter
indicated that the CFPB disregarded the legal meanings of ``reasonable
and proportional'' and that it would be reasonable for card issuers to
impose late fees that are up to the full amount of the payment past due
using the same methodology as certain State laws on returned payments.
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\211\ In considering the appropriate safe harbor threshold
amount, the CFPB is guided by factors including (1) the cost
incurred by the creditor from an omission or violation; (2) the
deterrence of omissions or violations by the cardholder; (3) the
conduct of the cardholder; and (4) such other factors deemed
necessary or appropriate. CARD Act section 102, 123 Stat. 1740 (15
U.S.C. 1665d(c)).
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One credit union indicated that the CFPB inaccurately based the 25
percent limitation on the cost of collecting delinquent accounts pre-
charge-off. The commenter expressed concerns with this analysis because
accounts assessed late fees pose a higher risk of delinquency and thus
charge-off. The commenter noted that all costs incurred on credit
unions' credit card products are also incurred by all members and,
therefore, all costs should be included in the analysis.
Several banks and credit unions and many trade associations
cautioned the CFPB that the 25 percent limitation could potentially
cause negative consequences for consumers. One credit union and several
trade associations indicated that the 25 percent limitation would cause
card issuers to raise their minimum payment requirements in order to
charge a higher late fee. Industry commenters and trade associations
highlighted various potential consequences that could result from card
issuers increasing their minimum payment requirements including an
increase in delinquencies and defaults; damage to consumers' credit
scores; higher rates for credit cards; decrease in credit availability,
and an increase in consumers' future borrowing costs.
Many trade associations also raised concerns that any potential
effect that the 25 percent limitation may have on raising card issuers'
costs, from upfront costs like additional computer programming needs to
the late fee not covering issuers' costs, could cause card issuers to
take actions that may have a negative effect on consumers. For example,
these commenters asserted that card issuers may raise other fees
associated with their credit card products, raise rates, be unable to
issue credit cards, or be unable to provide credit access to as many
consumers.
One credit union trade association also cautioned the CFPB that the
25 percent limitation may cause consumers to be less likely to try to
avoid late fees by communicating with credit unions that they are
experiencing financial difficulties which would ultimately cost both
the consumer and the credit union.
Alternative suggestions to 25 percent restriction. Many consumer
groups in a joint letter, an individual commenter, and a bank provided
the CFPB with alternative suggestions to the CFPB's 25 percent
limitation proposal. The consumer groups urged the CFPB to consider
alternatively limiting the late fee to 25 percent of the minimum
payment remaining. Therefore, if a consumer had made a partial payment
of the minimum payment due, the late fee would be limited to 25 percent
of the remaining minimum amount due and not 25 percent of the total
minimum payment.
The individual commenter suggested that a card issuer should be
permitted to charge a late fee that is 3 percent of the total
underlying debt, similar to Sec. 1026.52(b)(1)(ii)(C). The individual
commenter indicated that a card issuer who permits a consumer to pay
the underlying debt off over time is taking on a higher credit risk
than card issuers that require payments in full. Therefore, all card
issuers, at a minimum, should be able to charge 3 percent of the total
underlying debt. Similarly, a bank suggested the CFPB tie the late fee
to the underlying balance rather than the minimum payment.
Specific data provided on 25 percent restriction. Many individual
commenters on behalf of a credit union, a few industry trade
associations, and a few bank and credit union commenters provided the
CFPB with specific data as it relates to 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.
An industry trade association and many individual commenters on
behalf of a credit union indicated that the credit union's late fee of
$25 would effectively be reduced to $6.25 under the proposal. The
individual commenters also indicated that the CFPB's proposal would
require the card issuer to elect the lesser of the proposed $8 safe
harbor amount or 25 percent of the missed payment.
One credit union indicated that according to estimates, the 25
percent limitation would result in an average late fee amount of $4.61,
which is a 62 percent decrease compared to the credit union's average
late fee of $12.13. A bank commenter indicated that more than 53
percent of its accounts have a minimum payment less than $32 and two-
thirds of its accounts have a minimum payment below $50.
A few trade associations indicated that one bank reported that 40
percent of its required minimum payments for consumer credit card
accounts are under $32. These trade associations also indicated that a
small card issuer reported to the trade associations that it estimated
53 percent of its accounts and 29.1 percent of balances have minimum
payments under $32.
Application of 25 percent restriction to all penalty fees. Many
consumer groups in a joint letter expressed support in response to the
CFPB's solicitation of comments on whether 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 should extend to all other credit card penalty
fees. The consumer groups specifically expressed concerns that card
issuers otherwise will begin to engage in tactics to increase the
amount of other credit card penalty fees.
One bank and one industry trade association indicated they would
not be supportive of extending the 25 percent limitation to all other
credit card penalty fees. These two commenters were generally concerned
that extending the proposal to other penalty fees was not adequately
addressed or analyzed in the CFPB's proposal and therefore should not
be considered as a part of the final rule.
The Final Rule
For the reasons stated herein, the CFPB is not adopting, for either
Larger Card Issuers or Smaller Card Issuers, the proposed amendment to
Sec. 1026.52(b)(2)(i)(A) to limit the dollar amount associated with a
late payment to 25 percent of the required minimum periodic payment due
immediately prior to assessment of the late payment. Therefore, the
CFPB is also not adopting the proposed revision to comment 52(b)(2)(i)-
1.\212\ In doing so, the CFPB acknowledges comments highlighting the
impact a 25 percent limitation may have on issuers' costs. Many
commenters specifically noted the impact the 25 percent limitation may
have on credit unions and small card
[[Page 19184]]
issuers. The commenters expressed concerns that credit unions and small
card issuers tend to have higher pre-charge-off collection costs and a
lower minimum payment. It was also noted that restrictions on Federal
credit unions on charging higher interest rates may further impact
their potential to recoup pre-charge-off collections costs they cannot
collect through late fees because of the 25 percent limitation.
Commenters additionally expressed concerns that not only would the 25
percent limitation prevent card issuers from covering pre-charge-off
collection costs related to a late payment but there would also be
upfront costs incurred. For example, for card issuers that choose to
adjust its minimum payments due, a notice of change in terms would need
to be issued.
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\212\ This final rule makes technical changes to cross
references in comments 52(b)(2)(i)-1.ii, 52(b)(2)(i)-2.ii and iii,
and 52(b)(2)(i)-3.ii to conform to OFR style requirements.
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The CFPB recognizes that some of the concerns discussed above could
be addressed by only applying the 25 percent restriction to Larger Card
Issuers. Nonetheless, the CFPB has determined that even with respect to
Larger Card Issuers, the benefits the 25 percent limitation may have
for consumers, such as requiring a more reasonable and proportional
late fee for instances where the minimum payment due is small, do not
outweigh considerations of card issuers' ability to recoup their pre-
charge-off collection costs when they are using the $8 safe harbor
threshold amount. In addition to considering the comments noted above,
the CFPB also acknowledges the specific data provided by commenters
demonstrating potential late fee amounts based on current minimum
payments due. Commenters here highlighted that some card issuers have a
large percentage of their accounts with a minimum payment of less than
$32. For these card issuers, the 25 percent limitation would be
especially impactful because, as reported in comments, 40 to 53 percent
of accounts would have charges under the $8 safe harbor. The CFPB is
concerned that when a card issuer cannot charge a significant number of
their accounts the $8 safe harbor amount, card issuers' pre-charge-off
collection costs may not be covered.
The CFPB also acknowledges commenters who highlighted the potential
for card issuers to raise its minimum payments due in response to the
25 percent limitation and the impacts this may have on consumers. These
comments noted that in order to combat lower late payment fees that the
25 percent limitation may impose, card issuers might raise minimum
payments due. Conversely, other commenters explained that card issuers
raising minimum payments would be a positive for consumers because,
according to these commenters, current minimum payments due result in
long repayment periods and higher finance charges.
In weighing these considerations, the CFPB has determined not to
adopt the 25 percent limitation proposal in order to minimize impacts
to minimum balances due. While the CFPB agrees with commenters that
raising minimum payments due could be a positive for some consumers,
the potential negative impacts of higher minimum payments on consumers,
like an increase in delinquencies and defaults in particular for
consumers with limited cash flow, do not outweigh any benefits higher
minimum payments due may have for consumers.
The CFPB also acknowledges alternative suggestions provided by
commenters such as limiting the late fee to 25 percent of the minimum
payment remaining or permitting a late fee that is 3 percent of the
total underlying debt. The CFPB declines to adopt alternatives
suggested for the same reasons the CFPB is not adopting the proposed 25
percent limitation. That is to say, the CFPB has determined that the
potential impacts on card issuers' ability to recoup pre-charge-off
collection costs does not outweigh the benefits to consumers, and the
CFPB is concerned about the impact the 25 percent restriction may have
on minimum payments due.
As discussed above, the CFPB received only a few responses to its
request for comment on whether the 25 percent limitation should be
applied to all penalty fees covered by Sec. 1026.52(b). The CFPB has
determined that, like the 25 percent limitation for late payments, the
benefits to consumers do not outweigh the impact on card issuers'
costs. Additionally, with respect to consumer groups' concern that card
issuers will begin to engage in tactics to increase the number of those
penalty fees if the CFPB lowers the safe harbor late fee amounts, the
CFPB notes that this is less likely because it has not adopted the 25
percent limitation for late fees. As such, a 25 percent limitation for
all other credit card penalty fees will not be implemented. In doing
so, the CFPB rejects the notion raised by industry commenters that the
CFPB could not have adopted the 25 percent limitation with respect to
these other penalty fees in this final rule because it did not
establish a sufficient factual or legal analysis with respect to these
penalty fees.
52(b)(2)(ii) Multiple Fees Based on a Single Event or Transaction
Section 1026.52(b)(2)(ii) prohibits card issuers from imposing
multiple penalty fees based on a single event or transaction.
The CFPB's Proposal
The CFPB did not propose to amend the text of Sec.
1026.52(b)(2)(ii). However, the CFPB proposed to revise comment
52(b)(2)(ii)-1 to clarify several examples illustrating this
requirement. Specifically, the 2023 Proposal would have amended several
examples in comment 52(b)(2)(ii)-1 to reflect a late fee amount of $8,
consistent with the proposed amendments to Sec. 1026.52(b)(1)(ii), and
to make minor technical changes for consistency with the proposal.
Comments Received and the Final Rule
The CFPB received no comments on the proposed revisions to comment
52(b)(2)(ii)-1. This final rule adopts comment 52(b)(2)(ii)-1 as
proposed with several revisions. Consistent with the proposal, this
final rule amends comment 52(b)(2)(ii)-1 to reflect a late fee amount
of $8 for purposes of the examples, consistent with the new late fee
safe harbor amount applicable to Larger Card Issuers. This final rule
also amends comment 52(b)(2)(ii)-1.i and ii to specify that the card
issuer for purposes of the examples is not a Smaller Card Issuer
pursuant to Sec. 1026.52(b)(3). This final rule also makes a technical
change to a cross reference in comment 52(b)(2)(ii)-1.ii.B to conform
to OFR style requirements. Even though Smaller Card Issuers are not
subject to the $8 late fee safe harbor threshold in Sec.
1026.52(b)(1)(ii), the CFPB has determined it is useful to revise the
late fee amounts in the examples to be $8, consistent with the late fee
safe harbor threshold amount that applies to Larger Card Issuers.
52(b)(3) Smaller Card Issuers
As discussed in part VI, the CFPB is not adopting at this time
certain proposed provisions with respect to Smaller Card Issuers.
Specifically, with respect to such card issuers, the CFPB is not
adopting: (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. To implement that distinction, the CFPB is adopting a
definition of Smaller Card Issuer in new Sec. 1026.52(b)(3). The
CFPB's reasons for not adopting the provisions as to Smaller Card
Issuers, including the reasons for setting the
[[Page 19185]]
Smaller Card Issuer definition at one million open credit card
accounts, are discussed in detail in part VI. The CFPB's reasons for
adopting specific aspects of the Smaller Card Issuer definition are
discussed in the section-by-section analysis of Sec. 1026.52(b)(3)(i)
and (ii) below.
52(b)(3)(i)
Section 1026.52(b)(3)(i) sets forth the general definition of
Smaller Card Issuer. It provides that, except as provided in Sec.
1026.52(b)(3)(ii), a card issuer is a Smaller Card Issuer for purposes
of the safe harbor late fee provisions in Sec. 1026.52(b)(1)(ii)(E) if
the card issuer 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.\213\ Thus, a card issuer must include
its affiliates' open credit card accounts along with its own in
determining whether it meets the Smaller Card Issuer definition. The
CFPB determines that requiring card issuers to include the open credit
card accounts of their affiliates is consistent with the goal of
ensuring coverage of Larger Card Issuers and preventing those Larger
Card Issuers with more than one million open accounts from relying on
affiliates to divide accounts in order to qualify as Smaller Card
Issuers--and thus impose higher safe harbor late fee amounts. Section
1026.52(b)(3)(i) further provides that for purposes of the Smaller Card
Issuer definition, ``affiliate'' means any company that controls, is
controlled by, or is under common control with another company, as set
forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
The CFPB is adopting this common definition of ``affiliate'' because it
is one with which card issuers are familiar and, as such, will
facilitate compliance.
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\213\ See supra note 5.
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The Smaller Card Issuer definition also incorporates the existing
definition of open credit card account in Sec. 1026.58(b)(6) of
Regulation Z, which is used for purposes of determining whether a card
issuer meets certain exceptions to requirements for submitting card
agreements to the CFPB. The CFPB is incorporating this open credit card
account definition into the definition of Smaller Card Issuer because
it is one with which card issuers are familiar and, as such, will
facilitate compliance.
Existing Sec. 1026.58(b)(6) defines open account, or open credit
card account, broadly as a credit card account under an open-end (not
home-secured) consumer credit plan for which 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. The
definition further provides that an account that has been suspended
temporarily is considered an open account or open credit card account.
The CFPB notes that this broad definition generally encompasses open
credit card accounts that a card issuer keeps on-balance sheet as well
as those that a card issuer may have sold or otherwise keeps off-
balance sheet (except for accounts that have been charged off). The
CFPB determines that this metric more accurately reflects the size of a
card issuer's portfolio and ensures that card issuers cannot meet the
Smaller Card Issuer definition, and thereby impose higher late fee safe
harbor amounts, by simply securitizing their accounts and moving them
off-balance sheet.
The CFPB also notes that to meet the Smaller Card Issuer definition
in Sec. 1026.52(b)(3), a card issuer together with its affiliates must
have fewer than one million open credit card accounts for the entire
preceding calendar year. Thus, as explained in new comment 52(b)(3)(i)-
1, if a card issuer together with its affiliates had more than one
million open credit card accounts from January through October of the
preceding calendar year, for example, but had fewer than that threshold
number in November and December, the card issuer is not a Smaller Card
Issuer in the next calendar year. Further, as also explained in the
comment, the card issuer is not a Smaller Card Issuer until such time
that the card issuer's number of open credit card accounts, together
with those of its affiliates, remains below one million for an entire
preceding calendar year.\214\ In order to provide clarity and certainty
for card issuers, the comment provides that a card issuer must remain
below the open credit card account threshold for the entire preceding
calendar year in order to meet the Smaller Card Issuer definition. The
requirement also provides certainty and consistency for consumers, who
might otherwise experience significant fluctuations in their late fee
amounts as their card issuer moves above and below the threshold.
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\214\ Consistent with Sec. 1026.9(c)(2)(i)(A), a Larger Card
Issuer that becomes a Smaller Card Issuer would have to provide
consumers a change-in-terms notice at least 45 days prior to
imposing higher late fee amounts under the safe harbor.
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52(b)(3)(ii)
Section 1026.52(b)(3)(ii) sets forth an exception to the general
definition of Smaller Card Issuer in Sec. 1026.52(b)(3)(i). It
provides that 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, then the card issuer will no
longer be a Smaller Card Issuer for purposes of Sec.
1026.52(b)(1)(ii)(E) as of 60 days after meeting or exceeding that
number of open credit card accounts.\215\ Thus, as explained in new
comment 52(b)(3)(ii)-1, the card issuer may not impose a late fee
pursuant to Sec. 1026.52(b)(1)(ii)(E) as of 60 days after meeting or
exceeding the threshold number of open credit card accounts, because at
that point the card issuer is no longer a Smaller Card Issuer. Instead,
for purposes of imposing a late fee pursuant to the safe harbor
provisions, the card issuer may impose a late fee of no more than $8
pursuant to Sec. 1026.52(b)(1)(ii) as of the 60th day.
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\215\ A Smaller Card Issuer that becomes a Larger Card Issuer
would not be required to provide consumer a change-in-terms notice
prior to imposing lower late amounts under the safe harbor, as the
requirement generally does not apply to reductions in fee amounts.
See Sec. 1026.9(c)(2)(v)(A).
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The CFPB notes that this approach is similar to the definition of
creditor in Sec. 1026.2(a)(17). That definition generally provides, in
relevant part, that a creditor is a person who regularly extends
consumer credit that is subject to finance charge or is payable by
written agreement in more than four installments. It further provides
that a person regularly extends consumer credit if, with certain
exceptions, that person extended consumer credit more than 25 times in
the preceding calendar year. However, the definition also generally
provides that if a person did not meet the numerical standard (i.e., 25
extensions of consumer credit) in the preceding calendar year, the
numerical standard must be applied in the current calendar year. As
such, a person who begins a calendar year beneath the definitional
threshold can become a creditor, and subject to all of the Regulation Z
requirements that apply to creditors, during that calendar year if the
person meets or exceeds the threshold.
[[Page 19186]]
Similarly, under this final rule, the definition of Smaller Card
Issuer generally provides that if a card issuer together with its
affiliates did not meet the numerical standards (i.e., one million open
credit card accounts) in the preceding calendar year, the numerical
standard must be applied in the current calendar year. The CFPB is
incorporating this concept into the definition of Smaller Card Issuer
in order to ensure that the $8 limitation in Sec. 1026.52(b)(1)(ii)
becomes applicable to formerly Smaller Card Issuers--and that
cardholders of those issuers receive the benefits therefrom--as soon as
practicable. To that end, the CFPB determines that a period of 60 days
after a formerly Smaller Card Issuer meets or exceeds the threshold, as
provided in the definition, is a sufficient amount of time for the card
issuer to come into compliance with the limitation in Sec.
1026.52(b)(1)(ii). The CFPB notes that 60 days is the same compliance
period accorded to Larger Card Issuers under this final rule as
discussed in part VIII.
Section 1026.58 Internet Posting of Credit Card Agreements
58(b) Definitions
58(b)(6) Open Account
The CFPB is adopting a technical amendment to the definition of
open account, or open credit card account, in Sec. 1026.58. As
discussed in the section-by-section analysis of Sec. 1026.52(b)(3),
the CFPB is adopting a definition of Smaller Card Issuer to implement
its decision not to finalize certain provisions of this final rule with
respect to card issuers with fewer than one million open credit card
accounts. That definition incorporates the definition of open account,
or open credit card account, in Sec. 1026.58(b)(6). The CFPB is
revising Sec. 1026.58(b)(6) to clarify that the definition of open
account, or open credit card account, is for purposes of both Sec.
1026.58 and Sec. 1026.52.
Section 1026.60 Credit and Charge Card Applications and Solicitations
60(a) General Rules
60(a)(2) Form of Disclosures; Tabular Format
Section 1026.60(a) provides that a card issuer must provide the
disclosures set forth in Sec. 1026.60 on or with a solicitation or an
application to open a credit or charge card account. Section
1026.60(a)(2) provides certain format requirements for the disclosures
required under Sec. 1026.60. Section 1026.60(a)(2)(i) provides that in
certain circumstances the disclosures required by Sec. 1026.60
generally must be disclosed in a tabular format. Section
1026.60(a)(2)(ii) provides that when a tabular format is required,
certain disclosures must be disclosed in the table using bold text,
including any late fee amounts and any maximum limits on late fee
amounts required to be disclosed under Sec. 1026.60(b)(9). Comment
60(a)(2)-5.ii includes a late fee example to illustrate the requirement
that any maximum limits on fee amounts must be disclosed in bold text.
The current example assumes that a card issuer's late fee will not
exceed $35.
The CFPB's Proposal
The CFPB proposed to amend the example to assume that the late fee
would not exceed $8, so that the maximum late fee amount in the example
would have been 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
60(a)(2)-5.ii. This final rule adopts comment 60(a)(2)-5.ii as proposed
with minor revisions to specify that the card issuer in the example is
not a Smaller Card Issuer as defined in Sec. 1026.52(b)(3). The CFPB
has determined that revising the example to be consistent with the late
fee safe harbor amount of $8 is necessary to reflect the changes to the
late fee safe harbor dollar amount as set forth in Sec.
1026.52(b)(1)(ii) for Larger Card Issuers. Notwithstanding the
revisions to the late fee safe harbor amount in the example, Smaller
Card Issuers as defined in Sec. 1026.52(b)(3) are not subject to the
$8 late fee safe harbor threshold adopted in this final rule and may
use the relevant safe harbor thresholds set forth in Sec.
1026.52(b)(1)(ii)(A) through (C). This final rule also makes a
technical change to a cross reference in comment 60(a)(2)-6.i to
conform to OFR style requirements.
Appendix G to Part 1026--Open-End Model Forms and Clauses
Appendix G to part 1026 generally provides model or sample forms or
clauses for complying with certain disclosure requirements applicable
to open-end credit plans, including a credit card account under an
open-end (not home-secured) consumer credit plan. The following five
sample forms or clauses set forth an example of the maximum late fee
amount of ``Up to $35'' under the heading ``Late Payment'': (1) G-
10(B); (2) G-10(C); (3) G-10(E); (4) G-17(B); and (5) G-17(C). The
following two sample forms set forth an example of the maximum late fee
amount of ``Up to $35'' under the heading ``Late Payment Warning'': (1)
G-18(D); and (2) G-18(F). Sample form G-21 sets forth an example of the
maximum late fee amount of ``Up to $35'' under the heading ``Late
Payment Fee.'' The following two sample forms or clauses set forth an
example of the late fee amount ($35) a consumer may incur if the
consumer does not pay the required amount by the due date under the
heading ``Late Payment Warning'': (1) G-18(B); and (2) G-18(G). The
following three sample forms set forth an example of the late fee
amount ($35) that the consumer was charged in the particular billing
cycle under the heading ``Fees'': (1) G-18(A); (2) G-18(F); and (3) G-
18(G).
The CFPB solicited comment on whether the late fee amount of $35 in
these sample forms or clauses, as applicable, should be revised to set
forth a late fee amount of $8, and whether the maximum late fee amount
of ``Up to $35'' in these sample forms or clauses, as applicable,
should be revised to set forth a maximum late fee amount of ``Up to
$8'' so that the late fee amount and maximum late fee amount in the
examples are consistent with the proposed $8 late fee safe harbor
amount set forth in proposed Sec. 1026.52(b)(1)(ii). The CFPB noted
that the 11 forms or clauses discussed above are just samples; card
issuers would need to disclose the late fee amount that they charge or
the maximum late fee amount on the account, as applicable, consistent
with the restrictions in Sec. 1026.52(b).
In addition, as discussed in the section-by-section analysis of
Sec. 1026.52(b)(2)(i), in the 2023 Proposal, the CFPB solicited
comment on whether to restrict card issuers from imposing a late fee on
a credit card account, unless the consumer has not made the required
payment within 15 calendar days following the due date. The CFPB
solicited comment on whether the following 10 sample forms or clauses
that currently disclose an example of the late fee amount ($35) or
maximum late fee amount (``Up to $35'') that could be incurred on the
account should be revised to disclose that a late fee will only be
charged if the consumer does not make the required payment within 15
calendar days of the due date: (1) G-10(B); (2) G-10(C); (3) G-10(E);
(4) G-17(B); (5) G-17(C); (6) G-18(B); (7) G-
[[Page 19187]]
18(D); (8) G-18(F),\216\ (9) G-18(G); \217\ and (10) G-21.\218\ The
CFPB also solicited comment on effective ways to help ensure that
consumers understand that a 15-day courtesy period only relates to the
late fee, and not to other possible consequences of paying late, such
as the loss of a grace period or the application of a penalty rate.
---------------------------------------------------------------------------
\216\ Sample Form G-18(F) contains two examples of late fees--
one example is the maximum late fee of ``Up to $35'' under the
heading ``Late Fee Warning'' and the other example is the late fee
($35) that was charged to the consumer in the particular billing
cycle under the heading ``Fees.'' The CFPB solicited comment only on
whether the 15-day courtesy period should be incorporated into the
``Late Fee Warning'' to indicate the late fee would only be charged
if the consumer does not make the required payment within 15
calendar days after each due date. The 15-day courtesy period
disclosure would not have been appropriate for the example of the
late fee under the heading ``Fee.''
\217\ Sample Form G-18(G) contains two examples of late fees--
one example is the late fee of ``$35'' under the heading ``Late Fee
Warning'' and the other example is the late fee ($35) that was
charged to the consumer in the particular billing cycle under the
heading ``Fees.'' The CFPB solicited comment only on whether the 15-
day courtesy period should be incorporated into the ``Late Fee
Warning'' to indicate the late fee would only be charged if the
consumer does not make the required payment within 15 calendar days
after each due date. The 15-day courtesy period disclosure would not
have been appropriate for the example of the late fee under the
heading ``Fee.''
