On March 3 2010 the Board of Governors of the Federal Reserve System issued proposed regulations regarding limitations on credit card penalty fees and credit card issuers' duty to review periodically all rate increases (for further details on prior rulemaking under the Credit CARD Act of 2009 please see "Federal Reserve issues regulations to implement Credit CARD Act of 2009"). The proposal would significantly limit penalty fees such as late fees, overlimit fees and returned cheque fees which credit card issuers charge, and requires issuers to review regularly accounts for which rates have been increased and reduce rates when required.
These are the board's final two proposals on the implementation of the Credit Card Accountability Responsibility and Disclosure Act 2009.
The new requirements will become effective on August 22 2010 and the board has limited the invitation for comments to a 30-day period, ending on April 14 2010, in order to give it time to issue a final rule.
Under the proposal, an issuer can assess a penalty fee only if the dollar amount of the fee: (i) represents "a reasonable proportion of the total costs incurred by the card issuer" from the type of violation giving rise to that penalty fee - for example, the issuer can calculate all costs incurred due to late payments and apportion the total over the total number of late payments (importantly, the issuer may not include the cost of bad debt losses in this calculation); or (ii) is reasonably necessary to deter the type of violation, based on an empirically derived and demonstrably and statistically sound model that reasonably estimates the effect of the amount of the fee on the frequency of violations. The model must "reasonably estimate that, independent of other variables, the imposition of a lower fee amount would result in a substantial increase in the frequency of [the] violation".
In either case, the card issuer must re-evaluate its determination annually and promptly adjust its fees as appropriate.
The board has proposed to use its authority to adopt a safe harbour, although it has sought comment on the specific dollar amount for the safe harbour. As proposed, a card issuer would be deemed to comply with the above requirement by charging a penalty of no more than an unspecified dollar amount or 5% of the amount associated with the violation, whichever is the greater. The 5% calculation would be subject to a maximum amount, which is also unspecified in the proposal.
The proposal would also restrict penalty fees in the following three additional ways. Importantly, these limits would prohibit a fee even if the fee was allowed by the standards above or the safe harbour:
The amount of the fee may not exceed the dollar amount associated with the violation for which the fee is imposed. A late payment fee may not exceed the portion of the minimum payment that is late, a returned cheque fee may not exceed the required minimum payment amount and an overlimit fee may not exceed the amount by which the account is over the limit on the date on which the fee is charged.
A card issuer may not impose a penalty fee for violations for which no dollar amount is associated with the violation. In particular, an issuer cannot charge a fee for declining to authorize a transaction, account inactivity or the closure or termination of an account.
A card issuer may not impose multiple penalty fees for the same violation (eg, a returned cheque fee and a late payment fee based on the same occurrence).
If an issuer increases (or has increased, as of January 1 2009 or later) the annual percentage rate (APR) on a credit card account, it must, on an ongoing basis, evaluate whether the factors used to determine the rate increase have changed, and reduce the APR if appropriate. Issuers must adopt reasonable written policies and procedures to comply with this requirement.
The issuer must review the factors at least every six months. It may choose to review either the same factors that it initially used to determine the APR increase or the factors considered by the issuer to determine the APR on its credit card accounts at the time of the review. The issuer must continue to review an account at least every six months until the APR is reduced to (or falls below) the rate which was in effect prior to the increase that triggered the duty to review. The board has sought comment on whether the obligation to review should expire after a fixed period of time (eg, five years).
When issuers acquire portfolios, they will be required to comply with the new requirement on acquired accounts. As issuers may receive imperfect records on accounts which they acquire, the board has proposed an alternative whereby issuers can review all accounts which they acquire promptly after acquisition, and then be subject to the requirement of ongoing review only for those accounts on which they raise the APR based on the post-acquisition review or to which a penalty rate applies. It is unclear under the proposal whether issuers will be required to reduce rates on accounts based on the initial review of an acquired portfolio, although the example in the proposed commentary includes such a reduction.
Both the limits on penalty fees (Section 149) and the account review requirements (Section 148) are codified in Chapter 3 of the Truth in Lending Act. As a result, both provisions are subject to administrative enforcement only. Issuers may wish to consult regulators when implementing the new requirements.
For further information on this topic please contact James A Huizinga, Karl F Kaufmann, Michael F McEneney or John K Van De Weert at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email ([email protected], [email protected], [email protected] or [email protected]).
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