\218\ Sample Form G-18(A) only provides an example of a late fee
that has been charged on the account in that billing cycle (see late
fee disclosed under the ``Fees'' heading), so a disclosure of the
15-day courtesy period would not have been appropriate for this
disclosure.
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In addition, the CFPB noted that the following five samples forms
also include disclosures about maximum penalty fee amounts of ``Up to
$35'' for over-the-limit fees \219\ and returned-payment fees: (1) G-
10(B); (2) G-10(C); (3) G-10(E); (4) G-17(B); and (5) G-17(C). As
discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii), in the 2023 Proposal, the CFPB solicited comment on
whether the $8 safe harbor threshold amount that it proposed for late
fees should also apply to other penalty fees, including over-the-limit
fees and returned-payment fees. If the CFPB were to adopt the $8 safe
harbor threshold amount for all penalty fees, the CFPB solicited
comment on whether the CFPB should revise the maximum amount of the
over-the-limit fees and returned-payment fees shown on these forms to
be ``Up to $8.'' Moreover, as discussed in the section-by-section
analysis of Sec. 1026.52(b)(2), in the 2023 Proposal, the CFPB
solicited comment on whether the 15-day courtesy period should be
provided with respect to all penalty fee, including the over-the-limit
fees and returned-payment fees. If the CFPB were to adopt the 15-day
courtesy period for all penalty fees, the CFPB solicited comment on
whether the 15-day courtesy period should be disclosed in the five
sample forms discussed above with respect to the over-the-limit fee and
the returned-payment fee.
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\219\ These sample forms refer to over-the-limit fees as ``over-
the-credit-limit fees.''
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Comments Received and the Final Rule
The CFPB received no comments on the revisions to the relevant
sample forms or clauses in appendix G on which it solicited comment and
is adopting the revisions as discussed below. The final rule amends the
applicable sample forms or clauses to include a late fee amount of $8
and a maximum late fee amount of ``Up to $8'' consistent with the late
fee safe harbor amount set forth in Sec. 1026.52(b)(1)(ii) applicable
to Larger Card Issuers. Specifically, the final rule amends the
following 11 sample forms or clauses: (1) G-10(B); (2) G-10(C); (3) G-
10(E); (4) G-17(B); (5) G-17(C); (6) G-18(A); (7) G-18(B); (8) G-18(D);
(9) G-18(F); (10) G-18(G); and (11) G-21.
Notwithstanding the changes to the late fee amount in the sample
forms or clauses, Smaller Card Issuers as defined in Sec.
1026.52(b)(3) are not subject to the $8 late fee safe harbor threshold
adopted in this final rule and may use the relevant safe harbor
thresholds set forth in Sec. 1026.52(b)(1)(ii)(A) through (C). The 11
revised forms or clauses are samples and card issuers are required to
disclose the late fee amounts, or maximum late fee amount, that it
charges consistent with Sec. 1026.52(b).
The CFPB did not receive comments regarding other changes to the
sample forms or clauses on which it solicited comment, such as whether
the 15-day courtesy period for imposing late fees or other penalty
fees, if adopted, should be disclosed in the sample forms or clauses.
As discussed in the section-by-section analysis of Sec. 1026.52(b)(2),
the CFPB is not adopting the 15-day courtesy period for late fees or
other penalty fees. Therefore, the CFPB is not adopting any edits to
the sample forms or clauses to disclose a courtesy period related to
late fees or any other penalty fees. In addition, as discussed in the
section-by-section analysis of Sec. 1026.52(b)(1)(ii), this final rule
does not adopt the $8 safe harbor threshold for penalty fees other than
late fees imposed by Larger Card Issuers including over-the-limit fees
and return payment fees, so this final rule does not adopt any changes
to the sample forms or clauses for penalty fees other than late fees.
VIII. Effective Date
The CFPB's Proposal
The CFPB proposed that the final rule, if adopted, would take
effect 60 days after publication in the Federal Register. The CFPB
solicited comment on whether the CFPB should provide a mandatory
compliance date that is after the effective date for the proposed
changes. The CFPB indicated in the 2023 Proposal that if a mandatory
compliance date were adopted, it would be limited to the prohibitions
on late fees in Sec. 1026.52(b)(1) and (2), except for the proposed
change to Sec. 1026.52(b)(1)(ii)(D) which would provide that future
annual adjustments for safe harbor amounts based on changes in the CPI
do not apply to the late fee safe harbor amount. The CFPB sought
comment on whether card issuers would need additional time after the
effective date to make changes to their disclosures to reflect the
changes in the late fee amounts that they are charging on credit card
accounts. And, if so, when compliance with the proposed changes, if
adopted, should be mandatory.
Separately, under TILA section 105(d), CFPB regulations requiring
any disclosure which differs from disclosures previously required by
TILA part A, part D, or part E must have an effective date of October 1
which follows by at least six months the date of promulgation subject
to certain exceptions.\220\
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\220\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------
The 2023 Proposal noted that, TILA section 105(d) only applies to
any proposed changes requiring disclosures, if adopted, it would not
necessitate the October 1 effective date for purposes of the late fee
disclosure for two reasons. First, the 2023 Proposal noted that under
Regulation Z, card issuers are currently required to disclose the late
fees amounts, or maximum late fees amounts, as applicable, that apply
to credit card accounts in certain disclosures, and the disclosure of
those late fee amounts must reflect the terms of the legal obligation
between the parties.\221\ In other words, the proposal, if finalized,
would not require any disclosure that differed from the current
requirement because the proposed change is not substantive but a mere
alteration of the disclosed maximum late fee amounts. Second, the
change in amount would apply to the safe harbor,
[[Page 19188]]
which is an amount that card issuers may elect but are not required to
use.
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\221\ Section 1026.5(c) requires that ``disclosures shall
reflect the terms of the legal obligation between the parties.''
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In addition, if the CFPB were to finalize the proposed 15-day
courtesy period, as discussed in the 2023 Proposal, the CFPB solicited
comment on whether the 15-day courtesy period and potential disclosure
language should have an effective date of ``October 1 which follows by
at least six months the date of promulgation,'' consistent with TILA
section 105(d).\222\
---------------------------------------------------------------------------
\222\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------
Comments Received
Disclosure and operational changes. One industry trade association
commenter advised that the CFPB provide a reasonable date within which
issuers could adjust their practices and systems, update disclosures
and conduct internal evaluations in order to determine whether they
would continue to rely on the safe harbor or use the cost analysis
provisions in Sec. 1026.52(b)(1)(i) to set the late fee amount. One
credit union commenter asserted that an implementation period of at
least six months from the effective date of the rule is necessary to
allow smaller institutions time to comply with the new requirements.
One credit union trade association commenter stressed that smaller
issuers would need an extended compliance window to accurately
implement the necessary changes to their systems and consumer
disclosures. This commenter further advised that the CFPB adopt a
staggered implementation strategy such that larger issuers are required
to comply before smaller issuers.
One credit union and several industry trade association commenters
asserted that the proposed changes, if adopted, would require major
adjustments to multiple disclosures, cost calculations and cost
composition, and not just adjustments to the $8 late fee in the
disclosures as stated in the CFPB's 2023 Proposal. These commenters
indicated that issuers would also need to disclose and explain the
proposed fee cap of 25 percent of the minimum required payment and how
it relates to the proposed $8 late fee, eliminate disclosures for the
higher late payment fee for recurring late payments within a six-month
period and update their systems to reflect the changes as detailed in
the CFPB's proposal. The commenters further asserted that the CFPB's
proposed 60-day effective date ignores the full impact of the proposed
revisions, if adopted, and the substantial changes to disclosures and
systems that would be necessary to comply with the revised regulation.
Furthermore, some of these commenters mentioned that the CFPB's
assertion that card issuers are not mandated to use the safe harbor
failed to take into account the fact that most card issuers rely on the
existing safe harbor and would need to change their disclosures
regardless of whether they continue to rely on the safe harbor or opt
to disclose late fees calculated under the cost analysis provisions in
Sec. 1026.52(b)(1)(i). These commenters concluded that either option
would require extensive changes to required disclosures and that the
60-day effective period is impracticable and unworkable.
One financial institution asserted that the CFPB's proposal for the
60-day effective date would be problematic for issuers whose portfolios
significantly consist of private label and co-branded credit cards, due
to existing contractual limitations that will need to be renegotiated
with partners to effectuate changes in account-pricing terms. This
commenter asserted that the 60-day effective date provides an
unreasonably short amount of time to renegotiate existing contracts and
implement new terms and the proposal, if finalized, would
disproportionately affect private label and co-branded credit card
issuers.
Impact of TILA section 105(d) on the effective date. One law firm
commenter on behalf of several card issuers and several industry trade
association commenters asserted that the CFPB's proposed effective date
was in violation of section 105(d) of TILA. These commenters asserted
that because the CFPB's 2023 Proposal, if adopted, would require
changes to multiple mandatory consumer disclosures, the effective date
must be October 1 which follows by at least six months the date of
promulgation consistent with TILA section 105(d). One of the trade
association commenters indicated that under section 105(d), any
proposed changes finalized after March 31, 2023, is statutorily
required to have an effective date of October 1, 2024. They explained
that the only statutory exception provided to the CFPB under section
105(d) to shorten the effective date is ``when it makes a specific
finding that such action is necessary to comply with the findings of a
court or to prevent unfair or deceptive disclosure practices,'' neither
of which the CFPB mentioned in its proposal. Furthermore, the law firm
commenter and several of the industry trade association commenters
explained that the two grounds provided by the CFPB for the non-
applicability of section 105(d) mischaracterized the proposed changes
and that, as long as any changes are to be made to the disclosures,
section 105(d) of TILA would apply. These commenters concluded that it
would be arbitrary and capricious for the CFPB to reduce the amount of
time statutorily required to amend existing disclosure requirements, or
to reclassify existing late fee practices and disclosures as ``unfair
or deceptive'' when they are fully consistent with TILA and the CFPB's
Regulation Z current penalty fee safe harbor provision. The law firm
described above and several of the industry trade association
commenters asserted that the delayed effective date requirements of
section 105(d) of TILA are necessary not only to accommodate the
changes in disclosures, but also to provide issuers sufficient time to
put in place systems to calculate the late fee amounts they can charge
customers, which then become the subject of the disclosures. These
commenters asserted that the final rule should take effect no earlier
than October 1, 2024.
The Final Rule
For the reasons discussed below, the CFPB has determined that this
final rule will take effect 60 days after publication in the Federal
Register. The 60-day effective date applies to the following revisions,
among others, with respect to late fees imposed by Larger Card Issuers;
(1) the repeal of the current safe harbor threshold amounts in Sec.
1026.52(b)(1)(ii)(A) and (B); (2) the adoption of a late fee safe
harbor dollar amount of $8 in Sec. 1026.52(b)(1)(ii); (3) the
elimination of a higher safe harbor dollar amount for subsequent late
fees that occur during the same billing cycle or in one of the next six
billing cycles; \223\ and (4) the elimination of the annual adjustment
provisions for the safe harbor dollar amounts so that those provisions
do not apply to the $8 late fee safe harbor amount.
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\223\ This final rule does not amend the safe harbor set forth
in Sec. 1026.52(b)(1)(ii)(C) applicable to charge card accounts.
---------------------------------------------------------------------------
Disclosure and operational changes. With respect to the commenters
asserting that the 2023 Proposal, if adopted, would require complex
changes to their operating systems, the CFPB has determined that Larger
Card Issuers likely have the capacity and resources to comply with the
revisions discussed above within 60-days of when this final rule is
published in the Federal Register.
The CFPB notes that several provisions proposed, and for which the
CFPB sought comments, have not been adopted under this final rule. For
example, the CFPB is not adopting the proposed provisions to restrict
late fee amounts to 25 percent of the required minimum payment. In
addition, this
[[Page 19189]]
final rule does not adopt the following provisions on which the CFPB
sought comment: (1) a 15-day courtesy period; (2) the elimination of
safe harbor threshold amounts for other penalty fees; and (3) imposing
additional conditions on using the safe harbor threshold amounts (such
as providing auto payment options). The CFPB has determined that not
adopting these changes in this final rule reduces the extent of
operational and disclosure changes referenced by industry commenters.
The full impact of this final rule on card issuers' operations is
therefore much more limited than the possible revisions discussed in
the CFPB's 2023 Proposal. In sum, Larger Card Issuers would have 60
days to delete the existing late fee figure in their disclosures and
replace it with $8 or another number computed using the cost analysis
provisions, and this change would only have to appear on disclosures
mailed or delivered to consumers 60 days after publication of this
final rule in the Federal Register. The CFPB expects that this
effective date will provide Larger Card Issuers with sufficient time to
accomplish this task.
With respect to commenters' assertions that card issuers would need
to conduct a comprehensive cost analysis to determine whether the new
safe harbor late fee adequately covers their cost, the CFPB maintains
that this final rule does not mandate Larger Card Issuers to conduct
any cost analysis. Due to safety and soundness regulation and general
good corporate governance principles, the CFPB expects that Larger Card
Issuers have more sophisticated cost accounting systems than Smaller
Card Issuers and should be able to calculate a late fee amount based on
the cost analysis provisions within 60 days. However, if Larger Card
Issuers choose to use the cost analysis provisions as set forth in
Sec. 1026.52(b)(1)(i), including the requirement to exclude post-
charge off collection costs from its analysis, they must do so and
comply with the changes in this final rule by this final rule's
effective date. Alternatively, Larger Card Issuers may choose to
initially adopt the $8 late fee safe harbor amount while separately
conducting a more extensive cost analysis.
With respect to comments on the impact of the 60-day effective date
on private label and co-branded card issuers, the CFPB notes that many
private label and co-branded card issuers are likely to be Larger Card
Issuers (i.e., card issuers that together with their affiliates have
one million or more open credit card accounts), and these issuers,
whose business focuses on credit cards, likely have the capacity and
resources to make the required disclosures within the 60-day timeframe.
In addition, such issuers have the option to initially adopt the $8
late fee safe harbor as they separately renegotiate contract terms with
their partners.
With respect to the commenters' requests for a staggered
implementation strategy and additional time to comply with the final
rule by smaller issuers, the CFPB has determined that this request is
not needed. The CFPB notes that Smaller Card Issuers as defined in
Sec. 1026.52(b)(3) are not subject to the safe harbor reduction.
Impact of TILA section 105(d) on the effective date. Under TILA
section 105(d), CFPB regulations requiring any disclosure which differs
from disclosures previously required by TILA part A, part D, or part E,
or by any regulation of the Bureau promulgated thereunder must have an
effective date of October 1 which follows by at least six months the
date of promulgation subject to certain exceptions.\224\ The CFPB
maintains that TILA section 105(d) does not necessitate the October 1,
2024 effective date for purposes of the late fee disclosure for three
reasons. First, as noted in the proposal, under Regulation Z, card
issuers are currently required to disclose the late fee amount, or
maximum late fee amount, as applicable, that apply to credit card
accounts in certain disclosures, and the disclosure of those late fee
amounts must reflect the terms of the legal obligation between the
parties.\225\ This final rule does not change these requirements nor
alter any existing disclosure of the maximum late fee amounts; instead,
it would solely result in a change to the amount of the late fee
disclosed by Larger Card Issuers using the safe harbor, i.e., from a
current amount of up to $41 to the new safe harbor of $8.
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\224\ 15 U.S.C. 1604(d).
\225\ See supra note 221.
---------------------------------------------------------------------------
Second, while the CFPB recognizes that this rule will result in
Larger Card Issuers changing the numerical value for late fees in their
disclosures for consumers, the CFPB notes that such changes to the
numerical amount of late fees are something that card issuers
frequently do. For example, card issuers change the disclosure of late
fee amounts after the CFPB adjusts the safe harbors for inflation
without waiting until the next October 1. Third, the change in amount
applies to the safe harbor, which is an amount that card issuers may
elect but are not ``required'' to use.
IX. CFPA Section 1022(b) Analysis
A. Overview
This final rule is summarized in part I. In developing this final
rule, the CFPB has considered this final rule's potential benefits,
costs, and impacts in accordance with section 1022(b)(2)(A) of the
CFPA.\226\ The CFPB requested comment on the preliminary analysis
presented in the 2023 Proposal and submissions of additional data that
could inform the CFPB's analysis of the benefits, costs, and impacts,
and the discussion below reflects comments received. In developing this
final rule, the CFPB consulted with the appropriate prudential
regulators and other Federal agencies, including regarding the
consistency of this final rule with any prudential, market, or systemic
objectives administered by those agencies, in accordance with section
1022(b)(2)(B) of the CFPA.\227\ The CFPB also consulted with agencies
described in TILA section 149.\228\
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\226\ 12 U.S.C. 5512(b)(2)(A).
\227\ 12 U.S.C. 5512(b)(2)(B).
\228\ 15 U.S.C. 1665d(b) and 1665d(e).
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B. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the CFPB has
obtained from industry, other regulatory agencies, and publicly
available sources, including reports published by the CFPB. These
sources form the basis for the CFPB's consideration of the likely
impacts of this final rule. The CFPB provides estimates, to the extent
possible, of the potential benefits and costs to consumers and covered
persons of this final rule, given available data.
Specifically, this discussion relies on the CFPB's analysis of both
portfolio and account data from the Y-14 collection, as described in
part V above. The discussion also relies on data collected directly
from a diverse set of credit card issuers to support the CFPB's
biennial report on the state of the consumer credit card market as
required by the CARD Act.\229\ The CFPB also consulted the academic
literature, as well as public comments in response to the Board's 2010
Final Rule, the CFPB's ANPR, and the CFPB's 2023 Proposal that preceded
this final rule.
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\229\ See supra note 87.
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The CFPB acknowledges limitations that prevent an exhaustive
determination of benefits, costs, and impacts. Quantifying the
benefits, costs, and impacts requires quantifying future consumer and
card issuer responses to the changes. It is impossible to predict these
responses with certainty given
[[Page 19190]]
available data and research methods. This reflects in part the fact
that the effects of this final rule will depend on choices made by
independent actors in response to this final rule, which are inherently
difficult to predict with certainty. In particular, the available
evidence does not permit a definitive prediction of how changes to late
fees will affect late payments and delinquencies or the expected
substitution effects across credit cards and between credit cards and
other forms of credit. Similarly, the evidence available does not
permit definitive conclusions about the cost and effectiveness of steps
Larger Card Issuers might take to facilitate timely repayment, collect
efficiently, reprice any of their services, remunerate their staff,
suppliers, or sources of capital differently, or enter or exit any
segment of the credit card market. Having said that, the data and
research available is relatively significant and helpful for
understanding the likely general effects of this final rule.
In light of these data limitations, the analysis below provides
quantitative estimates where possible and a qualitative discussion of
this final rule's benefits, costs, and impacts. General economic
principles and the CFPB's expertise, together with the available data,
provide insight into these benefits, costs, and impacts.
C. Baseline for Analysis
In evaluating this final rule's benefits, costs, and impacts, the
CFPB considered the impacts against a baseline in which the CFPB takes
no action. This baseline includes existing regulations and the current
state of the market. In particular, it assumes (1) the continuation of
the existing safe harbor amounts for credit card late fees, currently
$30 generally and $41 for each subsequent late payment occurring in one
of the next six billing cycles; and (2) that these amounts will be
adjusted when there are changes to the CPI in accordance with the
current provision in Sec. 1026.52(b)(1)(ii)(D).
D. Comments Received
General Comments on the 1022(b)(2)(A) Analysis
Several industry trade associations and one academic commenter
generally asserted that the cost-benefit analysis for the 2023 Proposal
was inadequate. The academic commenter asserted that the cost-benefit
analysis was not based on academically vetted and scrutinized economic
justifications for a specific safe harbor of $8 in distinction to
another level, whether lower or higher than $30.
One credit union trade association commenter asserted that the 2023
Proposal lacked a sufficient cost-benefit analysis, and the proposal
did not contain a comprehensive outline of potential effects. This
commenter further asserted that the proposal did not contain a
systematic economic analysis of a ``but-for world'' in which the rule
is implemented. This commenter provided the views of a consulting firm
hired by the commenter indicating that in the consultant's view, the
CFPB did not provide a valid economic analysis of the impact of the
2023 Proposal on: (1) the increased frequency of late payments caused
by lower late fees; (2) the changes in APRs, credit limits, minimum
payments and other credit card terms caused by lower late fees; (3) the
increased risk of charge-offs and losses faced by credit card issuers
resulting from the increased frequency of late and skipped payments
caused by lower late fees; (4) the much greater difficulty in adapting
to lower late fees faced by Federal credit unions that cannot charge
APRs of more than 18 percent; (5) which consumers will benefit from,
and which consumers will be harmed by, the decrease in late fees and
the resulting changes in other credit card terms; and (6) the decrease
in access to credit, and the reduction in credit limits for consumers
with lower credit scores caused by lower late fees.
The CFPB disagrees with the general assertion that its
consideration of benefits and costs of the 2023 Proposal under section
1022(b) of the CFPA was inadequate. The CFPB in its 1022(b) analysis
for the 2023 Proposal conducted a thorough analysis of the reasonably
available data to estimate, quantify, and monetize benefits and costs
to the extent possible. As noted above, the CFPB has limited evidence
to predict fully how changes to late fees will affect late payments and
delinquencies or the expected substitution effects across credit cards
and between credit cards and other forms of credit. While some
commenters assumed that such predictions can be made with a high degree
of certainty, no commenter offered new and reliable evidence or
research to corroborate their assertions. Given the difficulties of
precisely foreseeing future impacts, the most viable approach involves
a careful examination of the effects from analogous historical events.
In developing this final rule, the CFPB undertook a thorough review of
available research and data analyzing the impacts of comparable
regulatory changes in recent decades that allow some reasonable
extrapolation regarding potential outcomes.
Comments Concerning Proposal's Impact on Consumers
One financial regulatory advocacy group asserted that reducing the
amount of late fees charged would have a positive effect on the
financial health of consumers especially those who carry over credit
balances each month. This commenter asserted that the financial
distress suffered by consumers due to the high cost of late fees was
further compounded by the limited amount of a consumer's payment that
is applied to the principal.
One trade association commenter asserted that the CFPB failed to
properly quantify the benefits to consumers, and the commenter claimed
that the 2023 Proposal would disproportionately benefit a small portion
of consumers at the expense of others. This commenter also asserted
that the CFPB's proposal (1) evinced a lack of understanding with
respect to issuers' obligations to manage credit risk, which the
commenter claimed would require issuers to take actions that may result
in a reduction in access to credit, and (2) assumed that the proposed
changes would incentivize issuers to do more to encourage on-time
payments.
One credit union trade association claimed that the cost-benefit
analysis in the 2023 Proposal indicated that there would be many
possible negative consequences to consumers of the proposed changes,
which the commenter stated would include higher interest rates on
credit cards and negative changes to other terms and fee amounts. This
commenter claimed that the CFPB indicated that many consumers will be
``harmed'' by these changes without experiencing any of the benefits.
This commenter urged the CFPB to re-examine the cost/benefit balance of
the proposal and recognize that it will ultimately cause more harm to
more consumers than the benefits to those it will favor.
Several industry trade associations asserted that the CFPB did not
adequately reflect the cost of the 2023 Proposal to consumers. These
commenters claimed that the vast majority of consumer cardholders will
be harmed by the proposal. These commenters also claimed that the
proposal (1) would limit the ability of issuers to allocate the cost
and risk of late payments to the late paying population and would
require issuers to spread these costs across all consumer cardholders;
(2) would increase late payments and associated costs; and (3) would
cause the cost of credit to
[[Page 19191]]
increase, credit availability to drop, and rewards and other credit
card features to decline or disappear. These commenters also claimed,
somewhat contradictorily, that the CFPB ``expressly acknowledges''
these consequences with no rebuttal.
One law firm representing several card issuers claimed that while
the CFPB acknowledged various costs imposed by the 2023 Proposal, it
did not provide adequate support for its assessment that the 2023
Proposal would result in a ``net benefit for consumers.'' This
commenter asserted that the 2023 Proposal would benefit only the ``very
small subset'' of the consumer population that regularly pays late fees
and claimed that the 2023 Proposal acknowledges that cardholders who
never make late payments ``would not benefit and would be worse off''
due to potential increases in maintenance fees and APRs. This commenter
asserted that with respect to the population of consumers with subprime
credit scores that regularly pay late fees, the proposal did not
adequately consider that any benefits received ``would ultimately be
offset'' by any of the possible outcomes articulated by the CFPB in the
2023 Proposal: increases in the APR; reduced access to credit;
increased delinquencies and negative credit reporting; or increases in
other credit card fees.
As an initial matter, this rule is intended to tailor the safe
harbor to a more reasonable approximation of the existing statutory
standard of ``reasonable and proportional.'' In other words, this rule
brings the regulations closer in line with the statutory text. The
requirement that penalty fees be reasonable and proportional to
violations reflects Congress' judgment that penalty fees should not be
higher, even if higher fees might have led to lower prices for
consumers who do not incur penalties. The CFPB is not in a position to
dispute Congress' conclusion that the benefits of the statutory scheme
were worth the trade-offs. The CFPB's analysis of the costs, benefits,
and impacts of this rule inform the agency's decision, but ultimately,
the decision to finalize this rule is based on a conclusion that the
rule is more closely aligned with the statute.
The CFPB disagrees with the assertion that its consideration of
benefits and costs to consumers was inadequate in the 2023 Proposal. As
noted by several commenters, the CFPB discussed in the 2023 Proposal
not only the proposed rule's potential benefits to consumers who often
incur late fees but also the potential costs to some consumers, in
particular those who seldom incur late fees, from potential offsetting
changes to the terms of credit card agreements, such as increases in
the interest rate, increases in the amount of other fees, or changes in
rewards.\230\ For example, the 2023 Proposal explained the decrease in
late fees would affect different consumers differently depending on how
often they pay late and whether they carry a balance. The 2023 Proposal
further noted that: (1) Cardholders who never pay late will not benefit
from the reduction in late fees and could pay more for their account if
maintenance fees in their market segment rise in response--or if their
interest rate increases in response and these on-time cardholders also
carry a balance; (2) Frequent late payers are likely to benefit
monetarily from reduced late fees, even if their higher interest rates
or maintenance fees offset some of the benefits; (3) Cardholders who do
not regularly carry a balance but occasionally miss a payment would
benefit from the proposed changes so long as any increase in the cost
of finance charges (including the result of late payments that
eliminate their grace period) is smaller than the drop in fees; and (4)
Cardholders who carry a balance but rarely miss a payment are less
likely to benefit on net.\231\
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\230\ 88 FR 18906 at 18932-36.
\231\ Id. at 18934.
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The CFPB also notes that APRs and other prices reflect the issuer's
assessment of individual consumers' likely usage and risk profiles,
particularly at Larger Card Issuers. If an issuer prices its product
knowing that a consumer is very unlikely to make late payments, then a
reduction in late fees will make little difference to the optimal
pricing for that consumer, and there is no reason to expect meaningful
offsetting price changes for such a consumer. Any offsetting price
changes are likely to be more significant for categories of consumers
that issuers anticipate are more likely to pay late fees.
These expectations can be correct only as averages for broader
groups based on factors the issuer can observe when setting prices for
an account, meaning that the effects of the rule on consumers will
still depend on whether they make more or fewer late payments relative
to others who appear similar. Nonetheless, individualized pricing based
on risk profiles limits the extent to which consumers who infrequently
pay late are likely to pay more as a result of the rule.
In the 2023 Proposal, the CFPB also considered that for consumers
who incur late fees the possibility that the dollar value of additional
consumer costs from offsetting price changes could be equal to or
greater than the savings to consumers from lower late fees. The CFPB
explained that it was unlikely that the fee reductions would be fully
offset because (1) offsetting price increases are most likely where
markets are most competitive since, in competitive markets where profit
margins are low, any reduction in revenue is likely to lead some firms
to exit the market, limiting supply and driving prices up for
consumers; and (2) recent evidence suggests that profits from credit
card issuance are significant, making it unlikely that reduced fee
revenue would lead to exit.\232\ This reasoning has been empirically
validated by the very limited offset found by studies of the fee
reductions from the implementation of the CARD Act. The 2023 Proposal
cited a prominent academic study as well as its own internal research.
Some commenters cited research on the effects of debit card interchange
fee limits in the Durbin Amendment.\233\ The latest revision of this
working paper estimates that banks offset less than half of the lost
interchange revenue through increases in checking account fees.
Although these findings relate to a different product market, they are
generally consistent with the conclusion that lost bank revenue from
reduced credit card late fees would not be fully offset.\234\
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\232\ Id. at 18933-34.
\233\ Vladimir Mukharlyamov & Natasha Sarin, Price Regulation in
Two-Sided Markets: Empirical Evidence from Debit Cards (Dec. 24,
2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579.
\234\ The authors also note that the Durbin amendment's limits
on debit card interchange fees may have led banks to issue credit
cards more actively, which generate larger interchange fees, which
would tend to lessen any reduction in total interchange fees for
merchants.
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The CFPB considered the evidence that it deemed to be reliable and
that was reasonably available, and commenters did not provide
additional sources of reliable data about the effects of late fees on
consumers and covered persons that materially alters the CFPB's
assessment of the benefits and costs to consumers and covered persons
of the 2023 Proposal.
In the 2023 Proposal, the CFPB also considered general economic
principles in its analysis. For example, economic principles imply that
private firms will weigh costs and benefits of different actions, and
that if the benefit of an action is exogenously reduced, those firms
will generally change their actions in response. Thus, for example, in
the 2023 Proposal, the CFPB considered that firms considering
investments in
[[Page 19192]]
reminders or other mechanisms to discourage late payment would balance
the cost of such investments against the benefit, and that the
reduction of late fee amounts would affect that cost/benefit
calculation.\235\
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\235\ Id. at 18935.
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Comments Concerning Proposal's Impact on Card Issuers
One industry trade association asserted that the CFPB inadequately
weighed the costs and reduced deterrent effect of the lower safe harbor
described in the 2023 Proposal. In doing so, the commenter also claimed
that the CFPB (1) underweighted the costs of compliance with a lower
safe harbor regime; and (2) did not adequately quantify the various
impacts that its $9 billion estimated reduction in fee revenue will
have on the pricing and availability of credit cards. This commenter
claimed that the CFPB's inadequate evaluation of the costs associated
with the 2023 Proposal render the proposal arbitrary and capricious in
violation of the APA.
One bank asserted that the CFPB in the 2023 Proposal did not
adequately consider the reduction of access to consumer financial
products in its cost-benefit analysis under 1022(b); rather, the bank
claimed that the CFPB stated the 2023 Proposal is ``likely to drive
some firms out of the market.'' This commenter also claimed that the
CFPB in the 2023 Proposal did not adequately consider the impact on
covered persons in rural areas.
One law firm representing several clients claimed that the 2023
Proposal's consideration of costs and burdens did not adequately
consider the cost of compliance for card issuers. This commenter
claimed that the 2023 Proposal would impose disproportionately high
costs on credit card issuers that service borrowers with subprime
credit scores, many of whom may need to exceed the $8 safe harbor, and
such issuers would need to spend significant resources to build
internal processes and procedures for calculating and documenting the
costs of late fees if they want to use cost analysis provisions set
forth in Sec. 1026.52(b)(1)(i). This commenter also claimed that the
2023 Proposal would require such issuers to spend significant resources
building out an evidentiary record in order to use the cost analysis
provisions, particularly in light of the CFPB's continued public
scrutiny of credit card late fees.
One individual commenter claimed that the CFPB has acted
arbitrarily and capriciously in not adequately considering the
potential costs to issuers. This commenter asserted that the CFPB did
not adequately estimate the possible increase in compliance burden as
more credit card issuers would find it necessary to prove their
collection costs exceed the safe harbor limits.
One industry trade association questioned whether the CFPB had
evidence to support the claim that card issuers could mitigate late
payment using other steps. For example, this commenter claimed that the
CFPB did not have adequate evidence for the CFPB's statement that card
issuers can mitigate the lost revenue by launching additional programs
to reduce the incidence of late payments, such as sending reminders and
offering automatic or convenient payment options. The commenter
asserted that its members report that such measures are common practice
now and are not likely to be more effective if cardholders are
contacted more frequently.
Two credit union trade associations asserted that the CFPB should
not have suggested in the 2023 Proposal that issuers can mitigate the
loss of revenue from late fees by taking other measures such as
increasing interest rates. For example, these commenters indicated that
credit unions face different compliance costs and challenges than
larger card issuers particularly as related to use of the cost analysis
provisions set forth in Sec. 1026.52(b)(1)(i). Several credit union
trade associations and credit union commenters further asserted that
Federally chartered credit unions may be prohibited from raising
interest rates because they are subject to a statutory interest rate
cap so that may not be a feasible mechanism to recover lost
revenue.\236\
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\236\ See supra note 104.
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The CFPB disagrees with the claim that its analysis pursuant to
section 1022(b)(2)(A) of the CFPA in the 2023 Proposal does not
adequately address the costs to card issuers. As discussed in the
1022(b) analysis of the 2023 Proposal, the CFPB considered a range of
potential costs to issuers of complying with the 2023 Proposal.\237\
For example, the 2023 Proposal noted that because the proposal would
significantly reduce the aggregate value of late fees paid by
consumers, the proposal would significantly reduce late fee revenue for
issuers.\238\ Nor does the CFPB agree with commenters suggesting that
affected credit card issuers lack adequate existing means to track
pertinent costs in a manner sufficient to conduct reliable cost
analysis as set forth in Sec. 1026.52(b)(1)(i). Given the general
sophistication and scale of the Larger Card Issuers covered under the
final rule, these institutions have access to substantial data on
internal costs and operations.
---------------------------------------------------------------------------
\237\ Id. at 18935-36.
\238\ Id. at 18935.
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The CFPB also disagrees with the claim that it did not adequately
consider in the 2023 Proposal the potential effects on the pricing and
availability of credit cards, as it discussed a range of possible
effects on the terms of credit cards and availability of credit cards
as a result of reduced late fee revenue. For example, the 2023 Proposal
explained that (1) issuers can mitigate the costs of the proposal to
some extent by taking other measures (e.g., increasing interest rates
or changing rewards); and (2) it is also possible that some consumers'
access to credit could fall if issuers could adequately offset lost fee
revenue expected from them only by increasing APRs to a point at which
a particular card is not viable, for example, because the APR exceeds
applicable legal limits.\239\ The CFPB also noted that economic theory
as well as relevant empirical evidence convinced it that full pass-
through to consumers was not likely.
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\239\ Id. at 18934-35.
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With respect to the criticism by the two credit union trade
associations that credit unions face different compliance costs and
challenges than larger card issuers particularly as related to use of
the cost analysis provisions set forth in Sec. 1026.52(b)(1)(i), the
CFPB notes that this final rule will not cover most credit unions
because they are Smaller Card Issuers as defined in new Sec.
1026.52(b)(3). As discussed in part VI, the CFPB recognizes that it
relied on Y-14 data from certain Larger Card Issuers in the 2023
Proposal, and as discussed in that part, the CFPB also recognizes that
smaller credit unions could face different challenges in using the cost
analysis provisions in Sec. 1026.52(b)(1)(i) because of economies of
scale and other issues.
The CFPB acknowledges that at least four Federal credit unions are
likely to be impacted by the final rule. The APR caps reduce these
firms' ability to risk-price to certain customers, especially in an
environment with higher inflation and prevailing nominal rates of
interest. This fact will be heightened by the final rule, which will be
a further constraint on credit card pricing for these firms, consistent
with the intent of Congress to ensure that penalty fees are reasonable
and proportional.
[[Page 19193]]
E. Potential Benefits and Costs to Consumers and Covered Persons
This section discusses the benefits and costs to consumers and
covered persons of the following changes applicable to late fees
charged by Larger Card Issuers: (1) the repeal of the current safe
harbor threshold amounts, the adoption of a lower safe harbor dollar
amount of $8, and the elimination of 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; and (2) the
elimination of the annual adjustments for the safe harbor dollar
amounts to reflect changes in the CPI set forth in current Sec.
1026.52(b)(1)(ii)(D) to the $8 late fee safe harbor. These two
amendments will only apply with respect to late fees charged by Larger
Card Issuers (i.e., card issuers that together with their affiliates
have million or more open credit card accounts). This final rule does
not adopt these two amendments for Smaller Card Issuers.
Pursuant to the annual adjustments for safe harbor dollar amounts
in Sec. 1026.52(b)(1)(ii)(D), this final rule also 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 certain sample forms and clauses in,
and commentary to, Regulation Z to clarify the application of the rule
and make conforming adjustments. The CFPB does not separately discuss
the benefits and costs of these other amendments but has determined
that they will generally lower compliance costs for card issuers and
facilitate consumer understanding of the rule. Finally, the discussion
below also considers the benefits and costs of certain other
alternatives that the CFPB considered.
Potential Benefits and Costs to Consumers and Covered Persons of the $8
Late Fee Safe Harbor Changes
The CFPB is amending Sec. 1026.52(b)(1)(ii) to repeal the current
safe harbor amounts for late fees charged by Larger Card Issuers--
currently set at $30 and $41 for a first and subsequent violation,
respectively--and to adopt a late fee amount of $8 for the first and
subsequent violations.\240\ This final rule will eliminate the higher
safe harbor amount for subsequent late payment violations with respect
to late fees charged by Larger Card Issuers.
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\240\ As discussed in the section-by-section analysis of Sec.
1026.52(b)(1)(ii)(C) in part VII, the CFPB is not lowering or
otherwise changing the safe harbor amount of a late fee that card
issuers may impose when a charge card account becomes seriously
delinquent.
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As discussed in part VI, based on its review of both public and
confidential data, the CFPB estimates that these revised provisions
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 total
outstanding balances in the credit card market. Thus, these revised
provisions would cover all of the Y-14+ issuers for which the CFPB has
total collections and late fee revenue data, as well as about a dozen
other similar issuers with large credit card portfolios.
Potential Benefits and Costs to Consumers of the $8 Late Fee Safe
Harbor Changes
In general, this final rule's lower safe harbor amount for late
fees of $8 for first and subsequent violations will benefit consumers
doing business with Larger Card Issuers who pay late by reducing their
late fee amounts. This direct benefit may be offset to the extent that
Larger Card Issuers respond to lost fee revenue from consumers in
specific risk tiers with price increases elsewhere (like APR) to
consumers in that same risk tier, and potentially if consumers respond
to reduced late fees in ways that harm them in the long run. The
discussion below begins with the direct benefits from lower late fees,
then turns to the possibility that those benefits are offset through
changes to other prices, and then addresses the potential effects on
consumers of changes to late payment behavior.
The direct benefits to consumers who pay late could be as high as
the fees saved with the $8 fee amount on violations without or with a
recent prior violation--that is, the difference between fees currently
charged and the lower $8 amount. For example, for a consumer who would
incur a $31 late fee, the savings will be $23. Based on data considered
in the 2023 Proposal, the CFPB estimates that aggregate late fees
assessed for issuers in the Y-14+ data were $14 billion in 2019 and $12
billion in 2020 and that the average late fee charged was $31 in
2020.\241\ Thus, if fees had been reduced to $8, it would have reduced
aggregate late fees charged to consumers by several billion dollars.
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\241\ Late Fee Report, at 4. As discussed in part V, the Y-14+
data includes information from the Board's Y-14 data and a diverse
group of specialized issuers. After issuing the 2023 Proposal, the
CFPB also published its 2023 CARD Act report on credit cards, which
reports $11.5 billion and $14.5 billion late fee revenue for Y-14+
issuers in 2021 and 2022, respectively. 2023 Report, at 65.
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To estimate the extent of the reduction, based on data considered
in the 2023 Proposal, the CFPB examines Y-14 account-level data for the
12-month period from September 2021 to August 2022. The issuers in this
sample represent an estimated 73 percent of aggregate credit card
balances and reported collecting $5.688 billion in late fees during the
period, and the CFPB estimates that the collected fees would have been
$1.451 billion, or 74.6 percent lower, if fees had been $8 rather than
the fees actually collected.\242\ As noted in the 2023 Proposal, the
CFPB does not have account-level data for any issuers other than those
included in the Y-14 data. In the 2023 Proposal, the CFPB assumed that
the 73 percent of balances covered by these issuers with collection
costs in the Y-14 data collection most recently is representative of
the fee structure and incidence of the entire market, and provided that
these figures would have implied $5.8 billion savings for consumers
(not including any fees charged but not ultimately collected). However,
as noted in the 2023 Proposal, the Y-14+ data suggest that late fee
revenue per account at these Y-14 issuers is less than for other
issuers in the Y-14+. This implies an even greater reduction in fee
revenue and, in turn, greater consumer savings from Larger Card Issuers
not included in the Y-14 data, meaning that $5.8 billion is therefore
likely to be an underestimate of the potential reduction in fees. As
discussed in the 2023 Proposal, if the 74.6 percent reduction in fee
revenue were applied to the total estimated $12 billion in late fees at
the Larger Card Issuers included in the Y-14+ from 2020, it would have
implied a reduction
[[Page 19194]]
in fee revenue of approximately $9 billion.\243\
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\242\ By adjusting the collected late fee revenue with how
assessed fee amounts would have changed, this analysis disregards
the apparent but immaterial benefits to accounts whose assessed fees
are not collected (but charged off). The CFPB estimates that this
affects as much as 14 percent of late fee incidents. Also, as many
as 5 percent of assessed late fees are reversed in later months
(within-month waivers and reversals might already be netted out in
the account data the Y-14 collection collects). The analysis here
applied the same cap to reversals as to the original fees, thus
minimizing the overcounting of benefits.
\243\ The CFPB notes that the estimated reduction of fee revenue
of approximately $9 billion was for the Y-14+ issuers only and did
not factor in additional reduction of fee revenue for other card
issuers (namely, Larger Card Issuers that are not included in the Y-
14+ and are covered by this final rule, and Smaller Card Issuers
that would have been covered by the $8 late fee safe harbor under
the proposal but are not covered by the $8 late fee safe harbor
under this final rule).
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The benefits to consumers, however, will be lower if issuers choose
to rely on the cost analysis provisions in Sec. 1026.52(b)(1)(i) in
order to set late fees at amounts higher than the $8 safe harbor. By
using estimates of pre-charge-off collection costs per paid incident
using the Y-14 data from September 2021 to August 2022 (consistent with
the data used in the 2023 Proposal), the CFPB expected that fewer than
four of the 12 issuers might use the cost analysis provisions to charge
late fee amounts above $8 based on their reported pre-charge-off
collection costs per paid violation. The CFPB's calculations suggested
that if these major issuers rely on the cost analysis provisions in
Sec. 1026.52(b)(1)(i) while the others in the Y-14 data use the $8
safe harbor amount, it would lower the mechanical impact of the new
safe harbor amounts by 3 percent relative to the case of all Y-14
issuers charging late fees of $8 (from an estimated fee reduction of
$4.23 billion for these Y-14 issuers to an estimated $4.11 billion),
representing a reduction in fees collected of 72.3 percent for these
issuers.\244\ In the 2023 Proposal, the CFPB assumed that the 73
percent of balances covered by these issuers with collection costs in
the Y-14 data collection is representative of the fee structure and
incidence of the entire market, and provided that these figures would
have implied $5.6 billion savings for consumers (not including any fees
charged but not ultimately collected). However, as discussed above and
in the 2023 Proposal, the Y-14+ data suggest that late fee revenue per
account at these Y-14 issuers is less than for other issuers in the Y-
14+. This implies a larger reduction in fee revenue at Larger Card
Issuers not in the Y-14 data, meaning that $5.6 billion is therefore
likely to be an underestimate of the potential reduction in fees. As
discussed in the 2023 Proposal, if the 72.3 percent reduction in fee
revenue were applied to the total estimated $12 billion in late fees at
Larger Card Issuers in the Y-14+ from 2020, it will imply a reduction
in fee revenue of approximately $9 billion.\245\
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\244\ This analysis assumes each issuer sets late fees for all
their credit card products using only the safe harbor in Sec.
1026.52(b)(1)(ii) or only the cost analysis provisions in Sec.
1026.52(b)(1)(i). In practice, some issuers may use the safe harbor
amount for some credit card products and the cost analysis
provisions for others, which could lead the revenue impact of the
new safe harbor amount to be different among issuers in the Y-14.
\245\ See supra note 243.
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After issuance of the 2023 Proposal, the CFPB collected quarterly
data on Larger Card Issuers in the Y-14+ sample for 2021 and 2022.
Thus, for a similar period, but from October 2021 to September 2022,
the CFPB now can compare late fee revenue of the Y-14 analysis sample
to the Y-14+ total. The Y-14 issuers whose account level data was used
reported $5.8 billion in late fee revenue over this period, which is 53
percent of the $11 billion total for that time period in the Y-14+
data. These data are consistent with the CFPB's expectation as noted
above and in the 2023 Proposal that the late fee revenue per account at
these Y-14 issuers is less than for other issuers in the Y-14+.
Also, since the issuance of the 2023 Proposal, the CFPB published
new estimates for late fee revenue at Larger Card Issuers in the Y-14+
from 2021 and 2022. These data are consistent with the consumer
benefits discussed above and in the 2023 Proposal of the $8 safe harbor
as applied to the Y-14+ issuers, and in fact, suggest that the consumer
benefits may be higher than the $9 billion estimated in the 2023
Proposal. Based on the $14.5 billion estimated late fee revenue for the
Y-14+ in 2022, the CFPB estimates that the total consumer benefits at
Y-14+ issuers from the mechanical effect (based on a drop-in late fee
revenue proportional to the simulated effects in the account-level
data) would be $10.5 billion instead of the estimated consumer benefit
of $9 billion based on the lower $12 billion total in 2020. In
addition, total benefits for consumers holding cards of Larger Card
Issuers will be even higher than the estimate based on the Y-14+ data,
given that the CFPB estimates that there are about a dozen Larger Card
Issuers that are not included in the Y-14+ data.\246\
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\246\ The CFPB is not aware of estimates of late fee revenue of
Larger Card Issuers not in the Y-14+ data. Consumers doing business
with Smaller Card Issuers would not be directly impacted by the $8
late fee safe harbor adopted in this final rule.
---------------------------------------------------------------------------
The above analysis is based on collection expenses as reported in
the Y-14 data. Some commenters reported that some issuers that report
Y-14 data have collection expenses that they do not account for in
their Y-14 reporting of collection expenses. If some Larger Card
Issuers have greater costs than they report in the Y-14 data and such
costs can be included for purposes of the cost analysis provisions in
Sec. 1026.52(b)(1)(i), it is possible that more Y-14 issuers than
reflected above would use the cost analysis provisions, reducing both
potential benefits to cardholders and potential costs to issuers.
The above estimates do not consider potential responses by
consumers to lower late fees--in particular, the possibility that
consumers are more likely to miss a payment due date if the fee for
doing so is reduced. If this occurs and more consumers make untimely
payments, consumers could face costs for doing so, including costs like
increased penalty interest rates or lower credit scores. Such a
response will affect the estimates above, as well as the final
incidence of the benefits and costs.
As discussed in part VII above concerning deterrence and in the
2023 Proposal's 1022(b) analysis, however, the available evidence leads
the CFPB to expect that a $8 late fee will still have a deterrent
effect on late payments, although that effect may be lessened by the
change to some extent, and other factors may be more relevant (or may
become more relevant) towards creating deterrence. Even with a late fee
of $8 at Larger Card Issuers, consumers will have incentives to make
their minimum payment on time to avoid the late fee and other potential
consequences of paying late, such as the potential loss of the grace
period, and potential credit reporting consequences. To the extent
consumers are late in paying because they are inattentive to their
account or because they are so cash-constrained that they are unable to
make a minimum payment, the amount of the late fee may have little
effect on whether they pay late.
To the extent consumers who pay on time when faced with current
late fees will instead rationally choose to make a late payment in
response to lower late fees that will result from this final rule,
those consumers will benefit from the additional flexibility that a
lower late fee will afford. For such consumers, the benefit of delaying
the minimum payment past the due date, net of the perceived other
financial consequences of missing the due date, must be less than their
account's existing late fees but greater than the fees that will result
from this final rule. Their benefit from this final rule will be less
than the difference between the two fees, but it will still add to the
total consumer gains from this final rule. More generally, all
consumers will benefit from the option value of managing a potential
episode of financial distress at lower costs if and when necessary.
[[Page 19195]]
Since this final rule will reduce Larger Card Issuers' revenue from
late fees, these issuers may respond by adjusting interest rates or
other card terms to offset the lost income. Issuers' responses will
affect both the sum of consumer gains and their distribution across
consumers within pricing tiers. Total consumer gains would be the
lowest in the unlikely case that Larger Card Issuers made up for all
lost revenue and any potential cost increase by changing other consumer
prices. Any such offset could manifest in higher maintenance fees,
lower rewards, or higher interest on interest-paying accounts.
Offsetting price increases are most likely where markets are most
competitive since, in competitive markets, any reduction in revenue is
likely to drive some firms out of the market, limiting supply and
driving prices up for consumers. As the recent profitability of
consumer credit card businesses suggests that these markets are
imperfectly competitive, the CFPB expects less than full offset, with
consumers gaining in total from reduced late fees.\247\ The same
observation indicates that the market is unlikely to see any exits and
no fewer entries, especially as the final rule directly impacts the
late fee revenue of Larger Card Issuers only, who are even less likely
to be on the margin of exit or entry. The two pieces of evidence most
relevant to set the CFPB's expectations for offset are an academic
publication and a CFPB report that includes an analysis of the effects
of the fee changes resulting from the Board's 2010 Final Rule
implementing the CARD Act.\248\ The academic study used a precursor of
the Y-14 data and expanded on the CFPB's analysis in its 2013 CARD
report \249\ that also compared average outcomes for consumer and small
business credit cards but did not conduct a formal causal analysis. The
identifying assumption of the academic work is that in the absence of
the CARD Act, outcomes for consumer and small business accounts would
have maintained parallel trends. The authors found late fees dropping
in the subprime segment (with FICO scores below 660 at origination) by
1.5 percentage point of average daily balances as a result of the rule,
and around a tenth as large a response at accounts with FICO credit
scores above 660.\250\ The authors also found that fees that were not
subject to the CARD Act restrictions for consumer accounts did not
increase to offset lost revenue from regulated fees. The frequency of
late payments did not change around the August 2010 implementation
date, which suggested to the authors that cardholders did not respond
to the reduction in the late fee amount by increasing the frequency of
late payments, and thus late fee revenue changed one-for-one with the
late fee amounts.
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\247\ In its latest annual report on credit card profitability
to Congress, the Board found that ``[c]redit card earnings have
almost always been higher than returns on all bank activities, and
earnings patterns for 2022 were consistent with historical
experience.'' Bd. of Governors of the Fed. Rsrv. Sys., Profitability
of Credit Card Operations of Depository Institutions (July 2023), at
4, https://www.federalreserve.gov/publications/files/ccprofit2023.pdf. The Board also found that the quarterly average
return on credit card assets (ROA) using Y-14 data was stable at
around 1.10 percent during the 2014-19 period before the pandemic,
while the quarterly average credit card bank ROA using Call Report
data was 1.03 percent. These measures dipped below zero early in the
COVID-19 pandemic but rebounded to around 2 percent by 2021 for the
Y-14. Late and other fees accounted for slightly less than 10 to 30
percent of ROA at reporting firms during the 2014-2021 period.
Robert Adams et al., Credit Card Profitability, FEDS Notes, Bd. of
Governors of the Fed. Rsrv. Sys. (Sept. 9, 2022), https://doi.org/10.17016/2380-7172.3100.
\248\ Sumit Agarwal et al., Regulating Consumer Financial
Products: Evidence from Credit Cards, 130 Quarterly J. of Econ., at
111-164 (Feb. 2015), https://doi.org/10.1093/qje/qju037; 2013
Report, at 20-37.
\249\ 2013 Report, at 35-36.
\250\ See Agarwal et al., supra note 248.
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To attempt to identify potential offsetting price changes, the
authors develop a theoretical model of pricing offset under imperfect
competition and imperfect salience (at the end of their appendix,
extended in a separate publication \251\), and calibrate the model to
market benchmarks. They conclude from this model that for every dollar
in fee reduction, credit card issuers will increase prices by about 19
cents. The empirical investigation rules out offset effects of greater
than 61 cents on the dollar with 95 percent confidence.
---------------------------------------------------------------------------
\251\ See Agarwal et al., supra note 248; see Sumit Agarwal et
al., A Simple Framework for Estimating Consumer Benefits from
Regulating Hidden Fees, 43 J. of Legal Studies (Jun. 2014), https://www.journals.uchicago.edu/doi/abs/10.1086/677856?journalCode=jls.
---------------------------------------------------------------------------
A third study that some commenters deemed relevant focuses on the
effects of debit card interchange fee limits in the Durbin Amendment,
which applied to large institutions, and found that less than half of
lost interchange revenue was offset through increases to consumer
checking account fees.\252\ Although these findings relate to a
different product market, they are generally consistent with the
conclusion that lost bank revenue from reduced credit card late fees
would not be fully offset.\253\
---------------------------------------------------------------------------
\252\ Supra note 233.
\253\ Another study cited by commenters compares the credit card
limits relative to total debt of consumers with subprime scores to
consumers with better scores and finds that credit cards made up a
smaller share of available credit for consumers with subprime scores
during the period when the CARD Act was proposed, passed and
implemented. Yiwei Dou, Julapa Jagtiani, Joshua Ronen and Ramain
Quinn Maingi (2022), ``The Credit Card Act and Consumer Debt
Structure,'' Journal of Law, Finance, and Accounting: Vol. 7: No. 1,
pp 91-126. http://dx.doi.org/10.1561/108.00000058. The CFPB is not
convinced that this comparison can establish the causal effect of
the CARD Act for consumers with subprime credit scores, as consumers
in all credit score categories are likely to have been affected by
the provisions of the CARD Act and market responses.
---------------------------------------------------------------------------
The CFPB reads this evidence as strongly suggesting less than full
offset, if any. In considering offsetting changes, Larger Card Issuers
will also face competitive pressures from Smaller Card Issuers, which
will not be required by this final rule to reduce late fee amounts and
therefore may not face similar pressure to increase other fees or APRs.
To illustrate a realistic level of the potential offsetting effect,
consider the increase in interest income required to offset 19 percent
lost late fee income, using the same calibration as in the academic
study.\254\ As discussed above, over the 12 months between September
2021 and August 2022, limiting late fees to $8 could have reduced the
late fee revenue of Y-14 issuers with cost data by 72.3 percent, or
$4.11 billion, even if some issuers use the cost analysis provisions to
determine the amount of the late fee as discussed above. Total interest
income at the issuers with collection costs in the Y-14 data was $71.4
billion over the same 12 months, so offsetting 19 percent of the lost
fee revenue would require increasing interest revenue by $780 million,
or 1.1 percent. Were such a proportional change uniform across all
accounts, it would be less than 40 basis points on any APR that is
below 36 percent.\255\ Differentiated, for instance, ``risk-based''
pricing might imply interest rates rising more than this average in
some groups (presumably those who are predicted to generate more late
fee revenue) and less
[[Page 19196]]
in other groups, if at all--essentially limiting any offset to within
pricing tiers.
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\254\ The available evidence suggests that issuers compete
fiercely with more salient (though not necessarily transparent)
rewards and, to a lesser extent, annual or account maintenance fees.
(Other types of penalty fees, such as over-the-limit or returned
check fees, are subject to existing CARD Act limits, and in any case
apply only in particular circumstances and generate relatively
little revenue.) This leads the CFPB to estimate an interest-only
response as the full-offset benchmark. See, for instance, the
academic research cited in supra note 248, or Figure 44 of the 2013
Report, at 82.
\255\ For data related to total interest income in the Y-14
collection, see Revenue-Cost Report, at 6-9.
---------------------------------------------------------------------------
Economic theory also suggests the potential for a pass-through
greater than what would be required to offset lost fee revenue, if the
credit card market is sufficiently adversely selected on APRs.\256\
Intuitively, if the offsetting change in APRs leads low-risk consumers
to leave the pool of credit card borrowers to a greater degree than it
leads higher-risk consumers to leave the pool of credit card borrowers,
then the resulting change in average credit risk could lead to further
increases in APRs in market equilibrium. However, the CFPB notes that
existing evidence on adverse selection in the credit card market
suggests that adverse selection is unlikely to be this severe. Most
notably, the aforementioned research paper studying the effects of the
safe-harbor fee levels in the Board's 2010 Final Rule finds that this
high pass-through scenario can be rejected with high statistical
confidence.\257\ Complementary academic research finds less than full
pass-through of other shocks to credit card lenders' costs,\258\ and
that the effects of adverse selection after the Board's 2010 Final Rule
took effect were generally modest.\259\ Overall, the CFPB concludes
that concerns about adverse selection are unlikely to alter the above
analysis's conclusion that any offsetting changes to APRs are likely to
be limited.
---------------------------------------------------------------------------
\256\ Neale Mahoney & E. Glen Weyl, Imperfect Competition in
Selection Markets, 99 Review of Economics and Statistics, MIT Press
at 637-51 (Oct. 1, 2017), https://doi.org/10.1162/REST_a_00661.
\257\ Agarwal et al., supra note 248.
\258\ Tal Gross et al., The Economic Consequences of Bankruptcy
Reform, 111 (7) American Economic Review, 2309-41 (July 2021),
https://www.aeaweb.org/articles?id=10.1257/aer.20191311.
\259\ Scott Thomas Nelson, Essays on Household finance and
credit market regulation, Ph.D. Thesis, Massachusetts Institute of
Technology, Department of Economics (2018), https://dspace.mit.edu/handle/1721.1/118066.
---------------------------------------------------------------------------
This middle-of-the-road interest offset estimate for Larger Card
Issuers, at least on one that reprices all accounts by the same
percentage to recover all lost late fee revenue with higher finance
charges, suggests that any losses to credit access will be limited.
However, the CFPB acknowledges that late fee revenue has been
concentrated on certain market segments, suggesting that any price
responses are also likely to be focused in those segments. Risk-based
pricing is likely to work by tiers. In particular, interest rates or
other charges of subprime credit cards might increase more than for
other cards, and some consumers might find these cards too expensive
due to higher interest rate offers. Even if this were to happen, it
would not result from a higher average consumer cost of using credit
cards but from greater transparency about the cards' actual expected
cost of ownership.\260\ To the extent consumers consciously decline
offers because of the card's actual price becoming more salient, this
will constitute a benefit to those consumers.
---------------------------------------------------------------------------
\260\ As discussed below, however, the cost of ownership of
cards could go up for some consumers and down for others, depending
on their usage patterns.
---------------------------------------------------------------------------
On the other hand, it is also possible that some consumers' access
to credit could fall if Larger Card Issuers could adequately offset
lost fee revenue expected from them only by increasing APRs to a point
at which a particular card is not viable, for example, because the APR
exceeds applicable legal limits.
Any offsetting changes, like the decrease in late fees, would
affect different consumers differently depending, for example, on how
often they pay late and whether they carry a balance. For example,
within any market segment there will be some cardholders who never pay
late; such consumers will not benefit from the reduction in late fees
and could pay more for their account if maintenance fees in their
market segment rise in response--or if interest rates increase in a
segment in response and some on-time cardholders in that segment also
carry a balance. Frequent late payers are likely to benefit monetarily
from reduced late fees, even if higher interest rates or maintenance
fees offset some of the benefits. Cardholders who do not regularly
carry a balance but occasionally miss a payment will benefit from the
changes so long as any increase in the cost of finance charges
(including the result of late payments that eliminate their grace
period) is smaller than the drop in fees.\261\ Cardholders who carry a
balance but rarely miss a payment are less likely to benefit on net.
Any consumers potentially harmed by changes to terms of credit cards at
Larger Card Issuers could potentially switch to cards issued by Smaller
Card Issuers, which in turn could deter offsetting salient price
responses at the Larger Card Issuers.
---------------------------------------------------------------------------
\261\ If a consumer pays late and loses the grace period, the
consumer will pay interest on the balances. The analysis here
focuses on whether an increased interest as a result of the increase
in the rate to offset some of the reduction in late fee revenue is
greater than the reduction in the late fee.
---------------------------------------------------------------------------
Though the late fee changes most directly benefit those who make
late payments, the CFPB notes that late fees are collected only from
those delinquent cardholders who eventually pay at least the late fee
amount. Some collection costs and charge-off losses are caused by
delinquent customers who do not recover before account closure and
charge-off. These cardholders will not receive any of the benefits of
the lower fees they are nominally assessed but do not pay in
practice.\262\ Using a subsample of Y-14 account data, the CFPB
estimated that around 14 percent of late fees are assessed to accounts
that never make another payment.
---------------------------------------------------------------------------
\262\ This holds as long as the additional charged-off balance
due to higher late fees does not change the amount the holder of the
debt can eventually collect after charge-off, including through
litigation or wage garnishment. Even defaulting consumers would
benefit otherwise.
---------------------------------------------------------------------------
As mentioned above in part II.E, consumers may not fully consider
late fees when shopping for a credit card.\263\ This is true in the
baseline and is most likely to remain the case once this final rule is
implemented. To the extent this is or will be true, the actual cost of
using a credit card is or will be greater than consumers' expected cost
and reducing late fees will reduce the difference between the two.
Whether or not changes to other prices offset a reduction in late fee
revenue, consumers may benefit if, when choosing a credit card, they
have a more accurate view of the expected total costs of using the
card. To the extent that some consumers become better informed about
the terms of credit cards, issuers may respond by offering improved
terms, which could benefit even consumers who do not shop around. In
addition, consumers might benefit or incur costs from further repricing
and restructuring other financial products cross-marketed by credit
card issuers and their holding companies. The CFPB is not aware of data
that could help quantify such effects.
---------------------------------------------------------------------------
\263\ Under the final rule, these consumers might also
mistakenly choose a credit card of a Smaller Card Issuer, when they
would have preferred an offer from a Larger Card Issuers that has
lower late fees.
---------------------------------------------------------------------------
Recent studies in psychology and economics highlight some patterns
likely to affect consumer welfare in the credit card market, depending
on how accurately cardholders forecast the likelihood that they will
incur late fees. A seminal theoretical study \264\ identified and
coined the term for na[iuml]vet[eacute]-based discrimination, in which
firms recognize that some potential consumers are prone to such
systematic mistakes. If this is indeed a feature of credit card
markets, ``na[iuml]ve'' and ``sophisticated'' consumers, using the
[[Page 19197]]
terminology of this scholarship, could be affected by this final rule
differently. Na[iuml]ve consumers may mistakenly expect high fees to be
unimportant to them, as they are overly optimistic about not missing a
payment. Such consumers will benefit from the changes to late fee
amounts, which lower the cost of this mistake. Sophisticated consumers,
inasmuch they would have been cross subsidized by na[iuml]ve customers'
costly mistakes, may pay higher maintenance fees or interest or collect
fewer rewards if the issuer offsets the revenue lost to na[iuml]ve
consumers. The CFPB considers that to the extent there are offsetting
changes to card terms, some of these effects are likely but has not
quantified their magnitude.
---------------------------------------------------------------------------
\264\ Paul Heidhues & Botond K[ouml]szegi, Na[iuml]vet[eacute]-
Based Discrimination, 132 (2) The Quarterly Journal of Economics, at
1019-1054 (May 2017), https://doi.org/10.1093/qje/qjw042.
---------------------------------------------------------------------------
The CFPB acknowledges the possibility that consumers who were more
likely to pay attention to late fees than to other consequences of
paying late, like interest charges, penalty rates, credit reporting,
and the loss of a grace period, might be harmed in the short run if a
reduction in late fees makes it more likely that they mistakenly miss
payments. The CFPB has not quantified this effect but notes that
reducing late fees may increase issuer incentives to find other
approaches to make the consequences of late payment salient to
consumers, including reminders or warnings.
Other studies in psychology and economics might suggest that
penalties can serve as a valuable commitment device, for example
helping them to make choices that they prefer in the long term despite
the temptation to make different choices in the short term.\265\ If
some consumers were to value high fees for late payment in this way,
then they might experience some harm if lower fees make it harder to
responsibly manage their credit card debt. To the extent that late fees
benefit some consumers in this way, any harm to such consumers may be
mitigated to the extent that this final rule creates additional
incentives for issuers to emphasize reminders, automatic payment, and
other mechanisms that maintain similar or better payment behavior, as
discussed below.
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\265\ For a discussion of commitment devices most relevant to
this context, see section 10.2 of John Beshears et al., Behavioral
Household Finance, Handbook of Behavioral Economics: Applications
and Foundations 1, at 177-276 (2018), https://doi.org/10.1016/bs.hesbe.2018.07.004.
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This final rule may benefit consumers indirectly by making late
payments less profitable to Larger Card Issuers and thereby increasing
Larger Card Issuer incentives to take steps that will encourage on-time
payment. Consumers may benefit from issuer practices such as more
effective reminders or convenient payment options. If issuers bear no
net cost from late payments, or even profit from them, then they have
no incentive to take even inexpensive steps to reduce the incidence of
late payments. Even with this final rule changes, Larger Card Issuers
will not have incentives to take all steps they could that would
efficiently reduce the incidence of late payment since the late fees
they do charge mean they do not bear the full cost of late payments.
Nonetheless, by limiting Larger Card Issuer revenue from violations
that exceeds cost, this final rule changes Larger Card Issuer
incentives in a way that benefits consumers.
Relative to the 2023 Proposal, this final rule introduces an
incentive for credit card issuers that together with their affiliates
have close to one million open credit card accounts to stay or get
below that threshold for the sake of higher late fee revenues as a
Smaller Card Issuer than as a Larger Card Issuer. If this results in
the closure of some accounts, maybe dormant accounts, those cardholders
will have less liquidity immediately available as well as a potentially
worse credit score. Similarly, consumers whose credit card applications
are turned down, or who do not receive card offers, because of more
stringent underwriting standards by issuers just below the size
threshold could incur additional costs of shopping for an additional
card and perhaps pay a slightly higher cost of applying for the next
best credit card. The CFPB expects few issuers, if any, to be close to
the threshold at any given time and change practices just because of
this incentive.
Potential Benefits and Costs to Covered Persons of the $8 Late Fee Safe
Harbor Changes
Because this final rule will significantly reduce the aggregate
value of late fees paid by consumers, this final rule will
significantly reduce late fee revenue for Larger Card Issuers. As noted
above in part II.F, late fee revenue constitutes 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.\266\ 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.\267\ As discussed below, Larger Card Issuers can
offset losses to consumer revenue to some extent by taking other
measures (e.g., increasing interest rates or changing rewards), and the
reduction in late fees could affect consumer choices or market
competition in ways that may create benefits or costs to Larger Card
Issuers.
---------------------------------------------------------------------------
\266\ Late Fee Report, at 4.
\267\ 2023 Report, at 65.
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Larger Card Issuers' costs and revenue will also be affected by
changes in consumer behavior in response to the reduced late fee
amounts. In particular, lower late fees at Larger Card Issuers could
make some consumers somewhat more likely to make late payments. As
discussed above in the section-by-section analysis of Sec.
1026.52(b)(1)(ii) in part VII, the CFPB expects that a $8 late fee will
still have a deterrent effect on late payments, although that effect
may be lessened by the lower late fee to some extent, and other factors
may be more relevant (or may become more relevant) to creating
deterrence. For example, as discussed in the 2023 Proposal, and in this
final rule (the section-by-section of Sec. 1026.52(b)(1)(ii)), the
CFPB expects that consumers may be deterred by factors other than the
fee amount, like higher interest rates and potential credit reporting.
As noted in the 2023 Proposal and this final rule, the CFPB also
expects that any additional late payments due to the reduced late fee
safe harbor amount will generate both additional fee income and
additional collection costs relative to an outcome with lower fee
amounts but no additional incidents. Even if more consumers pay late
because of the decreased late fee amount, the cost of collecting any
such additional late payments is unlikely to be greater, per incident,
than the cost of collecting late payments under the existing safe
harbor. Therefore, the CFPB expects that collection costs to Larger
Card Issuers will not increase by more than fee income derived from any
additional late payments.
The CFPB recognizes that an increased number of late payments could
result in additional delinquencies and ultimately increase credit
losses for Larger Card Issuers. But the CFPB is not aware of evidence
showing that higher late fees prevent consumers from eventually
defaulting on their accounts.\268\ Further, if this is a concern,
[[Page 19198]]
the CFPB notes that Larger Card Issuers can take other steps to help
reduce the likelihood of consumers missing payments, which would
mitigate potential costs of this final rule from increased
delinquencies. For example, as noted in the 2023 Proposal and this
final rule, Larger Card Issuers could increase investments in payment
reminders or automatic payments or provide lower-friction methods of
payment, payment rescheduled for soon after regular deposits, or
rewards for paying on time.\269\ Larger Card Issuers could also
increase minimum payment amounts or adjust credit limits to reduce
credit risk associated with consumers who make late payments.
---------------------------------------------------------------------------
\268\ For some consumers, a high late fee may contribute to
default by increasing their overall debt burden and making it more
difficult to recover from delinquency. For example, the 2023 paper
by Grodzicki et al., described above in the section-by-section
analysis of Sec. 1026.52(b)(1)(ii) in part VII, with all the
caveats noted there, found that a decrease in late fees increases
borrowing for prime borrowers but triggers repayment for subprime
cardholders. This paper explained that this latter effect on
subprime cardholders might result from the lower late fee amount
lessening the need for subprime cardholders to focus on avoiding
late fees and instead allowing some subprime cardholders to start to
pay more attention to the high cost of their revolving debt.
\269\ A joint comment in response to the ANPR submitted by
several industry trade associations stated that issuers promote
on[hyphen]time payments through a variety of means in addition to
late fees, including multiple payment reminders sent via mail,
email, or text notification depending on consumer preference. These
commenters further stated that one issuer reported that as of five
months after rollout of its new alert system, the issuer's gross
monthly late fees were 20 percent lower and the late fee incidence
rate per balance had fallen by nearly 25 percent. Similarly, a large
credit union trade association noted that some credit unions already
have systems in place or are currently contracting with third-party
vendors to offer their members convenient reminders for upcoming
payment due dates via text message and email.
---------------------------------------------------------------------------
As discussed above, Larger Card Issuers could also increase other
prices in a way that would offset some revenue lost from reduced late
fees. In general, Larger Card Issuers will set the terms of credit
cards to maximize profits, and it is not clear that limiting late fees
will directly affect the existing profit-maximizing finance charge or
account maintenance fee, for example. However, a reduction in late fee
revenue could cause Larger Card Issuers to change other terms if the
lost late fee revenue reduced the profitability of issuing credit cards
to the point at which issuers are faced with a choice between raising
new revenue by changing other card terms or exiting the market segment.
As discussed above, such offsetting price increases are most likely
where profit margins are low since any reduction in revenue is likely
to drive risk-adjusted returns on capital below market expectations,
limiting supply and driving prices up for consumers. The recent
profitability of consumer credit card businesses makes the CFPB expect
the market to see exceedingly few exits and no change in entries.\270\
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\270\ See supra note 247.
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Larger Card Issuers' revenue loss from this final rule could be
mitigated by the ability to use the cost analysis provisions in Sec.
1026.52(b)(1)(i) rather than setting late fees at the safe harbor
amount. Any Larger Card Issuer with costs greater than $8 per late
payment will be able to set a higher fee using the cost analysis
provisions, although doing so would likely involve some expense to
conduct the relevant analysis, ensure that it complies with the
existing rule's requirements and potential changes from this final
rule, and ensure that the relevant data and analysis are documented in
a way that would permit the issuer to demonstrate compliance to
regulators. The CFPB understands that Larger Card Issuers already
conduct sophisticated analyses of credit card operations, and the CFPB
expects the cost of additional analyses to be small, with most
additional costs to come from procedures needed to demonstrate
compliance.
The $8 late fee safe harbor in this final rule will only apply to
Larger Card Issuers, but changes to the terms of credit cards at these
institutions could affect demand for similar products at financial
institutions not covered by the $8 late fee safe harbor, and this could
affect Smaller Card Issuers and their customers in turn. In general,
Smaller Card Issuers will benefit from new limitations on the types of
products that competing firms can offer. For example, if Larger Card
Issuers were to increase account annual fees to offset some lost
revenue from late fees, the credit cards of other issuers would become
more attractive. The ability of consumers to switch to these products
could mitigate any costs to consumers from offsetting interest or fee
changes at Larger Card Issuers or from reduced access to credit cards.
On the other hand, significant reductions in credit card late fees at
Larger Card Issuers might create competitive pressure for Smaller Card
Issuers to lower their own late fees, in which case their consumers
could experience effects similar to those at Larger Card Issuers. Given
the difficulty in predicting the market response of Larger Card Issuers
to this final rule, it is uncertain whether cardholders of Smaller Card
Issuers will experience net benefits or costs from this final rule, and
whether Smaller Card Issuers will experience net benefits or costs from
this final rule.
Potential Benefits and Costs to Consumers and Covered Persons From Not
Applying the Annual Adjustments to the $8 Safe Harbor Amount for Late
Fees at Larger Card Issuers
The CFPB will not apply the annual adjustments to reflect changes
in the CPI to the $8 safe harbor amount for late fees imposed by Larger
Card Issuers. Instead, the CFPB will continue to monitor the market and
adjust the safe harbor amount as the CFPB determines is appropriate to
reflect changes to pre-charge-off collection costs and other factors.
The discussion below considers the effects of this change relative to a
baseline in which the new $8 safe harbor amount applicable to late fees
charged by Larger Card Issuers is adjusted to reflect changes in the
CPI; however, the effects would be qualitatively similar at other safe
harbor amounts.
The benefits and costs of this final rule to consumers and covered
persons depend on whether future adjustments by the CFPB would be
greater or less than the changes that would result from the CPI
adjustments that are currently used. As discussed in the section-by-
section analysis of Sec. 1026.52(b)(1)(ii)(D) in part VII and
illustrated in Figure 3, trends in collection costs for Larger Card
Issuers and the CPI do not appear to be closely related.\271\ If the
safe harbor amount were to fall or to grow less rapidly through the
CFPB's future adjustments than the current CPI adjustments, then
consumers would benefit from the reduced real cost of late fees, and
Larger Card Issuers using the late fee safe harbor amount would see
lower revenue. Conversely, if the late fee safe harbor amount were
adjusted in the future by more than it would be through the current CPI
adjustments, consumers could face costs from the change, and Larger
Card Issuers using the late fee safe harbor amount would see increased
revenue.
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\271\ The 2023 Proposal looked at costs and the CPI-U price
index, as in Figure 3. As discussed elsewhere, the CFPB uses the
CPI-W index to make adjustments pursuant to Sec.
1026.52(b)(1)(ii)(D) and thus, this final rule considers the impact
of eliminating the adjustment based on the CPI-W price index. As
Figure 4 attests, the relationship between costs and this price
index is fundamentally the same as the one in Figure 3.
---------------------------------------------------------------------------
Under this final rule, it is likely that the $8 late fee safe
harbor amount applicable to late fees charged by Larger Card Issuers
will be adjusted less frequently than under the current rule. Some
consumers will benefit from the transparency and administrative ease of
these late fee amounts changing less often. The cardholders who will
benefit are those whose late fee amount is not
[[Page 19199]]
set using the cost analysis provisions in Sec. 1026.52(b)(1)(i),
because the provision does not affect how often fees could be adjusted
pursuant to the cost analysis provisions. The CFPB also notes that even
if the CPI-based adjustments were to continue to apply to the late fee
safe harbor threshold amount applicable to Larger Card Issuers, the
lower $8 safe harbor amount combined with the requirement that if the
cumulative change in the adjusted value derived from applying the
annual CPI-W to the safe harbor amounts has risen by a whole dollar,
means that the $8 would be adjusted less frequently using the annual
adjustments than how often the late fee safe harbor amounts have
changed recently. Similarly, the lower $8 safe harbor amount combined
with the requirement that if the cumulative change in the adjusted
value derived from applying the annual CPI-W level to the safe harbor
amounts has decreased by a whole dollar, means that this $8 safe harbor
amount would likely change less frequently using the annual adjustments
than the current late fee safe harbor amounts.
To the extent that some Larger Card Issuers experience increases in
collection costs that would have been addressed through CPI-based
adjustments, these issuers will retain the option under this final rule
to use the cost analysis provisions in Sec. 1026.52(b)(1)(i) and thus
recover their higher costs with higher late fee amounts. Their
cardholders will still benefit from the elimination of the annual
adjustments to the $8 late fee safe harbor amount if the cost analysis
provisions result in less substantial increase than would have been the
case under the CPI adjustments. If a rise in a fee stemming from the
cost analysis provision were faster, the consumer would have seen the
same fee rise from this issuer determining the late fee using the cost
analysis provisions in Sec. 1026.52(b)(1)(i), irrespective of this
provision.
Larger Card Issuers with decreasing costs will lose out on a
mechanical increase in their revenue above cost to reflect CPI
adjustments unless the late fee safe harbor amount is otherwise
adjusted. As shown in Figure 3 above in part VII, recent collection
cost totals from the Y-14 portfolio data suggest that some issuers have
been experiencing decreasing nominal collection costs even in the
inflationary period of 2021-2022.
Potential Benefits and Costs to Consumers and Covered Persons of
Applying Annual Adjustments to Safe Harbor Threshold Amounts for
Penalty Fees Other Than Late Fees for All Card Issuers and for Late
Fees at Smaller Card Issuers
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 as well
as late fees imposed by Smaller Card Issuers.
Based on a 2023 survey of credit card agreements submitted to the
CFPB's Credit Card Agreement Database as discussed in part II.E, the
CFPB estimates that 1 percent of Smaller Card Issuers charge the
current safe harbor threshold amounts for late fees, representing far
less than 1 percent of balances of consumer credit cards. The
cardholders of these issuers will pay 6.7 percent more in fees for late
payments, and 4.9 percent more for each subsequent late payment in one
of the next six billing cycles. These Smaller Card Issuers will collect
correspondingly higher revenue from these late fees.
The CFPB does not have specific data on the percentage of Larger
and Smaller Card Issuers that charge the safe harbor amount for penalty
fees other than late fees. The cardholders of these issuers will pay
6.7 percent more in fees for violations.
Annual adjustments in the future will operate the same way as in
the baseline and thus have no additional impact.
Potential Benefits and Costs to Consumers and Covered Persons of
Proposed Alternatives Lowering the Limitation on Late Fees to 25
Percent of the Minimum Payment Due
The CFPB considered whether to amend Sec. 1026.52(b)(2)(i)(A) to
limit the dollar amount associated with a late payment to 25 percent of
the required minimum periodic payment due immediately before the
assessment of the late fee. Currently, late fee amounts must not exceed
100 percent of the required payment. As discussed in part VII, the CFPB
is not finalizing this proposed amendment for either Larger Card
Issuers or Smaller Card Issuers because the CFPB determined the
benefits the 25 percent limitation may have for consumers, such as
requiring a more reasonable and proportional late fee for instances
where the minimum payment due is small, do not outweigh considerations
of card issuers' ability to recoup their pre-charge-off collection
costs when they are using the $8 safe harbor threshold amount. The CFPB
also determined not to adopt the 25 percent limitation proposal in
order to minimize impacts to minimum balances due.
A Courtesy Period That Would Prohibit Late Fees Imposed Within 15
Calendar Days After the Payment Due Date
In the 2023 Proposal, the CFPB considered an alternative approach
in which Sec. 1026.52(b)(2) would be amended to provide for a courtesy
period that would prohibit late fees imposed within 15 calendar days
after the payment due date. Such a courtesy period could apply only to
late fees assessed if the card issuer is using the late fee safe harbor
amount or, alternatively, could be applicable generally (regardless of
whether the card issuer assesses late fees according to the safe harbor
amount set forth in Sec. 1026.52(b)(1)(ii) or the cost analysis
provisions in Sec. 1026.52(b)(1)(i)). The CFPB is not finalizing this
alternative.
The CFPB has determined that, absent additional evidence, the
potential impacts to card issuers' costs and consumers outweigh the
benefits of a mandatory 15-day courtesy period. While the CFPB
acknowledges the possible benefits raised by commenters, such as
helping consumers who mail in their late payments avoid a penalty fee
for any mail delivery issues, the potential for card issuers to recoup
costs at half the safe harbor amount per late payment combined with
other concerns about consumer confusion outweighs the possible benefits
to consumers.
Eliminating the Safe Harbors for Late Fees
As discussed in part VII, the CFPB solicited comment on the
alternative of proposing to eliminate the safe harbor provisions for
late fees in Sec. 1026.52(b)(1)(ii) altogether, in which case card
issuers could only impose late fees under the cost analysis provisions
in Sec. 1026.52(b)(1)(i). The CFPB is not finalizing this alternative
to revoke the late fees for Larger Card Issuers without replacing it
with another safe harbor amount and thus, requiring Larger Card issuers
to use the cost analysis provisions to determine the amount of late
fees. As discussed in part VII, the CFPB has determined that revoking
the safe harbor and then adopting the $8 late fee safe harbor amount
for Larger Card Issuers--as this final rule does--better achieves its
goals.
[[Page 19200]]
Applying the Changes to the Safe Harbor Provision With Respect to Other
Penalty Fees
The CFPB considered an alternative that would apply the $8 safe
harbor to other penalty fees, such as over-the-limit fees, returned-
payment fees, and declined access check fees. In particular, the CFPB
considered whether the new $8 late safe harbor threshold should apply
to other penalty fees and whether, alternatively, if the CFPB were to
eliminate the safe harbor provisions in Sec. 1026.52(b)(1)(ii) for
late fees charged, the CFPB should also eliminate the safe harbor for
other penalty fees charged. This final rule does not adopt this
alternative.
F. Potential Specific Impacts of This Final Rule on Depository
Institutions and Credit Unions With $10 Billion or Less in Total
Assets, As Described in CFPA Section 1026
As the lower $8 safe harbor amount in this final rule applies only
to Larger Card Issuers (i.e., card issuers that together with their
affiliates have one million or more open credit card accounts), the
CFPB expects no specific impact on Smaller Card Issuers as defined in
Sec. 1026.52(b)(3) (i.e., card issuers that have less than one million
open credit card accounts for the entire preceding calendar year)
directly.\272\
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\272\ See supra note 5.
---------------------------------------------------------------------------
Based on its review of both public and confidential data, the CFPB
expects that there are approximately 30-35 Larger Card Issuers that
together with their affiliates have one million or more open credit
card accounts, and one dozen or fewer among them with $10 billion or
less in assets.
As with other Larger Card Issuers, depository institutions and
credit unions that together with their affiliates have one million or
more open credit card accounts but the depository institutions and
credit unions have $10 billion or less in total assets will generally
lose fee revenue as a result of this final rule. The CFPB has no reason
to believe that depository institutions and credit unions that are
Larger Card Issuers and have $10 billion or less in total assets will
experience effects qualitatively different from those discussed above
in part IX.E.
Institutions with $10 billion or less in assets might experience
indirect effects of the new $8 late fee safe harbor amount adopted in
this final rule. As noted above, changes to the terms of credit cards
at Larger Card Issuers could affect demand for similar products at
financial institutions not covered by the new $8 late fee safe harbor
amount adopted in this final rule. For example, if some Larger Card
Issuers were to increase some account APRs to offset some lost revenue
from late fees, the credit cards of other institutions could become
more attractive. On the other hand, significant reductions in late fees
at Larger Card Issuers might create competitive pressure for financial
institutions not directly affected by this final rule to lower their
own late fees, and thus lose revenue. Given the difficulty in
predicting the market response of Larger Card Issuers, it is uncertain
whether financial institutions not covered by the $8 safe harbor
threshold adopted in this final rule will experience net benefits or
costs from this final rule.
G. Potential Specific Impacts of This Final Rule on Consumer Access to
Credit and on Consumers in Rural Areas
The CFPB is concerned about the geographic concentration of current
late fees and that areas with higher incidence of late fees tend to
also be areas with higher numbers of consumers from disadvantaged
groups, as summarized in part II.F above. While the CFPB has not
analyzed the incidence of late fees in rural areas specifically, as
explained in the 2023 Proposal, CFPB research has found that consumers
in rural areas are somewhat less likely than other Americans to have a
credit card, and not significantly more likely than other Americans to
have a credit card delinquency.\273\ These findings suggest that the
effects of the rule on late fees paid by rural consumers may generally
be similar to those of other Americans.
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\273\ CFPB, Consumer Finances in Rural Appalachia, at 12 (Sept.
1, 2022) (Appalachia Report), https://www.consumerfinance.gov/data-research/research-reports/consumer-finances-in-rural-appalachia/.
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On the other hand, as discussed in the 2023 Proposal, consumers in
rural areas have lower median household income, and lower median credit
card balances, than consumers in non-rural areas.\274\ Though high-
income Americans have more credit cards, low-income areas have more
late payments per card. As a result, there is no clear indication
whether savings from this final rule will be greater or lesser for
consumers in rural areas; however, reductions in fee amounts that are
similar in dollar terms may be more meaningful on average for consumers
with lower incomes, and given that consumers in rural areas may have
lower median income, the reduction in late fees could result in more
meaningful on average benefits for consumers in rural areas.
---------------------------------------------------------------------------
\274\ Id. at 8, 12.
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As discussed above in part IX.D and in the 2023 Proposal, the CFPB
acknowledges that late fee revenue has been concentrated in certain
market segments, suggesting that any price responses to this final rule
are also likely to be focused in those segments. In particular,
interest rates or other terms could be less advantageous for subprime
consumers or certain consumers in specific regions; for these
consumers, some types of cards may become too expensive due to higher
interest rates or less advantageous terms. Although, even if this were
to happen, it would not result from a higher expected consumer cost of
using credit cards but from greater transparency about the cards'
actual anticipated cost of ownership. Lost credit to consumers
consciously declining offers because the cards are too expensive is
unlikely to harm and potentially may benefit consumers, particularly
given the ability of consumers to shop and compare costs between cards.
X. Regulatory Flexibility Act Analysis
The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) and a final regulatory
flexibility analysis of any rule subject to notice-and-comment
rulemaking requirements unless the agency certifies that the rule will
not have a SISNOSE.\275\ The CFPB is also subject to specific
additional procedures under the RFA involving convening a panel to
consult with small business representatives before proposing a rule for
which an IRFA is required.\276\
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\275\ 5 U.S.C. 601 et seq.
\276\ 5 U.S.C. 609.
---------------------------------------------------------------------------
Small institutions, for the purposes of the Small Business
Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by
SBA. Effective March 17, 2023, depository institutions with less than
$850 million in total assets are determined to be small for the period
used in the subsequent analysis.\277\
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\277\ See Small Business Administration, Table of size
standards, https://www.sba.gov/document/support--table-size-
standards (last visited on December 18, 2023).
---------------------------------------------------------------------------
A. The CFPB's Proposal
In the 2023 Proposal, the CFPB determined that an IRFA is not
required for the proposal because it would not have a SISNOSE.
The 2023 Proposal would have affected small entities that issue
credit cards most directly by reducing late fee revenue from credit
cards. To assess
[[Page 19201]]
whether the 2023 Proposal, if adopted, would have had a SISNOSE, the
CFPB considered the significance of credit card late fee revenue as a
share of the total revenue of affected small entities. As discussed in
part VII of the 2023 Proposal, the CFPB did not have data with which to
precisely estimate the effect of the 2023 Proposal on late fee revenue.
The CFPB analyzed available information on total late fee revenue below
because the CFPB considered total late fee revenue to be an upper bound
on potential impacts of the 2023 Proposal, if adopted, on small
entities.
In the 2023 Proposal, the CFPB estimated that there were
approximately 3,780 small banks, of which approximately 498 reported
outstanding credit card debt on their balance sheets.\278\ In addition,
the CFPB estimated that there were approximately 4,586 small credit
unions, of which approximately 2,785 reported credit card assets.\279\
Detailed information about sources of credit card revenue was not
available for most small banks. However, FFIEC Call Reports included a
measure of outstanding credit card debt held as assets. Revenue for
banks was reported on the FFIEC Call Reports as net-interest income
plus non-interest income. Interest income was partially reported by
product type. For example, all banks were required to report ``all
interest, fees, and similar charges levied against or associated with
all extensions of credit to individuals for household, family, or other
personal expenditures arising from credit cards (in domestic
offices).'' \280\ The CFPB considered this interest and fee income on
outstanding credit card balances as a proxy for credit card revenue.
---------------------------------------------------------------------------
\278\ These estimates and others for small banks were based on
data from the quarterly Federal Financial Institutions Examination
Council (FFIEC) Consolidated Reports of Condition and Income (FFIEC
Call Reports), and refer to the fourth quarter of 2021, unless
otherwise noted. Fed. Fin. Insts. Examination Council, Call Reports,
https://cdr.ffiec.gov/public/ManageFacsimiles.aspx (last visited
Dec. 14, 2022).
\279\ These estimates and others for small credit unions were
based on data from NCUA Call Reports, and refer to the fourth
quarter of 2021, unless otherwise noted. Nat'l Credit Union Admin.,
Call Report Quarterly Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data (last visited Dec.
14, 2022).
\280\ See the Board's Micro Data Reference Manual, B485, https://www.federalreserve.gov/apps/mdrm/data-dictionary (last visited Dec.
14, 2022).
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As discussed in the 2023 Proposal, credit cards represented a small
fraction of both assets and revenue for small banks. Thus, for the vast
majority of small banks, even a large reduction in credit card late fee
revenue would have represented well below 1 percent of bank revenue
and, therefore, would not have had a significant economic impact.
As discussed in the 2023 Proposal, the CFPB did not have equivalent
data on credit card revenue for small credit unions because credit
unions were not required to separately report income from their credit
card business in the NCUA Call Reports. However, NCUA Call Reports
provided information on credit card assets as a share of total assets.
To obtain a rough estimate of credit card revenue shares at small
credit unions, in the 2023 Proposal, the CFPB extrapolated using the
relationship between credit card revenue share and credit card asset
share in bank call report data. As with small banks, the small share of
revenue coming from credit cards, together with the fact that late fees
made up only a fraction of credit card revenue, implied that even a
significant drop-in late fee revenue would not have had a significant
economic impact for the large majority of small credit unions.
Accordingly, the Director certified that the 2023 Proposal would
not have had a significant economic impact on a substantial number of
small entities. Thus, neither an IRFA nor a small business review panel
was required for the proposal.
B. Comments Received
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 card
issuers asserted that the 2023 Proposal, if adopted, would have a
SISNOSE and thus the CFPB is required to hold a SBREFA panel under the
RFA prior to finalizing the rulemaking. Many banks and credit unions,
industry trade associations, and individuals on behalf of credit unions
(1) expressed concern that the CFPB did not conduct a SBREFA panel to
seek feedback from smaller issuers that would be significantly impacted
by the proposal; (2) asserted that lowering the safe harbor as proposed
would have a significant impact on small financial institutions; and
(3) urged the CFPB to withdraw the proposal and convene a SBREFA panel
in fulfillment of its statutory obligation under the SBREFA Act of
1996.
The agency that advocates for small businesses asserted that (1)
the CFPB does not have the necessary data to develop an adequate
factual basis for its SISNOSE certification and does not have
sufficient information to indicate that small institutions contribute
to the problem that is the target of the proposal; and (2) without a
factual basis, the CFPB may not certify under section 605(b) and must
publish an Initial Regulatory Flexibility Analysis under section 603 of
the RFA.
One law firm representing card issuers asserted that CFPB's failure
to convene a SBREFA panel renders the 2023 Proposal not only
statutorily unsound, but also arbitrary and capricious under the APA.
C. The Final Rule
In the 2023 Proposal, the CFPB determined that an IRFA was not
needed because the 2023 Proposal would not have had a SISNOSE. As
described in the analysis included in the 2023 Proposal, the CFPB
estimated that credit card assets and revenue held by small banks and
small credit unions represent a small fraction of both total assets and
revenue for those small entities.
As discussed in more detail in part VI, the CFPB is not finalizing
the following provisions in this final rule for Smaller Card Issuers:
(1) the 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 of the same type that occur
during the same billing cycle or in one of the next six billing cycles;
and (2) the elimination of the annual adjustments for the safe harbor
threshold dollar amounts set forth Sec. 1026.52(b)(1)(ii)(D). 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.\281\ For purposes of the definition of
``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 pursuant to the annual automatic adjustments in Sec.
1026.52(b)(1)(ii)(D) in this final rule, will apply to late fees
imposed by Smaller Card Issuers.
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\281\ See supra note 5.
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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
[[Page 19202]]
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.
Small institutions, for the purposes of the SBREFA of 1996, are
defined by SBA. Effective March 17, 2023, financial institutions with
less than $850 million in total assets are determined to be small.\282\
---------------------------------------------------------------------------
\282\ See Small Business Administration, Table of size
standards, https://www.sba.gov/document/support--table-size-
standards (last visited on October 24, 2023).
---------------------------------------------------------------------------
The CFPB has determined that nearly all small entities for purposes
of the RFA will qualify as a ``Smaller Card Issuer'' as defined in this
final rule, and therefore, the new, lower $8 late fee safe harbor
amount and the elimination of the annual adjustments to the $8 late fee
safe harbor amount will not apply to them. Accordingly, this final rule
will not directly reduce revenue of a substantial number of small
entities.
Accordingly, the Director hereby certifies that this final rule
will not have a significant economic impact on a substantial number of
small entities.
The CFPB notes that it is unconvinced by the comments related to
the SISNOSE, and as explained in part VI, and that it appropriately
certified in the 2023 Proposal that the 2023 Proposal would not have
had a SISNOSE. As described above in the initial regulatory flexibility
analysis included in the 2023 Proposal, the CFPB described the credit
card market data that it used to develop an adequate basis for the
Director's SISNOSE certification. Using this data, the CFPB estimated
that credit card assets and revenue held by small banks and small
credit unions (as defined by the RFA) represent a small fraction of
both total assets and revenue for those small entities. Thus, pursuant
to the RFA, the CFPB was not required to conduct a SBREFA panel prior
to releasing the 2023 Proposal.
In fact, as discussed in part VI, the CFPB's determination that
credit cards are not a significant revenue source for Smaller Card
Issuers (in terms of total revenue for the institution) played a part
in the CFPB's decision not to apply certain provisions of the 2023
Proposal to Smaller Card Issuers at this time.
XI. Paperwork Reduction Act
The information collections contained within TILA and Regulation Z
are approved under Office of Management and Budget (OMB) Control Number
3170-0015. The current expiration date for this approval is May 31,
2025. The CFPB has determined that this final rule would not impose any
new information collections or revise any existing recordkeeping,
reporting, or disclosure requirements on covered entities or members of
the public that would be collections of information requiring approval
by OMB under the Paperwork Reduction Act.\283\
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\283\ 44 U.S.C. 3506; 5 CFR part 1320.
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XII. Severability
If any provision of this rule, or any application of a provision,
is stayed or determined to be invalid, the remaining provisions or
applications are severable and shall continue in effect. In particular,
if the $8 safe harbor for Larger Card Issuers is stayed or determined
to be invalid, the conclusion to repeal the existing safe harbor is
severable and shall continue in effect.
List of Subjects in 12 CFR Part 1026
Advertising, Banks, Banking, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth above, the CFPB amends Regulation Z, 12
CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
0
2. Section 1026.52 is amended by revising paragraph (b)(1)(ii) and
adding paragraph (b)(3) to read as follows:
Sec. 1026.52 Limitation on fees.
* * * * *
(b) * * *
(1) * * *
(ii) Safe harbors. Except as provided in paragraph (b)(1)(ii)(E) of
this section, a card issuer may impose a fee for a late payment on an
account if the dollar amount of the fee does not exceed $8. A card
issuer may impose a fee for other types of violations of the terms or
other requirements of an account if the dollar amount of the fee does
not exceed, as applicable:
(A) $32;
(B) $43 if the card issuer previously imposed a fee pursuant to
paragraph (b)(1)(ii)(A) of this section for a violation of the same
type that occurred during the same billing cycle or one of the next six
billing cycles; or
(C) Three 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 limitation on the amount of a late payment fee in
paragraph (b)(1)(ii) of this section.
(D) The amounts in paragraphs (b)(1)(ii)(A) and (B) of this section
will be adjusted annually by the Bureau to reflect changes in the
Consumer Price Index.
(E) A smaller card issuer, as defined in paragraph (b)(3) of this
section, may impose a fee for a late payment on an account if the
dollar amount of the fee does not exceed the amount in paragraph
(b)(1)(ii)(A) or (B) of this section, as applicable, notwithstanding
the limitation on the amount of a late payment fee in this paragraph
(b)(1)(ii).
* * * * *
(3) Smaller card issuer. (i) Except as provided in paragraph
(b)(3)(ii) of this section, a card issuer is a smaller card issuer for
purposes of paragraph (b)(1)(ii)(E) of this section if the card issuer
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. For purposes of this paragraph (b)(3),
affiliate means any company that controls, is controlled by, or is
under common control with another company, as set forth in the Bank
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
(ii) 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, the card issuer will no longer be a smaller
card issuer for purposes of paragraph (b)(1)(ii)(E) of this section as
of 60 days after meeting or exceeding that number of open credit card
accounts.
0
3. Section 1026.58 is amended by revising paragraph (b)(6) to read as
follows:
[[Page 19203]]
Sec. 1026.58 internet posting of credit card agreements.
* * * * *
(b) * * *
(6) Open accounts. For purposes of this section and Sec. 1026.52,
an account is an ``open account'' or ``open credit card account'' if it
is a credit card account under an open-end (not home-secured) consumer
credit plan and either:
(i) The cardholder can obtain extensions of credit on the account;
or
(ii) There is an outstanding balance on the account that has not
been charged off. An account that has been suspended temporarily (for
example, due to a report by the cardholder of unauthorized use of the
card) is considered an ``open account'' or ``open credit card
account.''
* * * * *
0
4. Appendix G to part 1026 is amended by revising the entries for G-
10(B), G-10(C), G-10(E), G-17(B), G-17(C), G-18(A), G-18(B), G-18(D),
G-18(F), G-18(G), and G-21 to read as follows:
Appendix G to Part 1026--Open-End Model Forms and Clauses
* * * * *
BILLING CODE 4810-AM-P
G-10(B) APPLICATIONS AND SOLICITATIONS SAMPLE (CREDIT CARDS)
[GRAPHIC] [TIFF OMITTED] TR15MR24.006
G-10(C) APPLICATIONS AND SOLICITATIONS SAMPLE (CREDIT CARDS)
[[Page 19204]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.007
* * * * *
G-10(E) APPLICATIONS AND SOLICITATIONS SAMPLE (CHARGE CARDS)
[[Page 19205]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.008
* * * * *
G-17(B) ACCOUNT-OPENING SAMPLE
[[Page 19206]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.009
G-17(C) ACCOUNT-OPENING SAMPLE
[[Page 19207]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.010
* * * * *
G-18(A) PERIODIC STATEMEMT TRANSACTIONS; INTEREST CHARGES; FEES SAMPLE
[[Page 19208]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.011
G-18(B) LATE PAYMENT FEE SAMPLE
[GRAPHIC] [TIFF OMITTED] TR15MR24.012
* * * * *
G-18(D) PERIODIC STATEMENT NEW BALANCE, DUE DATE, LATE PAYMENT AND
MINIMUM PAYMENT SAMPLE (CREDIT CARDS)
[[Page 19209]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.013
* * * * *
G-18(F) PERIODIC STATEMENT FORM
[[Page 19210]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.014
[[Page 19211]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.015
G-18(G) PERIODIC STATEMENT FORM
[[Page 19212]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.016
[[Page 19213]]
[GRAPHIC] [TIFF OMITTED] TR15MR24.017
* * * * *
G-21 CHANGE-IN-TERMS SAMPLE (INCREASE IN FEES)
[GRAPHIC] [TIFF OMITTED] TR15MR24.018
BILLING CODE 4810-AM-C
* * * * *
0
5. Supplement I to part 1026 is amended by:
0
a. Under Section 1026.7--Periodic Statement, revising 7(b)(11) Due
Date; Late Payment Costs;
0
b. Under Section 1026.52--Limitations on Fees:
0
i. Revising 52(a)(1) General rule, 52(b) Limitations on Penalty Fees,
52(b)(1) General Rule, 52(b)(1)(i) Fees Based on Costs, 52(b)(1)(ii)
Safe Harbors, 52(b)(2) Prohibited fees, 52(b)(2)(i) Fees That Exceed
Dollar Amount Associated With Violation, and 52(b)(2)(ii) Multiple Fees
Based on a Single Event or Transaction; and
0
ii. Adding 52(b)(3) Smaller card issuer, 52(b)(3)(i), and 52(b)(3)(ii)
in alphanumerical order; and
0
c. Under Section 1026.60--Credit and Charge Card Applications and
Solicitations, revising 60(a)(2) Form of Disclosures; Tabular Format.
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.7--Periodic Statement
* * * * *
7(b)(11) Due Date; Late Payment Costs
1. Informal periods affecting late payments. Although the terms
of the account agreement may provide that a card issuer may assess a
late payment fee if a payment is not received by a certain date, the
card issuer may have an informal policy or practice that delays the
assessment of the late
[[Page 19214]]
payment fee for payments received a brief period of time after the
date upon which a card issuer has the contractual right to impose
the fee. A card issuer must disclose the due date according to the
legal obligation between the parties, and need not consider the end
of an informal ``courtesy period'' as the due date under Sec.
1026.7(b)(11).
2. Assessment of late payment fees. Some State or other laws
require that a certain number of days must elapse following a due
date before a late payment fee may be imposed. In addition, a card
issuer may be restricted by the terms of the account agreement from
imposing a late payment fee until a payment is late for a certain
number of days following a due date. For example, assume a payment
is due on March 10 and the account agreement or State law provides
that a late payment fee cannot be assessed before March 21. A card
issuer must disclose the due date under the terms of the legal
obligation (March 10 in this example), and not a date different than
the due date, such as when the card issuer is restricted by the
account agreement or State or other law from imposing a late payment
fee unless a payment is late for a certain number of days following
the due date (March 21 in this example). Consumers' rights under
State law to avoid the imposition of late payment fees during a
specified period following a due date are unaffected by the
disclosure requirement. In this example, the card issuer would
disclose March 10 as the due date for purposes of Sec.
1026.7(b)(11), but could not, under State law, assess a late payment
fee before March 21.
3. Fee or rate triggered by multiple events. If a late payment
fee or penalty rate is triggered after multiple events, such as two
late payments in six months, the card issuer may, but is not
required to, disclose the late payment and penalty rate disclosure
each month. The disclosures must be included on any periodic
statement for which a late payment could trigger the late payment
fee or penalty rate, such as after the consumer made one late
payment in this example. For example, if a cardholder has already
made one late payment, the disclosure must be on each statement for
the following five billing cycles.
4. Range of late fees or penalty rates. 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. For example, a phrase indicating the
late payment fee could be ``up to $8'' complies with this
requirement.
5. Penalty rate in effect. If the highest penalty rate has
previously been triggered on an account, the card issuer may, but is
not required to, delete the amount of the penalty rate and the
warning that the rate may be imposed for an untimely payment, as not
applicable. Alternatively, the card issuer may, but is not required
to, modify the language to indicate that the penalty rate has been
increased due to previous late payments (if applicable).
6. Same day each month. The requirement that the due date be the
same day each month means that the due date must generally be the
same numerical date. For example, a consumer's due date could be the
25th of every month. In contrast, a due date that is the same
relative date but not numerical date each month, such as the third
Tuesday of the month, generally would not comply with this
requirement. However, a consumer's due date may be the last day of
each month, even though that date will not be the same numerical
date. For example, if a consumer's due date is the last day of each
month, it will fall on February 28th (or February 29th in a leap
year) and on August 31st.
7. Change in due date. A creditor may adjust a consumer's due
date from time to time provided that the new due date will be the
same numerical date each month on an ongoing basis. For example, a
creditor may choose to honor a consumer's request to change from a
due date that is the 20th of each month to the 5th of each month, or
may choose to change a consumer's due date from time to time for
operational reasons. See comment 2(a)(4)-3 for guidance on
transitional billing cycles.
8. Billing cycles longer than one month. The requirement that
the due date be the same day each month does not prohibit billing
cycles that are two or three months, provided that the due date for
each billing cycle is on the same numerical date of the month. For
example, a creditor that establishes two-month billing cycles could
send a consumer periodic statements disclosing due dates of January
25, March 25, and May 25.
9. Payment due date when the creditor does not accept or receive
payments by mail. If the due date in a given month falls on a day on
which the creditor does not receive or accept payments by mail and
the creditor is required to treat a payment received the next
business day as timely pursuant to Sec. 1026.10(d), the creditor
must disclose the due date according to the legal obligation between
the parties, not the date as of which the creditor is permitted to
treat the payment as late. For example, assume that the consumer's
due date is the 4th of every month, and the creditor does not accept
or receive payments by mail on Thursday, July 4. Pursuant to Sec.
1026.10(d), the creditor may not treat a mailed payment received on
the following business day, Friday, July 5, as late for any purpose.
The creditor must nonetheless disclose July 4 as the due date on the
periodic statement and may not disclose a July 5 due date.
* * * * *
Section 1026.52--Limitations on Fees
52(a) Limitations During First Year After Account Opening
52(a)(1) General Rule
1. Application. 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, including a prepaid
account as defined in Sec. 1026.61, to the card issuer or from
another credit account provided by the card issuer). For example:
i. Assume that, under the terms of a credit card account, a
consumer is required to pay $120 in fees for the issuance or
availability of credit at account opening. The consumer is also
required to pay a cash advance fee that is equal to five percent of
the cash advance and a late payment fee of $8 if the required
minimum periodic payment is not received by the payment due date
(which is the twenty-fifth of the month). The card issuer is not a
smaller card issuer as defined in Sec. 1026.52(b)(3). At account
opening on January 1 of year one, the credit limit for the account
is $500. Section 1026.52(a)(1) permits the card issuer to charge to
the account the $120 in fees for the issuance or availability of
credit at account opening. On February 1 of year one, the consumer
uses the account for a $100 cash advance. Section 1026.52(a)(1)
permits the card issuer to charge a $5 cash-advance fee to the
account. On March 26 of year one, the card issuer has not received
the consumer's required minimum periodic payment. Section
1026.52(a)(2) permits the card issuer to charge a $8 late payment
fee to the account. On July 15 of year one, the consumer uses the
account for a $50 cash advance. Section 1026.52(a)(1) does not
permit the card issuer to charge a $2.50 cash advance fee to the
account. Furthermore, Sec. 1026.52(a)(1) prohibits the card issuer
from collecting the $2.50 cash advance fee from the consumer by
other means.
ii. Assume that, under the terms of a credit card account, a
consumer is required to pay $125 in fees for the issuance or
availability of credit during the first year after account opening.
At account opening on January 1 of year one, the credit limit for
the account is $500. Section 1026.52(a)(1) permits the card issuer
to charge the $125 in fees to the account. However, Sec.
1026.52(a)(1) prohibits the card issuer from requiring the consumer
to make payments to the card issuer for additional non-exempt fees
with respect to the account during the first year after account
opening. Section 1026.52(a)(1) also prohibits the card issuer from
requiring the consumer to open a separate credit account with the
card issuer to fund the payment of additional non-exempt fees during
the first year after the credit card account is opened.
iii. Assume that a consumer opens a prepaid account accessed by
a prepaid card on January 1 of year one and opens a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined
by Sec. 1026.61 that is a credit card account under an open-end
(not home-secured) consumer credit plan on March 1 of year one.
Assume that, under the terms of the covered separate credit feature
accessible by the hybrid prepaid-credit card, a consumer is required
to pay $50 in fees for the issuance or availability of credit at
account opening. At credit account opening on March 1 of year one,
the credit limit for the account is $200. Section 1026.52(a)(1)
permits the card issuer to charge the $50 in fees to the credit
account. However, Sec. 1026.52(a)(1) prohibits the card issuer from
requiring the consumer to make payments to the card issuer for
additional non-exempt fees with respect to the credit account during
the first year after account opening. Section 1026.52(a)(1) also
prohibits
[[Page 19215]]
the card issuer from requiring the consumer to open an additional
credit feature with the card issuer to fund the payment of
additional non-exempt fees during the first year after the covered
separate credit feature is opened.
iv. Assume that a consumer opens a prepaid account accessed by a
prepaid card on January 1 of year one and opens a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined
in Sec. 1026.61 that is a credit card account under an open-end
(not home-secured) consumer credit plan on March 1 of year one.
Assume that, under the terms of the covered separate credit feature
accessible by the hybrid prepaid-credit card, a consumer is required
to pay $120 in fees for the issuance or availability of credit at
account opening. The consumer is also required to pay a cash advance
fee that is equal to 5 percent of any cash advance and a late
payment fee of $8 if the required minimum periodic payment is not
received by the payment due date (which is the 25th of the month).
The card issuer is not a smaller card issuer as defined in Sec.
1026.52(b)(3). At credit account opening on March 1 of year one, the
credit limit for the account is $500. Section 1026.52(a)(1) permits
the card issuer to charge to the account the $120 in fees for the
issuance or availability of credit at account opening. On April 1 of
year one, the consumer uses the account for a $100 cash advance.
Section 1026.52(a)(1) permits the card issuer to charge a $5 cash
advance fee to the account. On April 26 of year one, the card issuer
has not received the consumer's required minimum periodic payment.
Section 1026.52(a)(2) permits the card issuer to charge a $8 late
payment fee to the account. On July 15 of year one, the consumer
uses the account for a $50 cash advance. Section 1026.52(a)(1) does
not permit the card issuer to charge a $2.50 cash advance fee to the
account, because the total amount of non-exempt fees reached the 25
percent limit with the $5 cash advance fee on April 1 (the $8 late
fee on April 26 is exempt pursuant to Sec. 1026.52(a)(2)(i)).
Furthermore, Sec. 1026.52(a)(1) prohibits the card issuer from
collecting the $2.50 cash advance fee from the consumer by other
means.
2. Fees that exceed 25 percent limit. A card issuer that charges
a fee to a credit card account that exceeds the 25 percent limit
complies with Sec. 1026.52(a)(1) if the card issuer waives or
removes the fee and any associated interest charges or credits the
account for an amount equal to the fee and any associated interest
charges within a reasonable amount of time but no later than the end
of the billing cycle following the billing cycle during which the
fee was charged. For example, assuming the facts in the example in
comment 52(a)(1)-1.i, the card issuer complies with Sec.
1026.52(a)(1) if the card issuer charged the $2.50 cash advance fee
to the account on July 15 of year one but waived or removed the fee
or credited the account for $2.50 (plus any interest charges on that
$2.50) at the end of the billing cycle.
3. Changes in credit limit during first year.
i. Increases in credit limit. If a card issuer increases the
credit limit during the first year after the account is opened,
Sec. 1026.52(a)(1) does not permit the card issuer to require the
consumer to pay additional fees that would otherwise be prohibited
(such as a fee for increasing the credit limit). For example, assume
that, at account opening on January 1, the credit limit for a credit
card account is $400 and the consumer is required to pay $100 in
fees for the issuance or availability of credit. On July 1, the card
issuer increases the credit limit for the account to $600. Section
1026.52(a)(1) does not permit the card issuer to require the
consumer to pay additional fees based on the increased credit limit.
ii. Decreases in credit limit. If a card issuer decreases the
credit limit during the first year after the account is opened,
Sec. 1026.52(a)(1) requires the card issuer to waive or remove any
fees charged to the account that exceed 25 percent of the reduced
credit limit or to credit the account for an amount equal to any
fees the consumer was required to pay with respect to the account
that exceed 25 percent of the reduced credit limit within a
reasonable amount of time but no later than the end of the billing
cycle following the billing cycle during which the credit limit was
reduced. For example, assume that, at account opening on January 1,
the credit limit for a credit card account is $1,000 and the
consumer is required to pay $250 in fees for the issuance or
availability of credit. The billing cycles for the account begin on
the first day of the month and end on the last day of the month. On
July 30, the card issuer decreases the credit limit for the account
to $600. Section 1026.52(a)(1) requires the card issuer to waive or
remove $100 in fees from the account or to credit the account for an
amount equal to $100 within a reasonable amount of time but no later
than August 31.
4. Date on which account may first be used by consumer to engage
in transactions.
i. Methods of compliance. For purposes of Sec. 1026.52(a)(1),
an account is considered open no earlier than the date on which the
account may first be used by the consumer to engage in transactions.
A card issuer may consider an account open for purposes of Sec.
1026.52(a)(1) on any of the following dates:
A. The date the account is first used by the consumer for a
transaction (such as when an account is established in connection
with financing the purchase of goods or services).
B. The date the consumer complies with any reasonable activation
procedures imposed by the card issuer for preventing fraud or
unauthorized use of a new account (such as requiring the consumer to
provide information that verifies his or her identity), provided
that the account may be used for transactions on that date.
C. The date that is seven days after the card issuer mails or
delivers to the consumer account-opening disclosures that comply
with Sec. 1026.6, provided that the consumer may use the account
for transactions after complying with any reasonable activation
procedures imposed by the card issuer for preventing fraud or
unauthorized use of the new account (such as requiring the consumer
to provide information that verifies his or her identity). If a card
issuer has reasonable procedures designed to ensure that account-
opening disclosures that comply with Sec. 1026.6 are mailed or
delivered to consumers no later than a certain number of days after
the card issuer establishes the account, the card issuer may add
that number of days to the seven-day period for purposes of
determining the date on which the account was opened.
ii. Examples. A. Assume that, on July 1 of year one, a credit
card account under an open-end (not home-secured) consumer credit
plan is established in connection with financing the purchase of
goods or services and a $500 transaction is charged to the account
by the consumer. The card issuer may consider the account open on
July 1 of year one for purposes of Sec. 1026.52(a)(1). Accordingly,
Sec. 1026.52(a)(1) ceases to apply to the account on July 1 of year
two.
B. Assume that, on July 1 of year one, a card issuer approves a
consumer's application for a credit card account under an open-end
(not home-secured) consumer credit plan and establishes the account
on its internal systems. On July 5, the card issuer mails or
delivers to the consumer account-opening disclosures that comply
with Sec. 1026.6. If the consumer may use the account for
transactions on the date the consumer complies with any reasonable
procedures imposed by the card issuer for preventing fraud or
unauthorized use, the card issuer may consider the account open on
July 12 of year one for purposes of Sec. 1026.52(a)(1).
Accordingly, Sec. 1026.52(a)(1) ceases to apply to the account on
July 12 of year two.
C. Same facts as in comment 52(a)(1)-4.ii.B except that the card
issuer has adopted reasonable procedures designed to ensure that
account-opening disclosures that comply with Sec. 1026.6 are mailed
or delivered to consumers no later than three days after an account
is established on its systems. If the consumer may use the account
for transactions on the date the consumer complies with any
reasonable procedures imposed by the card issuer for preventing
fraud or unauthorized use, the card issuer may consider the account
open on July 11 of year one for purposes of Sec. 1026.52(a)(1).
Accordingly, Sec. 1026.52(a)(1) ceases to apply to the account on
July 11 of year two. However, if the consumer uses the account for a
transaction or complies with the card issuer's reasonable procedures
for preventing fraud or unauthorized use on July 8 of year one, the
card issuer may, at its option, consider the account open on that
date for purposes of Sec. 1026.52(a)(1), and therefore Sec.
1026.52(a)(1) ceases to apply to the account on July 8 of year two.
* * * * *
52(b) Limitations on Penalty Fees
1. Fees for violating the account terms or other requirements.
For purposes of Sec. 1026.52(b), a fee includes any charge imposed
by a card issuer based on an act or omission that violates the terms
of the account or any other requirements imposed by the card issuer
with respect to the account, other than charges attributable to
periodic interest rates. Accordingly, for purposes of Sec.
1026.52(b), a fee does not include charges attributable to an
increase in an annual percentage rate based on an act or omission
that violates the terms or other requirements of an account.
[[Page 19216]]
i. The following are examples of fees that are subject to the
limitations in Sec. 1026.52(b) or are prohibited by Sec.
1026.52(b):
A. Late payment fees and any other fees imposed by a card issuer
if an account becomes delinquent or if a payment is not received by
a particular date. A late payment fee or late fee is any fee imposed
for a late payment. See Sec. 1026.60(b)(9) and accompanying
commentary.
B. Returned payment fees and any other fees imposed by a card
issuer if a payment received via check, automated clearing house, or
other payment method is returned.
C. Any fee or charge for an over-the-limit transaction as
defined in Sec. 1026.56(a), to the extent the imposition of such a
fee or charge is permitted by Sec. 1026.56.
D. Any fee imposed by a card issuer if payment on a check that
accesses a credit card account is declined.
E. Any fee or charge for a transaction that the card issuer
declines to authorize. See Sec. 1026.52(b)(2)(i)(B).
F. Any fee imposed by a card issuer based on account inactivity
(including the consumer's failure to use the account for a
particular number or dollar amount of transactions or a particular
type of transaction). See Sec. 1026.52(b)(2)(i)(B).
G. Any fee imposed by a card issuer based on the closure or
termination of an account. See Sec. 1026.52(b)(2)(i)(B).
ii. The following are examples of fees to which Sec. 1026.52(b)
does not apply:
A. Balance transfer fees.
B. Cash advance fees.
C. Foreign transaction fees.
D. Annual fees and other fees for the issuance or availability
of credit described in Sec. 1026.60(b)(2), except to the extent
that such fees are based on account inactivity. See Sec.
1026.52(b)(2)(i)(B).
E. Fees for insurance described in Sec. 1026.4(b)(7) or debt
cancellation or debt suspension coverage described in Sec.
1026.4(b)(10) written in connection with a credit transaction,
provided that such fees are not imposed as a result of a violation
of the account terms or other requirements of an account.
F. Fees for making an expedited payment (to the extent permitted
by Sec. 1026.10(e)).
G. Fees for optional services (such as travel insurance).
H. Fees for reissuing a lost or stolen card.
2. Rounding to nearest whole dollar. A card issuer may round any
fee that complies with Sec. 1026.52(b) to the nearest whole dollar.
For example, if Sec. 1026.52(b) permits a card issuer to impose a
late payment fee of $5.50, the card issuer may round that amount up
to the nearest whole dollar and impose a late payment fee of $6.
However, if the late payment fee permitted by Sec. 1026.52(b) were
$5.49, the card issuer would not be permitted to round that amount
up to $6, although the card issuer could round that amount down and
impose a late payment fee of $5.
3. Fees in connection with covered separate credit features
accessible by hybrid prepaid-credit cards. With regard to a covered
separate credit feature and an asset feature on a prepaid account
that are both accessible by a hybrid prepaid-credit card as defined
in Sec. 1026.61 where the credit feature is a credit card account
under an open-end (not home-secured) consumer credit plan, Sec.
1026.52(b) applies to any fee for violating the terms or other
requirements of the credit feature, regardless of whether those fees
are imposed on the credit feature or on the asset feature of the
prepaid account. For example, assume that a late fee will be imposed
by the card issuer if the covered separate credit feature becomes
delinquent or if a payment is not received by a particular date.
This fee is subject to Sec. 1026.52(b) regardless of whether the
fee is imposed on the asset feature of the prepaid account or on the
separate credit feature.
4. Fees imposed on the asset feature of a prepaid account that
are not charges imposed as part of the plan. Section 1026.52(b) does
not apply to any fee or charge imposed on the asset feature of the
prepaid account that is not a charge imposed as part of the plan
under Sec. 1026.6(b)(3). See Sec. 1026.6(b)(3)(iii)(D) and (E) and
related commentary regarding fees imposed on the asset feature
prepaid account that are not charges imposed as part of the plan
under Sec. 1026.6(b)(3) with respect to covered separate credit
features accessible by hybrid prepaid-credit cards and non-covered
separate credit features as those terms are defined in Sec.
1026.61.
5. Examples. 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 applicable to card issuers other than smaller
card issuers as defined in Sec. 1026.52(b)(3).
52(b)(1) General Rule
1. Relationship between Sec. 1026.52(b)(1)(i) and (ii) and
(b)(2).
i. Relationship between Sec. 1026.52(b)(1)(i) and (ii). A card
issuer may impose a fee for violating the terms or other
requirements of an account pursuant to either Sec. 1026.52(b)(1)(i)
or (ii).
A. A card issuer that complies with the safe harbors in Sec.
1026.52(b)(1)(ii) is not required to determine that its fees
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of a type of violation under Sec.
1026.52(b)(1)(i).
B. A card issuer may impose a fee for one type of violation
pursuant to Sec. 1026.52(b)(1)(i) and may impose a fee for a
different type of violation pursuant to Sec. 1026.52(b)(1)(ii). For
example, a card issuer may impose a late payment fee of $9 based on
a cost determination pursuant to Sec. 1026.52(b)(1)(i) but impose
returned payment and over-the-limit fees of $25 or $35 pursuant to
the safe harbors in Sec. 1026.52(b)(1)(ii).
C. A card issuer that previously based the amount of a penalty
fee for a particular type of violation on a cost determination
pursuant to Sec. 1026.52(b)(1)(i) may begin to impose a penalty fee
for that type of violation that is consistent with Sec.
1026.52(b)(1)(ii) at any time (subject to the notice requirements in
Sec. 1026.9), provided that the first fee imposed pursuant to Sec.
1026.52(b)(1)(ii) is consistent with Sec. 1026.52(b)(1)(ii)(A). For
example, assume that consistent with Sec. 1026.56, a consumer has
affirmatively consented to the payment of transactions that exceed
the credit limit. A transaction occurs on January 15 that causes the
account balance to exceed the credit limit and, based on a cost
determination pursuant to Sec. 1026.52(b)(1)(i), the card issuer
imposes a $30 over-the-limit fee. The consumer's next monthly
payment brings the account balance below the credit limit. On July
15, another transaction causes the account balance to exceed the
credit limit. The card issuer may impose another $30 over-the-limit
fee pursuant to Sec. 1026.52(b)(1)(i) or may impose a $25 over-the-
limit fee pursuant to Sec. 1026.52(b)(1)(ii)(A). However, the card
issuer may not impose a $35 over-the-limit fee pursuant to Sec.
1026.52(b)(1)(ii)(B). If the card issuer imposes a $25 fee pursuant
to Sec. 1026.52(b)(1)(ii)(A) for the July 15 over-the-limit
transaction and on September 15 another transaction causes the
account balance to exceed the credit limit, the card issuer may
impose a $35 fee for the September 15 over-the-limit transaction
pursuant to Sec. 1026.52(b)(1)(ii)(B).
ii. Relationship between Sec. 1026.52(b)(1) and (2). Section
1026.52(b)(1) does not permit a card issuer to impose a fee that is
inconsistent with the prohibitions in Sec. 1026.52(b)(2). For example,
if Sec. 1026.52(b)(2)(i) prohibits the card issuer from imposing a
late payment fee that exceeds $7, Sec. 1026.52(b)(1)(ii) does not
permit the card issuer to impose a higher late payment fee.
52(b)(1)(i) Fees Based on Costs
1. Costs incurred as a result of violations. Section
1026.52(b)(1)(i) does not require a card issuer to base a fee on the
costs incurred as a result of a specific violation of the terms or
other requirements of an account. Instead, for purposes of Sec.
1026.52(b)(1)(i), a card issuer must have determined that a fee for
violating the terms or other requirements of an account represents a
reasonable proportion of the costs incurred by the card issuer as a
result of that type of violation. A card issuer may make a single
determination for all of its credit card portfolios or may make
separate determinations for each portfolio. The factors relevant to
this determination include:
i. The number of violations of a particular type experienced by
the card issuer during a prior period of reasonable length (for
example, a period of twelve months).
ii. The costs incurred by the card issuer during that period as
a result of those violations.
iii. At the card issuer's option, the number of fees imposed by
the card issuer as a result of those violations during that period
that the card issuer reasonably estimates it will be unable to
collect. See comment 52(b)(1)(i)-5.
iv. At the card issuer's option, reasonable estimates for an
upcoming period of changes in the number of violations of that type,
the resulting costs, and the number of fees that the card issuer
will be unable to collect. See illustrative examples in comments
52(b)(1)(i)-6 through -9.
2. Amounts excluded from cost analysis. The following amounts
are not costs incurred by a card issuer as a result of violations of
[[Page 19217]]
the terms or other requirements of an account for purposes of Sec.
1026.52(b)(1)(i):
i. Losses and associated costs (including the cost of holding
reserves against potential losses, the cost of funding delinquent
accounts, and any collection costs that are incurred after an
account is charged off in accordance with loan-loss provisions).
ii. Costs associated with evaluating whether consumers who have
not violated the terms or other requirements of an account are
likely to do so in the future (such as the costs associated with
underwriting new accounts). However, once a violation of the terms
or other requirements of an account has occurred, the costs
associated with preventing additional violations for a reasonable
period of time are costs incurred by a card issuer as a result of
violations of the terms or other requirements of an account for
purposes of Sec. 1026.52(b)(1)(i).
3. Third-party charges. As a general matter, amounts charged to
the card issuer by a third party as a result of a violation of the
terms or other requirements of an account are costs incurred by the
card issuer for purposes of Sec. 1026.52(b)(1)(i). For example, if
a card issuer is charged a specific amount by a third party for each
returned payment, that amount is a cost incurred by the card issuer
as a result of returned payments. However, if the amount is charged
to the card issuer by an affiliate or subsidiary of the card issuer,
the card issuer must have determined that the charge represents a
reasonable proportion of the costs incurred by the affiliate or
subsidiary as a result of the type of violation. For example, if an
affiliate of a card issuer provides collection services to the card
issuer on delinquent accounts, the card issuer must have determined
that the amounts charged to the card issuer by the affiliate for
such services represent a reasonable proportion of the costs
incurred by the affiliate as a result of late payments.
4. Amounts charged by other card issuers. The fact that a card
issuer's fees for violating the terms or other requirements of an
account are comparable to fees assessed by other card issuers does
not satisfy the requirements of Sec. 1026.52(b)(1)(i).
5. Uncollected fees. 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. 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 this part or 50 U.S.C. app. 527). However, fees that the
card issuer chooses not to impose or chooses not to collect (such as
fees the card issuer chooses to waive at the request of the consumer
or under a workout or temporary hardship arrangement) are not
relevant for purposes of this determination. See illustrative
examples in comments 52(b)(2)(i)-6 through -9.
6. Late payment fees.
i. Costs incurred as a result of late payments. For purposes of
Sec. 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).
ii. Examples. A. Late payment fee based on past delinquencies
and costs. Assume that, during year one, a card issuer experienced 1
million delinquencies and incurred $26 million in costs as a result
of those delinquencies. For purposes of Sec. 1026.52(b)(1)(i), a
$26 late payment fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of late payments
during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as in comment 52(b)(1)(i)-6.ii.A except that the card
issuer imposed a late payment fee for each of the 1 million
delinquencies experienced during year one but was unable to collect
25% of those fees (in other words, the card issuer was unable to
collect 250,000 fees, leaving a total of 750,000 late payments for
which the card issuer did collect or could have collected a fee).
For purposes of Sec. 1026.52(b)(2)(i), a late payment fee of $35
would represent a reasonable proportion of the total costs incurred
by the card issuer as a result of late payments during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as in comments 52(b)(1)(i)-6.ii.A and B except the card
issuer reasonably estimates that--based on past delinquency rates
and other factors relevant to potential delinquency rates for year
two--it will experience a 2% decrease in delinquencies during year
two (in other words, 20,000 fewer delinquencies for a total of
980,000). The card issuer also reasonably estimates that it will be
unable to collect the same percentage of fees (25%) during year two
as during year one (in other words, the card issuer will be unable
to collect 245,000 fees, leaving a total of 735,000 late payments
for which the card issuer will be able to collect a fee). The card
issuer also reasonably estimates that--based on past changes in
costs incurred as a result of delinquencies and other factors
relevant to potential costs for year two--it will experience a 5%
increase in costs during year two (in other words, $1.3 million in
additional costs for a total of $27.3 million). For purposes of
Sec. 1026.52(b)(1)(i), a $37 late payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of late payments during year two.
7. Returned payment fees.
i. Costs incurred as a result of returned payments. For purposes
of Sec. 1026.52(b)(1)(i), the costs incurred by a card issuer as a
result of returned payments include:
A. Costs associated with processing returned payments and
reconciling the card issuer's systems and accounts to reflect
returned payments;
B. Costs associated with investigating potential fraud with
respect to returned payments; and
C. Costs associated with notifying the consumer of the returned
payment and arranging for a new payment.
ii. Examples. A. Returned payment fee based on past returns and
costs. Assume that, during year one, a card issuer experienced
150,000 returned payments and incurred $3.1 million in costs as a
result of those returned payments. For purposes of Sec.
1026.52(b)(1)(i), a $21 returned payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of returned payments during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as in comment 52(b)(1)(i)-7.ii.A except that the card
issuer imposed a returned payment fee for each of the 150,000
returned payments experienced during year one but was unable to
collect 15% of those fees (in other words, the card issuer was
unable to collect 22,500 fees, leaving a total of 127,500 returned
payments for which the card issuer did collect or could have
collected a fee). For purposes of Sec. 1026.52(b)(2)(i), a returned
payment fee of $24 would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of returned
payments during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as in comments 52(b)(1)(i)-7.ii.A and B except the card
issuer reasonably estimates that--based on past returned payment
rates and other factors relevant to potential returned payment rates
for year two--it will experience a 2% increase in returned payments
during year two (in other words, 3,000 additional returned payments
for a total of 153,000). The card issuer also reasonably estimates
that it will be unable to collect 25% of returned payment fees
during year two (in other words, the card issuer will be unable to
collect 38,250 fees, leaving a total of 114,750 returned payments
for which the card issuer will be able to collect a fee). The card
issuer also reasonably estimates that--based on past changes in
costs incurred as a result of returned payments and other factors
relevant to potential costs for year two--it will experience a 1%
decrease in costs during year two (in other words, a $31,000
reduction in costs for a total of $3.069 million). For purposes of
Sec. 1026.52(b)(1)(i), a $27 returned payment fee would represent a
reasonable proportion of the total costs incurred by the card issuer
as a result of returned payments during year two.
8. Over-the-limit fees.
i. Costs incurred as a result of over-the-limit transactions.
For purposes of Sec. 1026.52(b)(1)(i), the costs incurred by a card
issuer as a result of over-the-limit transactions include:
A. Costs associated with determining whether to authorize over-
the-limit transactions; and
B. Costs associated with notifying the consumer that the credit
limit has been exceeded and arranging for payments to reduce the
balance below the credit limit.
ii. Costs not incurred as a result of over-the-limit
transactions. For purposes of Sec. 1026.52(b)(1)(i), costs
associated with obtaining the affirmative consent of consumers to
the card issuer's payment of transactions that exceed the credit
limit consistent with Sec. 1026.56 are not costs incurred by a card
issuer as a result of over-the-limit transactions.
[[Page 19218]]
iii. Examples. A. Over-the-limit fee based on past fees and
costs. Assume that, during year one, a card issuer authorized
600,000 over-the-limit transactions and incurred $4.5 million in
costs as a result of those over-the-limit transactions. However,
because of the affirmative consent requirements in Sec. 1026.56,
the card issuer was only permitted to impose 200,000 over-the-limit
fees during year one. For purposes of Sec. 1026.52(b)(1)(i), a $23
over-the-limit fee would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of over-the-
limit transactions during year two.
B. Adjustment based on fees card issuer is unable to collect.
Same facts as in comment 52(b)(1)(i)-8.iii.A except that the card
issuer was unable to collect 30% of the 200,000 over-the-limit fees
imposed during year one (in other words, the card issuer was unable
to collect 60,000 fees, leaving a total of 140,000 over-the-limit
transactions for which the card issuer did collect or could have
collected a fee). For purposes of Sec. 1026.52(b)(2)(i), an over-
the-limit fee of $32 would represent a reasonable proportion of the
total costs incurred by the card issuer as a result of over-the-
limit transactions during year two.
C. Adjustment based on reasonable estimate of future changes.
Same facts as in comments 52(b)(1)(i)-8.iii.A and B except the card
issuer reasonably estimates that--based on past over-the-limit
transaction rates, the percentages of over-the-limit transactions
that resulted in an over-the-limit fee in the past (consistent with
Sec. 1026.56), and factors relevant to potential changes in those
rates and percentages for year two--it will authorize approximately
the same number of over-the-limit transactions during year two
(600,000) and impose approximately the same number of over-the-limit
fees (200,000). The card issuer also reasonably estimates that it
will be unable to collect the same percentage of fees (30%) during
year two as during year one (in other words, the card issuer was
unable to collect 60,000 fees, leaving a total of 140,000 over-the-
limit transactions for which the card issuer will be able to collect
a fee). The card issuer also reasonably estimates that--based on
past changes in costs incurred as a result of over-the-limit
transactions and other factors relevant to potential costs for year
two--it will experience a 6% decrease in costs during year two (in
other words, a $270,000 reduction in costs for a total of $4.23
million). For purposes of Sec. 1026.52(b)(1)(i), a $30 over-the-
limit fee would represent a reasonable proportion of the total costs
incurred by the card issuer as a result of over-the-limit
transactions during year two.
9. Declined access check fees.
i. Costs incurred as a result of declined access checks. For
purposes of Sec. 1026.52(b)(1)(i), the costs incurred by a card
issuer as a result of declining payment on a check that accesses a
credit card account include:
A. Costs associated with determining whether to decline payment
on access checks;
B. Costs associated with processing declined access checks and
reconciling the card issuer's systems and accounts to reflect
declined access checks;
C. Costs associated with investigating potential fraud with
respect to declined access checks; and
D. Costs associated with notifying the consumer and the merchant
or other party that accepted the access check that payment on the
check has been declined.
ii. Example. Assume that, during year one, a card issuer
declined 100,000 access checks and incurred $2 million in costs as a
result of those declined checks. The card issuer imposed a fee for
each declined access check but was unable to collect 10% of those
fees (in other words, the card issuer was unable to collect 10,000
fees, leaving a total of 90,000 declined access checks for which the
card issuer did collect or could have collected a fee). For purposes
of Sec. 1026.52(b)(1)(i), a $22 declined access check fee would
represent a reasonable proportion of the total costs incurred by the
card issuer as a result of declined access checks during year two.
52(b)(1)(ii) Safe Harbors
1. Multiple violations of same type.
i. Same billing cycle or next six billing cycles. A card issuer
other than a smaller card issuer as defined in Sec. 1026.52(b)(3)
cannot impose a late fee in excess of $8 pursuant to Sec.
1026.52(b)(1)(ii), regardless of whether the card issuer has imposed
a late fee within the six previous billing cycles. For all other
penalty fees, a card issuer cannot impose a fee for a violation
pursuant to Sec. 1026.52(b)(1)(ii)(B) unless a fee has previously
been imposed for the same type of violation pursuant to Sec.
1026.52(b)(1)(ii)(A). Once a fee has been imposed for a violation
pursuant to Sec. 1026.52(b)(1)(ii)(A), the card issuer may impose a
fee pursuant to Sec. 1026.52(b)(1)(ii)(B) for any subsequent
violation of the same type until that type of violation has not
occurred for a period of six consecutive complete billing cycles. A
fee has been imposed for purposes of Sec. 1026.52(b)(1)(ii) even if
the card issuer waives or rebates all or part of the fee.
A. Late payments. For purposes of Sec. 1026.52(b)(1)(ii), a
late payment occurs during the billing cycle in which the payment
may first be treated as late consistent with the requirements of
this part and the terms or other requirements of the account.
B. Returned payments. For purposes of Sec. 1026.52(b)(1)(ii), a
returned payment occurs during the billing cycle in which the
payment is returned to the card issuer.
C. Transactions that exceed the credit limit. For purposes of
Sec. 1026.52(b)(1)(ii), a transaction that exceeds the credit limit
for an account occurs during the billing cycle in which the
transaction occurs or is authorized by the card issuer.
D. Declined access checks. For purposes of Sec.
1026.52(b)(1)(ii), a check that accesses a credit card account is
declined during the billing cycle in which the card issuer declines
payment on the check.
ii. Relationship to Sec. Sec. 1026.52(b)(2)(ii) and
1026.56(j)(1). If multiple violations are based on the same event or
transaction such that Sec. 1026.52(b)(2)(ii) prohibits the card
issuer from imposing more than one fee, the event or transaction
constitutes a single violation for purposes of Sec.
1026.52(b)(1)(ii). Furthermore, consistent with Sec.
1026.56(j)(1)(i), no more than one violation for exceeding an
account's credit limit can occur during a single billing cycle for
purposes of Sec. 1026.52(b)(1)(ii). However, Sec.
1026.52(b)(2)(ii) does not prohibit a card issuer from imposing fees
for exceeding the credit limit in consecutive billing cycles based
on the same over-the-limit transaction to the extent permitted by
Sec. 1026.56(j)(1). In these circumstances, the second and third
over-the-limit fees permitted by Sec. 1026.56(j)(1) may be imposed
pursuant to Sec. 1026.52(b)(1)(ii)(B). See comment 52(b)(2)(ii)-1.
iii. Examples. The following examples illustrate the application
of Sec. 1026.52(b)(1)(ii) introductory text and (b)(1)(ii)(A) and
(B) with respect to credit card accounts under an open-end (not
home-secured) consumer credit plan that are not charge card
accounts. For purposes of these examples, assume that the card
issuer is not a smaller card issuer as defined in Sec.
1026.52(b)(3). Also assume that the billing cycles for the account
begin on the first day of the month and end on the last day of the
month and that the payment due date for the account is the twenty-
fifth day of the month.
A. Violations of same type (over the credit limit). Consistent
with Sec. 1026.56, the consumer has affirmatively consented to the
payment of transactions that exceed the credit limit. On March 20, a
transaction causes the account balance to increase to $1,150, which
exceeds the account's $1,000 credit limit. Consistent with Sec.
1026.52(b)(1)(ii)(A), the card issuer imposes a $25 over-the-limit
fee for the March billing cycle. The card issuer receives a $300
payment on March 25, bringing the account below the credit limit. In
order for the card issuer to impose a $35 over-the-limit fee
pursuant to Sec. 1026.52(b)(1)(ii)(B), a second over-the-limit
transaction must occur during the April, May, June, July, August, or
September billing cycles.
1. Same facts as in the lead-in paragraph to comment
52(b)(1)(ii)-1.iii.A. On April 20, a transaction causes the account
balance to increase to $1,200, which exceeds the account's $1,000
credit limit. Consistent with Sec. 1026.52(b)(1)(ii)(B), the card
issuer may impose a $35 over-the-limit fee for the April billing
cycle. Furthermore, the card issuer may impose a $35 over-the-limit
payment fee for any over-the-limit transaction or event that
triggers an over-the-limit fee that occurs during the May, June,
July, August, September, or October billing cycles, subject to the
limitations in Sec. 1026.56(j)(1).
2. Same facts as in the lead-in paragraph to comment
52(b)(1)(ii)-1.iii.A. The account remains below the limit from March
25 until October 20, when a transaction causes the account balance
to exceed the credit limit. However, because this over-the-limit
transaction did not occur during the six billing cycles following
the March billing cycle, Sec. 1026.52(b)(1)(ii) only permits the
card issuer to impose an over-the-limit fee of $25.
B. Violations of different types (late payment and over the
credit limit). The credit limit for an account is $1,000. Consistent
with Sec. 1026.56, the consumer has
[[Page 19219]]
affirmatively consented to the payment of transactions that exceed
the credit limit. A required minimum periodic payment of $35 is due
on August 25. On August 26, a late payment has occurred because no
payment has been received. Accordingly, consistent with Sec.
1026.52(b)(1)(ii), the card issuer imposes a $8 late payment fee on
August 26. On August 30, the card issuer receives a $35 payment. On
September 10, a transaction causes the account balance to increase
to $1,150, which exceeds the account's $1,000 credit limit. On
September 11, a second transaction increases the account balance to
$1,350. On September 23, the card issuer receives the $50 required
minimum periodic payment due on September 25, which reduces the
account balance to $1,300. On September 30, the card issuer imposes
a $25 over-the-limit fee, consistent with Sec.
1026.52(b)(1)(ii)(A). On October 26, a late payment has occurred
because the $60 required minimum periodic payment due on October 25
has not been received. Accordingly, consistent with Sec.
1026.52(b)(1)(ii) the card issuer imposes a $8 late payment fee on
October 26.
C. Violations of different types (late payment and returned
payment). A required minimum periodic payment of $40 is due on July
25. On July 26, a late payment has occurred because no payment has
been received. Accordingly, consistent with Sec. 1026.52(b)(1)(ii),
the card issuer imposes a $8 late payment fee on July 26. On July
30, the card issuer receives a $60 payment. A required minimum
periodic payment of $40 is due on August 25. On August 24, a $40
payment is received. On August 27, the $40 payment is returned to
the card issuer for insufficient funds. In these circumstances,
Sec. 1026.52(b)(2)(ii) permits the card issuer to impose either a
late payment fee or a returned payment fee but not both, because the
late payment and the returned payment result from the same event or
transaction. Accordingly, for purposes of Sec. 1026.52(b)(1)(ii),
the event or transaction constitutes a single violation. However, if
the card issuer imposes a late payment fee, Sec. 1026.52(b)(1)(ii)
permits the issuer to impose a fee of $8. If the card issuer imposes
a returned payment fee, the amount of the fee may be no more than
$25 pursuant to Sec. 1026.52(b)(1)(ii)(A).
2. Adjustments based on Consumer Price Index for penalty fees
imposed pursuant to Sec. 1026.52(b)(1)(ii)(A) and (B). For purposes
of Sec. 1026.52(b)(1)(ii)(A) and (B), the Bureau shall calculate
each year price level adjusted amounts using the Consumer Price
Index in effect on June 1 of that year. When the cumulative change
in the adjusted minimum value derived from applying the annual
Consumer Price level to the current amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) has risen by a whole dollar, those
amounts will be increased by $1.00. Similarly, when the cumulative
change in the adjusted minimum value derived from applying the
annual Consumer Price level to the current amounts in Sec.
1026.52(b)(1)(ii)(A) and (B) has decreased by a whole dollar, those
amounts will be decreased by $1.00. The Bureau will publish
adjustments to the amounts in Sec. 1026.52(b)(1)(ii)(A) and (B).
i. Historical thresholds.
A. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $25 under Sec.
1026.52(b)(1)(ii)(A) and $35 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2013.
B. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $26 under Sec.
1026.52(b)(1)(ii)(A) and $37 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2014.
C. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A) and $38 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2015.
D. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A), through December 31, 2016. Card issuers were
permitted to impose a fee for violating the terms of an agreement if
the fee did not exceed $37 under Sec. 1026.52(b)(1)(ii)(B), through
June 26, 2016, and $38 under Sec. 1026.52(b)(1)(ii)(B) from June
27, 2016, through December 31, 2016.
E. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A) and $38 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2017.
F. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $27 under Sec.
1026.52(b)(1)(ii)(A) and $38 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2018.
G. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $28 under Sec.
1026.52(b)(1)(ii)(A) and $39 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2019.
H. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $29 under Sec.
1026.52(b)(1)(ii)(A) and $40 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2020.
I. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $29 under Sec.
1026.52(b)(1)(ii)(A) and $40 under Sec. 1026.52(b)(1)(ii)(B),
through December 31, 2021.
J. Card issuers were permitted to impose a fee for violating the
terms of an agreement if the fee did not exceed $30 under Sec.
1026.52(b)(1)(ii)(A) and $41 under Sec. 1026.52(b)(1)(ii)(B),
through May 13, 2024.
3. Delinquent balance for charge card accounts. Section
1026.52(b)(1)(ii)(C) provides that, when a charge card issuer that
requires payment of outstanding balances in full at the end of each
billing cycle has not received the required payment for two or more
consecutive billing cycles, the card issuer may impose a late
payment fee that does not exceed three percent of the delinquent
balance. For purposes of Sec. 1026.52(b)(1)(ii)(C), the delinquent
balance is any previously billed amount that remains unpaid at the
time the late payment fee is imposed pursuant to Sec.
1026.52(b)(1)(ii)(C). Consistent with Sec. 1026.52(b)(2)(ii), a
charge card issuer that imposes a fee pursuant to Sec.
1026.52(b)(1)(ii)(C) with respect to a late payment may not impose a
fee pursuant to Sec. 1026.52(b)(1)(ii)(B) with respect to the same
late payment. The following examples illustrate the application of
Sec. 1026.52(b)(1)(ii)(C):
i. Assume that a charge card issuer requires payment of
outstanding balances in full at the end of each billing cycle and
that the billing cycles for the account begin on the first day of
the month and end on the last day of the month. Also assume that the
card issuer is not a smaller card issuer as defined in Sec.
1026.52(b)(3). At the end of the June billing cycle, the account has
a balance of $1,000. On July 5, the card issuer provides a periodic
statement disclosing the $1,000 balance consistent with Sec.
1026.7. During the July billing cycle, the account is used for $292
in transactions, increasing the balance to $1,292. At the end of the
July billing cycle, no payment has been received and the card issuer
imposes a $8 late payment fee consistent with Sec.
1026.52(b)(1)(ii). On August 5, the card issuer provides a periodic
statement disclosing the $1,300 balance consistent with Sec.
1026.7. During the August billing cycle, the account is used for
$200 in transactions, increasing the balance to $1,500. At the end
of the August billing cycle, no payment has been received.
Consistent with Sec. 1026.52(b)(1)(ii)(C), the card issuer may
impose a late payment fee of $39, which is 3% of the $1,300 balance
that was due at the end of the August billing cycle. Section
1026.52(b)(1)(ii)(C) does not permit the card issuer to include the
$200 in transactions that occurred during the August billing cycle.
ii. Same facts as in comment 52(b)(1)(ii)-3.i except that, on
August 25, a $100 payment is received. Consistent with Sec.
1026.52(b)(1)(ii)(C), the card issuer may impose a late payment fee
of $36, which is 3% of the unpaid portion of the $1,300 balance that
was due at the end of the August billing cycle ($1,200).
iii. Same facts as in comment 52(b)(1)(ii)-3.i except that, on
August 25, a $200 payment is received. Consistent with Sec.
1026.52(b)(1)(ii)(C), the card issuer may impose a late payment fee
of $33, which is 3% of the unpaid portion of the $1,300 balance that
was due at the end of the August billing cycle ($1,100). In the
alternative, the card issuer may impose a late payment fee of $8
consistent with Sec. 1026.52(b)(1)(ii). However, Sec.
1026.52(b)(2)(ii) prohibits the card issuer from imposing both fees.
4. Smaller card issuers. Section 1026.52(b)(1)(ii)(E) provides
that a card issuer meeting the definition of smaller card issuer in
Sec. 1026.52(b)(3) may impose a fee for a late payment on an
account if the dollar amount of the fee does not exceed the amount
in Sec. 1026.52(b)(1)(ii)(A) or (B), as applicable, notwithstanding
the $8 limit on the amount of a late fee in Sec. 1026.52(b)(1)(ii).
Thus, assuming that the original historical safe harbor threshold
amounts apply, a smaller card issuer may impose a late fee of $25
for a first late payment violation and a
[[Page 19220]]
late fee of $35 for a late payment violation that occurs during the
same billing cycle or one of the next six billing cycles, provided
that those amounts are consistent with Sec. 1026.52(b)(2).
52(b)(2) Prohibited Fees
1. Relationship to Sec. 1026.52(b)(1). A card issuer does not
comply with Sec. 1026.52(b) if it imposes a fee that is
inconsistent with the prohibitions in Sec. 1026.52(b)(2). Thus, the
prohibitions in Sec. 1026.52(b)(2) apply even if a fee is
consistent with Sec. 1026.52(b)(1)(i) or (ii). For example, even if
a card issuer has determined for purposes of Sec. 1026.52(b)(1)(i)
that a $27 fee represents a reasonable proportion of the total costs
incurred by the card issuer as a result of a particular type of
violation, Sec. 1026.52(b)(2)(i) prohibits the card issuer from
imposing that fee if the dollar amount associated with the violation
is less than $27. Similarly, even if Sec. 1026.52(b)(1)(ii) permits
a card issuer to impose a $25 fee, Sec. 1026.52(b)(2)(i) prohibits
the card issuer from imposing that fee if the dollar amount
associated with the violation is less than $25.
52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation
1. Late payment fees. For purposes of Sec. 1026.52(b)(2)(i),
the dollar amount associated with a late payment is the amount of
the required minimum periodic payment due immediately prior to
assessment of the late payment fee. Thus, Sec. 1026.52(b)(2)(i)(A)
prohibits a card issuer from imposing a late payment fee that
exceeds the amount of that required minimum periodic payment. For
example:
i. Assume that a $15 required minimum periodic payment is due on
September 25. The card issuer does not receive any payment on or
before September 25. On September 26, the card issuer imposes a late
payment fee. For purposes of Sec. 1026.52(b)(2)(i), the dollar
amount associated with the late payment is the amount of the
required minimum periodic payment due on September 25 ($15). Thus,
under Sec. 1026.52(b)(2)(i)(A), the amount of that fee cannot
exceed $15 (even if a higher fee would be permitted under Sec.
1026.52(b)(1)).
ii. Same facts as in comment 52(b)(2)(i)-1.i except that, on
September 25, the card issuer receives a $10 payment. No further
payments are received. On September 26, the card issuer imposes a
late payment fee. For purposes of Sec. 1026.52(b)(2)(i), the dollar
amount associated with the late payment is the full amount of the
required minimum periodic payment due on September 25 ($15), rather
than the unpaid portion of that payment ($5). Thus, under Sec.
1026.52(b)(2)(i)(A), the amount of the late payment fee cannot
exceed $15 (even if a higher fee would be permitted under Sec.
1026.52(b)(1)).
iii. Assume that a $15 required minimum periodic payment is due
on October 28 and the billing cycle for the account closes on
October 31. The card issuer does not receive any payment on or
before November 3. On November 3, the card issuer determines that
the required minimum periodic payment due on November 28 is $50. On
November 5, the card issuer imposes a late payment fee. For purposes
of Sec. 1026.52(b)(2)(i), the dollar amount associated with the
late payment is the amount of the required minimum periodic payment
due on October 28 ($15), rather than the amount of the required
minimum periodic payment due on November 28 ($50). Thus, under Sec.
1026.52(b)(2)(i)(A), the amount of that fee cannot exceed $15 (even
if a higher fee would be permitted under Sec. 1026.52(b)(1)).
2. Returned payment fees. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with a returned
payment is the amount of the required minimum periodic payment due
immediately prior to the date on which the payment is returned to
the card issuer. Thus, Sec. 1026.52(b)(2)(i)(A) prohibits a card
issuer from imposing a returned payment fee that exceeds the amount
of that required minimum periodic payment. However, if a payment has
been returned and is submitted again for payment by the card issuer,
there is no additional dollar amount associated with a subsequent
return of that payment and Sec. 1026.52(b)(2)(i)(B) prohibits the
card issuer from imposing an additional returned payment fee. For
example:
i. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $15 is due on March 25. The card issuer receives a check
for $100 on March 23, which is returned to the card issuer for
insufficient funds on March 26. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with the returned
payment is the amount of the required minimum periodic payment due
on March 25 ($15). Thus, Sec. 1026.52(b)(2)(i)(A) prohibits the
card issuer from imposing a returned payment fee that exceeds $15
(even if a higher fee would be permitted under Sec. 1026.52(b)(1)).
Furthermore, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
assessing both a late payment fee and a returned payment fee in
these circumstances. See comment 52(b)(2)(ii)-1.
ii. Same facts as in comment 52(b)(2)(i)-2.i except that the
card issuer receives the $100 check on March 31 and the check is
returned for insufficient funds on April 2. The minimum payment due
on April 25 is $30. For purposes of Sec. 1026.52(b)(2)(i), the
dollar amount associated with the returned payment is the amount of
the required minimum periodic payment due on March 25 ($15), rather
than the amount of the required minimum periodic payment due on
April 25 ($30). Thus, Sec. 1026.52(b)(2)(i)(A) prohibits the card
issuer from imposing a returned payment fee that exceeds $15 (even
if a higher fee would be permitted under Sec. 1026.52(b)(1)).
Furthermore, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
assessing both a late payment fee and a returned payment fee in
these circumstances. See comment 52(b)(2)(ii)-1.
iii. Same facts as in comment 52(b)(2)(i)-2.i except that, on
March 28, the card issuer presents the $100 check for payment a
second time. On April 1, the check is again returned for
insufficient funds. Section 1026.52(b)(2)(i)(B) prohibits the card
issuer from imposing a returned payment fee based on the return of
the payment on April 1.
iv. Assume that the billing cycles for an account begin on the
first day of the month and end on the last day of the month and that
the payment due date is the twenty-fifth day of the month. A minimum
payment of $15 is due on August 25. The card issuer receives a check
for $15 on August 23, which is not returned. The card issuer
receives a check for $50 on September 5, which is returned to the
card issuer for insufficient funds on September 7. Section
1026.52(b)(2)(i)(B) does not prohibit the card issuer from imposing
a returned payment fee in these circumstances. Instead, for purposes
of Sec. 1026.52(b)(2)(i), the dollar amount associated with the
returned payment is the amount of the required minimum periodic
payment due on August 25 ($15). Thus, Sec. 1026.52(b)(2)(i)(A)
prohibits the card issuer from imposing a returned payment fee that
exceeds $15 (even if a higher fee would be permitted under Sec.
1026.52(b)(1)).
3. Over-the-limit fees. For purposes of Sec. 1026.52(b)(2)(i),
the dollar amount associated with extensions of credit in excess of
the credit limit for an account is the total amount of credit
extended by the card issuer in excess of the credit limit during the
billing cycle in which the over-the-limit fee is imposed. Thus,
Sec. 1026.52(b)(2)(i)(A) prohibits a card issuer from imposing an
over-the-limit fee that exceeds that amount. Nothing in Sec.
1026.52(b) permits a card issuer to impose an over-the-limit fee if
imposition of the fee is inconsistent with Sec. 1026.56. The
following examples illustrate the application of Sec.
1026.52(b)(2)(i)(A) to over-the-limit fees:
i. Assume that the billing cycles for a credit card account with
a credit limit of $5,000 begin on the first day of the month and end
on the last day of the month. Assume also that, consistent with
Sec. 1026.56, the consumer has affirmatively consented to the
payment of transactions that exceed the credit limit. On March 1,
the account has a $4,950 balance. On March 6, a $60 transaction is
charged to the account, increasing the balance to $5,010. On March
25, a $5 transaction is charged to the account, increasing the
balance to $5,015. On the last day of the billing cycle (March 31),
the card issuer imposes an over-the-limit fee. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount associated with the extensions
of credit in excess of the credit limit is the total amount of
credit extended by the card issuer in excess of the credit limit
during the March billing cycle ($15). Thus, Sec.
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing an over-
the-limit fee that exceeds $15 (even if a higher fee would be
permitted under Sec. 1026.52(b)(1)).
ii. Same facts as in comment 52(b)(2)(i)-3.i except that, on
March 26, the card issuer receives a payment of $20, reducing the
balance below the credit limit to $4,995. Nevertheless, for purposes
of Sec. 1026.52(b)(2)(i), the dollar amount associated with the
extensions of credit in excess of the credit limit is the total
amount of credit extended by the card issuer in excess of the credit
limit during the March billing cycle ($15). Thus, consistent with
Sec. 1026.52(b)(2)(i)(A), the card issuer may impose an over-the-
limit fee of $15.
4. Declined access check fees. For purposes of Sec.
1026.52(b)(2)(i), the dollar amount
[[Page 19221]]
associated with declining payment on a check that accesses a credit
card account is the amount of the check. Thus, when a check that
accesses a credit card account is declined, Sec.
1026.52(b)(2)(i)(A) prohibits a card issuer from imposing a fee that
exceeds the amount of that check. For example, assume that a check
that accesses a credit card account is used as payment for a $50
transaction, but payment on the check is declined by the card issuer
because the transaction would have exceeded the credit limit for the
account. For purposes of Sec. 1026.52(b)(2)(i), the dollar amount
associated with the declined check is the amount of the check ($50).
Thus, Sec. 1026.52(b)(2)(i)(A) prohibits the card issuer from
imposing a fee that exceeds $50. However, the amount of this fee
must also comply with Sec. 1026.52(b)(1)(i) or (ii).
5. Inactivity fees. Section 1026.52(b)(2)(i)(B)(2) prohibits a
card issuer from imposing a fee with respect to a credit card
account under an open-end (not home-secured) consumer credit plan
based on inactivity on that account (including the consumer's
failure to use the account for a particular number or dollar amount
of transactions or a particular type of transaction). For example,
Sec. 1026.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a
$50 fee when a credit card account under an open-end (not home-
secured) consumer credit plan is not used for at least $2,000 in
purchases over the course of a year. Similarly, Sec.
1026.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50
annual fee on all accounts of a particular type but waiving the fee
on any account that is used for at least $2,000 in purchases over
the course of a year if the card issuer promotes the waiver or
rebate of the annual fee for purposes of Sec. 1026.55(e). However,
if the card issuer does not promote the waiver or rebate of the
annual fee for purposes of Sec. 1026.55(e), Sec.
1026.52(b)(2)(i)(B)(2) does not prohibit a card issuer from
considering account activity along with other factors when deciding
whether to waive or rebate annual fees on individual accounts (such
as in response to a consumer's request).
6. Closed account fees. Section 1026.52(b)(2)(i)(B)(3) prohibits
a card issuer from imposing a fee based on the closure or
termination of an account. For example, Sec. 1026.52(b)(2)(i)(B)(3)
prohibits a card issuer from:
i. Imposing a one-time fee to consumers who close their
accounts.
ii. Imposing a periodic fee (such as an annual fee, a monthly
maintenance fee, or a closed account fee) after an account is closed
or terminated if that fee was not imposed prior to closure or
termination. This prohibition applies even if the fee was disclosed
prior to closure or termination. See also comment 55(d)-1.
iii. Increasing a periodic fee (such as an annual fee or a
monthly maintenance fee) after an account is closed or terminated.
However, a card issuer is not prohibited from continuing to impose a
periodic fee that was imposed before the account was closed or
terminated.
7. Declined transaction fees. Section 1026.52(b)(2)(i)(B)(1)
states that card issuers must not impose a fee when there is no
dollar amount associated with the violation, such as for
transactions that the card issuer declines to authorize. With regard
to a covered separate credit feature and an asset feature on a
prepaid account that are both accessible by a hybrid prepaid-credit
card as defined in Sec. 1026.61 where the credit feature is a
credit card account under an open-end (not home-secured) consumer
credit plan, Sec. 1026.52(b)(2)(i)(B)(1) prohibits a card issuer
from imposing declined transaction fees in connection with the
credit feature, regardless of whether the declined transaction fee
is imposed on the credit feature or on the asset feature of the
prepaid account. For example, if the prepaid card attempts to access
credit from the covered separate credit feature accessible by the
hybrid prepaid-credit card and the transaction is declined, Sec.
1026.52(b)(2)(i)(B)(1) prohibits the card issuer from imposing a
declined transaction fee, regardless of whether the fee is imposed
on the credit feature or on the asset feature of the prepaid
account. Fees imposed for declining a transaction that would have
only accessed the asset feature of the prepaid account and would not
have accessed the covered separate credit feature accessible by the
hybrid prepaid-credit are not covered by Sec.
1026.52(b)(2)(i)(B)(1).
52(b)(2)(ii) Multiple Fees Based on a Single Event or Transaction
1. Single event or transaction. Section 1026.52(b)(2)(ii)
prohibits a card issuer from imposing more than one fee for
violating the terms or other requirements of an account based on a
single event or transaction. If Sec. 1026.56(j)(1) permits a card
issuer to impose fees for exceeding the credit limit in consecutive
billing cycles based on the same over-the-limit transaction, those
fees are not based on a single event or transaction for purposes of
Sec. 1026.52(b)(2)(ii). The following examples illustrate the
application of Sec. 1026.52(b)(2)(ii). Assume for purposes of these
examples that the billing cycles for a credit card account begin on
the first day of the month and end on the last day of the month and
that the payment due date for the account is the twenty-fifth day of
the month.
i. Assume that the required minimum periodic payment due on
March 25 is $20 and the card issuer is not a smaller card issuer
pursuant to Sec. 1026.52(b)(3). On March 26, the card issuer has
not received any payment and imposes a late payment fee. Consistent
with Sec. 1026.52(b)(1)(ii) and (b)(2)(i), the card issuer may
impose an $8 late payment fee on March 26. However, Sec.
1026.52(b)(2)(ii) prohibits the card issuer from imposing an
additional late payment fee if the $20 minimum payment has not been
received by a subsequent date (such as March 31).
A. On April 3, the card issuer provides a periodic statement
disclosing that a $70 required minimum periodic payment is due on
April 25. This minimum payment includes the $20 minimum payment due
on March 25 and the $8 late payment fee imposed on March 26. On
April 20, the card issuer receives a $20 payment. No additional
payments are received during the April billing cycle. Section
1026.52(b)(2)(ii) does not prohibit the card issuer from imposing a
late payment fee based on the consumer's failure to make the $70
required minimum periodic payment on or before April 25.
Accordingly, consistent with Sec. 1026.52(b)(1)(ii) and (b)(2)(i),
the card issuer may impose an $8 late payment fee on April 26.
B. On April 3, the card issuer provides a periodic statement
disclosing that a $20 required minimum periodic payment is due on
April 25. This minimum payment does not include the $20 minimum
payment due on March 25 or the $8 late payment fee imposed on March
26. On April 20, the card issuer receives a $20 payment. No
additional payments are received during the April billing cycle.
Because the card issuer has received the required minimum periodic
payment due on April 25 and because Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing a second late payment fee
based on the consumer's failure to make the $20 minimum payment due
on March 25, the card issuer cannot impose a late payment fee in
these circumstances.
ii. Assume that the required minimum periodic payment due on
March 25 is $30 and the card issuer is not a smaller card issuer
pursuant to Sec. 1026.52(b)(3).
A. On March 25, the card issuer receives a check for $50, but
the check is returned for insufficient funds on March 27. Consistent
with Sec. 1026.52(b)(1)(ii) introductory text, (b)(1)(ii)(A), and
(b)(2)(i)(A), the card issuer may impose a late payment fee of $8 or
a returned payment fee of $25. However, Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing both fees because those fees
would be based on a single event or transaction.
B. Same facts as in comment 52(b)(2)(ii)-1.ii.A except that that
card issuer receives the $50 check on March 27 and the check is
returned for insufficient funds on March 29. Consistent with Sec.
1026.52(b)(1)(ii) introductory text, (b)(1)(ii)(A), and
(b)(2)(i)(A), the card issuer may impose a late payment fee of $8 or
a returned payment fee of $25. However, Sec. 1026.52(b)(2)(ii)
prohibits the card issuer from imposing both fees because those fees
would be based on a single event or transaction. If no payment is
received on or before the next payment due date (April 25), Sec.
1026.52(b)(2)(ii) does not prohibit the card issuer from imposing a
late payment fee.
iii. Assume that the required minimum periodic payment due on
July 25 is $30 and the card issuer is not a smaller card issuer
pursuant to Sec. 1026.52(b)(3). On July 10, the card issuer
receives a $50 payment, which is not returned. On July 20, the card
issuer receives a $100 payment, which is returned for insufficient
funds on July 24. Consistent with Sec. 1026.52(b)(1)(ii)(A) and
(b)(2)(i)(A), the card issuer may impose a returned payment fee of
$25. Nothing in Sec. 1026.52(b)(2)(ii) prohibits the imposition of
this fee.
iv. Assume that the card issuer is not a smaller card issuer
pursuant to Sec. 1026.52(b)(3) and the credit limit for an account
is $1,000 and that, consistent with Sec. 1026.56, the consumer has
affirmatively consented to the payment of transactions that exceed
the credit limit. On March 31, the
[[Page 19222]]
balance on the account is $970 and the card issuer has not received
the $35 required minimum periodic payment due on March 25. On that
same date (March 31), a $70 transaction is charged to the account,
which increases the balance to $1,040. Consistent with Sec.
1026.52(b)(1)(ii) introductory text, (b)(1)(ii)(A), and
(b)(2)(i)(A), the card issuer may impose a late payment fee of $8
and an over-the-limit fee of $25. Section 1026.52(b)(2)(ii) does not
prohibit the imposition of both fees because those fees are based on
different events or transactions. No additional transactions are
charged to the account during the March, April, or May billing
cycles. If the account balance remains more than $35 above the
credit limit on April 26, the card issuer may impose an over-the-
limit fee of $35 pursuant to Sec. 1026.52(b)(1)(ii)(B), to the
extent consistent with Sec. 1026.56(j)(1). Furthermore, if the
account balance remains more than $35 above the credit limit on May
26, the card issuer may again impose an over-the-limit fee of $35
pursuant to Sec. 1026.52(b)(1)(ii)(B), to the extent consistent
with Sec. 1026.56(j)(1). Thereafter, Sec. 1026.56(j)(1) does not
permit the card issuer to impose additional over-the-limit fees
unless another over-the-limit transaction occurs. However, if an
over-the-limit transaction occurs during the six billing cycles
following the May billing cycle, the card issuer may impose an over-
the-limit fee of $35 pursuant to Sec. 1026.52(b)(1)(ii)(B).
v. Assume that the credit limit for an account is $5,000 and
that, consistent with Sec. 1026.56, the consumer has affirmatively
consented to the payment of transactions that exceed the credit
limit. On July 23, the balance on the account is $4,950. On July 24,
the card issuer receives the $100 required minimum periodic payment
due on July 25, reducing the balance to $4,850. On July 26, a $75
transaction is charged to the account, which increases the balance
to $4,925. On July 27, the $100 payment is returned for insufficient
funds, increasing the balance to $5,025. Consistent with Sec.
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a
returned payment fee of $25 or an over-the-limit fee of $25.
However, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
imposing both fees because those fees would be based on a single
event or transaction.
vi. Assume that the required minimum periodic payment due on
March 25 is $50 and the card issuer is not a smaller card issuer
pursuant to Sec. 1026.52(b)(3). On March 20, the card issuer
receives a check for $50, but the check is returned for insufficient
funds on March 22. Consistent with Sec. 1026.52(b)(1)(ii)(A) and
(b)(2)(i)(A), the card issuer may impose a returned payment fee of
$25. On March 25, the card issuer receives a second check for $50,
but the check is returned for insufficient funds on March 27.
Consistent with Sec. 1026.52(b)(1)(ii) introductory text,
(b)(1)(ii)(A) and (B), and (b)(2)(i)(A), the card issuer may impose
a late payment fee of $8 or a returned payment fee of $35. However,
Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing both
fees because those fees would be based on a single event or
transaction.
vii. Assume that the required minimum periodic payment due on
February 25 is $100 and the card issuer is not a smaller card issuer
pursuant to Sec. 1026.52(b)(3). On February 25, the card issuer
receives a check for $100. On March 3, the card issuer provides a
periodic statement disclosing that a $120 required minimum periodic
payment is due on March 25. On March 4, the $100 check is returned
to the card issuer for insufficient funds. Consistent with Sec.
1026.52(b)(1)(ii) introductory text, (b)(1)(ii)(A), and
(b)(2)(i)(A), the card issuer may impose a late payment fee of $8 or
a returned payment fee of $25 with respect to the $100 payment.
However, Sec. 1026.52(b)(2)(ii) prohibits the card issuer from
imposing both fees because those fees would be based on a single
event or transaction. On March 20, the card issuer receives a $120
check, which is not returned. No additional payments are received
during the March billing cycle. Because the card issuer has received
the required minimum periodic payment due on March 25 and because
Sec. 1026.52(b)(2)(ii) prohibits the card issuer from imposing a
second fee based on the $100 payment that was returned for
insufficient funds, the card issuer cannot impose a late payment fee
in these circumstances.
52(b)(3) Smaller Card Issuer
52(b)(3)(i)
1. Entire calendar year. To meet the definition of smaller card
issuer, a card issuer together with its affiliates must have fewer
than one million open credit accounts for the entire preceding
calendar year. Thus, for example, if a card issuer together with its
affiliates had more than one million open credit card accounts from
January through October of the preceding calendar year but had fewer
than that threshold number in November and December, the card issuer
is not a smaller card issuer in the next calendar year. Further, the
card issuer is not a smaller card issuer until such time that the
card issuer's number of open credit card accounts, together with
those of its affiliates, remains below one million for an entire
preceding calendar year.
52(b)(3)(ii)
1. Meeting or exceeding threshold in current calendar year. 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, then the card issuer will no longer meet the
definition of smaller card issuer and therefore may not impose a
late fee pursuant to Sec. 1026.52(b)(1)(ii)(E) as of 60 days after
meeting or exceeding the threshold number of open credit card
accounts. For purposes of imposing a late fee pursuant to the safe
harbor provisions, the card issuer may impose a late fee of no more
than $8 pursuant to Sec. 1026.52(b)(1)(ii) as of the 60th day.
* * * * *
Section 1026.60--Credit and Charge Card Applications and
Solicitations
* * * * *
60(a)(2) Form of Disclosures; Tabular Format
1. Location of table.
i. General. Except for disclosures given electronically,
disclosures in Sec. 1026.60(b) that are required to be provided in
a table must be prominently located on or with the application or
solicitation. Disclosures are deemed to be prominently located, for
example, if the disclosures are on the same page as an application
or solicitation reply form. If the disclosures appear elsewhere,
they are deemed to be prominently located if the application or
solicitation reply form contains a clear and conspicuous reference
to the location of the disclosures and indicates that they contain
rate, fee, and other cost information, as applicable.
ii. Electronic disclosures. If the table is provided
electronically, the table must be provided in close proximity to the
application or solicitation. Card issuers have flexibility in
satisfying this requirement. Methods card issuers could use to
satisfy the requirement include, but are not limited to, the
following examples (whatever method is used, a card issuer need not
confirm that the consumer has read the disclosures):
A. The disclosures could automatically appear on the screen when
the application or reply form appears;
B. The disclosures could be located on the same web page as the
application or reply form (whether or not they appear on the initial
screen), if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and
indicates that the disclosures contain rate, fee, and other cost
information, as applicable;
C. Card issuers could provide a link to the electronic
disclosures on or with the application (or reply form) as long as
consumers cannot bypass the disclosures before submitting the
application or reply form. The link would take the consumer to the
disclosures, but the consumer need not be required to scroll
completely through the disclosures; or
D. The disclosures could be located on the same web page as the
application or reply form without necessarily appearing on the
initial screen, immediately preceding the button that the consumer
will click to submit the application or reply.
2. Multiple accounts. If a tabular format is required to be
used, card issuers offering several types of accounts may disclose
the various terms for the accounts in a single table or may provide
a separate table for each account.
3. Information permitted in the table. See the commentary to
Sec. 1026.60(b), (d), and (e)(1) for guidance on additional
information permitted in the table.
4. Deletion of inapplicable disclosures. Generally, disclosures
need only be given as applicable. Card issuers may, therefore, omit
inapplicable headings and their corresponding boxes in the table.
For example, if no foreign transaction fee is imposed on the
account, the heading Foreign transaction and disclosure may be
deleted from the table, or the disclosure form may contain the
heading Foreign transaction and a disclosure showing none. There is
an exception for the grace period disclosure; even if no grace
period exists, that fact must be stated.
[[Page 19223]]
5. Highlighting of annual percentage rates and fee amounts.
i. In general. See Samples G-10(B) and G-10(C) of appendix G to
this part for guidance on providing the disclosures described in
Sec. 1026.60(a)(2)(iv) in bold text. Other annual percentage rates
or fee amounts disclosed in the table may not be in bold text.
Samples G-10(B) and G-10(C) also provide guidance to issuers on how
to disclose the rates and fees described in Sec. 1026.60(a)(2)(iv)
in a clear and conspicuous manner, by including these rates and fees
generally as the first text in the applicable rows of the table so
that the highlighted rates and fees generally are aligned vertically
in the table.
ii. Maximum limits on fees. Section 1026.60(a)(2)(iv) provides
that any maximum limits on fee amounts must be disclosed in bold
text. For example, assume that a card issuer is not a smaller card
issuer as defined in Sec. 1026.52(b)(3) and consistent with Sec.
1026.52(b)(1)(ii), the card issuer's late payment fee will not
exceed $8. The maximum limit of $8 for the late payment fee must be
highlighted in bold. Similarly, assume an issuer will charge a cash
advance fee of $5 or 3 percent of the cash advance transaction
amount, whichever is greater, but the fee will not exceed $100. The
maximum limit of $100 for the cash advance fee must be highlighted
in bold.
iii. Periodic fees. Section 1026.60(a)(2)(iv) provides that any
periodic fee disclosed pursuant to Sec. 1026.60(b)(2) that is not
an annualized amount must not be disclosed in bold. For example, if
an issuer imposes a $10 monthly maintenance fee for a card account,
the issuer must disclose in the table that there is a $10 monthly
maintenance fee, and that the fee is $120 on an annual basis. In
this example, the $10 fee disclosure would not be disclosed in bold,
but the $120 annualized amount must be disclosed in bold. In
addition, if an issuer must disclose any annual fee in the table,
the amount of the annual fee must be disclosed in bold.
6. Form of disclosures. Whether disclosures must be in
electronic form depends upon the following:
i. If a consumer accesses a credit card application or
solicitation electronically (other than as described under comment
60(a)(2)-6.ii), such as online at a home computer, the card issuer
must provide the disclosures in electronic form (such as with the
application or solicitation on its website) in order to meet the
requirement to provide disclosures in a timely manner on or with the
application or solicitation. If the issuer instead mailed paper
disclosures to the consumer, this requirement would not be met.
ii. In contrast, if a consumer is physically present in the card
issuer's office, and accesses a credit card application or
solicitation electronically, such as via a terminal or kiosk (or if
the consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the card issuer to
provide applications or solicitations to consumers), the issuer may
provide disclosures in either electronic or paper form, provided the
issuer complies with the timing and delivery (``on or with'')
requirements of the regulation.
7. Terminology. Section 1026.60(a)(2)(i) generally requires that
the headings, content, and format of the tabular disclosures be
substantially similar, but need not be identical, to the applicable
tables in appendix G to this part; but see Sec. 1026.5(a)(2) for
terminology requirements applicable to Sec. 1026.60 disclosures.
* * * * *
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-05011 Filed 3-14-24; 8:45 am]
BILLING CODE 4810-AM-P
