Federal Reserve Releases Proposed Revisions To Regulation Z Relating To Reasonable Fees And Reevaluation Of Rate Increases

The Board of Governors of the Federal Reserve System (the Board) recently released a proposal (the Proposal) that would amend Regulation Z (Truth in Lending) to implement those sections of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Act) that take effect on Aug. 22, 2010. (The Act, enacted in May 2009, amended the Truth in Lending Act (TILA), among other statutes, and mandated various studies on interchange regulation and other matters. The Proposal would enact the final tranche of the Act's TILA amendments, the first two of which took effect in August 2009 and February 2010.) In our view, the Proposal is generally a moderate attempt by the Board to facilitate the final requirements of the Act, particularly given the political climate and ongoing negotiations in Washington on financial regulatory reform (including the status of a Consumer Financial Protection Agency and a systemic risk regulator).

The Proposal would generally require that penalty fees imposed by credit card issuers (issuers) be reasonable and proportional to the violation of the associated account terms. Additionally, the Proposal would require issuers, every six months, to re-evaluate annual percentage rates (rates) increased on or after Jan. 1, 2009. The provisions of the Proposal are not applicable to either home-equity lines of credit accessed by credit cards or overdraft lines of credit accessed by debit cards. The Board will consider comments on the Proposal for a period of 30 days following the date of publication in the Federal Register. As of March 11, 2010, the Proposal has not been published in the Federal Register.

Following are summaries of the Proposal: first, the provisions relating to reasonable fees; second, the provisions relating to reevaluation of rate increases; finally, conforming changes to other provisions in Regulation Z. For each topic, this advisory summarizes the section of the Act that the Proposal is implementing and then sets forth the proposed general rule and exceptions, if any. Brief additional commentary is inserted as appropriate.

Reasonable Fees

The Act

New TILA Section 149(a) requires that the amount of a penalty fee or charge levied for any omission with respect to or violation of a cardholder agreement governing use of a credit card account under an open end consumer credit plan be reasonable and proportional to such omission or violation. New Section 149(b) requires the Board to establish standards for determining compliance with Section 149(a), while Section 149(c) lists a number of factors for the Board to consider when establishing such standards. Finally, new Section 149(d) expressly authorizes the Board to establish a safe harbor for compliance with Section 149(a).

Regulation Z

The Proposal implements TILA Section 149 in § 52(b) of Regulation Z. The provision is implemented in two steps: § 52(b)(1) limits when an issuer may impose a fee, while § 52(b)(2) limits the amount of such fee.

Limits on imposition of fees. An issuer must not impose a charge, other than a charge attributable to a periodic interest rate, for violating the terms of a card account unless the dollar amount of the charge is based on either the cost to the issuer of the violation or deterrence of the violation. §52(b)(1). The fact that an issuer’s fees for violating the account terms are comparable to fees assessed by other issuers is not sufficient to satisfy § 52(b)(1). Comment 52(b)(1)-1. An issuer must make its own determinations as to whether its fees represent a reasonable proportion of the total costs incurred or are reasonably necessary to deter violations. An issuer may round any fee that complies with § 52(b) to the nearest whole dollar using standard rounding rules. Comment 52(b)-2.

Fees subject to limitation. Types of fees subject to § 52(b) include the following: fees imposed if an account becomes delinquent or if a payment is not received by a particular date; fees imposed if any method of payment is returned; fees for an over-the-limit transaction; fees for a declined transaction; and fees based on account inactivity or the closure or termination of an account. Comment 52(b)-1.

Fees not subject to limitation. Types of fees not subject to § 52(b) include the following: balance transfer fees; cash advance fees; foreign transaction fees; annual fees and other fees for the issuance or availability of credit, except to the extent that such fees are based on account inactivity; fees for insurance or debt cancellation or debt suspension coverage, provided that such fees are not imposed as a result of a violation of the account terms; fees for making an expedited payment (to the extent permitted by § 10(e)); fees for optional services (such as travel insurance); and fees for reissuing a lost or stolen card. Additionally, § 52(b) does not apply to charges attributable to a rate increase based on a violation of the account terms. Comment 52(b)-1.

Fees based on costs. An issuer may impose a charge, other than a charge attributable to a periodic interest rate, for violating the terms of an account if the issuer has determined that the dollar amount of the charge represents a reasonable proportion of the total costs incurred by the issuer as a result of that type of violation. § 52(b)(1)(i). Fees need not be based on costs incurred as a result of a specific violation of the account terms. Instead, a fee must represent a reasonable proportion of the costs incurred by the issuer as a result of that type of violation. Relevant factors include: (x) the number of violations of a particular type experienced by the issuer during a prior period; and (y) the costs incurred by the issuer during that period as a result of those violations. Fees may also be based on a reasonable estimate of the number of violations of a certain type and the resulting costs during an upcoming period. Comment 52(b)(1)(i)-1. Although higher rates of loss may be associated with particular violations, those losses and associated costs (such as the cost of holding reserves against losses) must be excluded from the cost analysis. Comment 52(b)(1)(i)-2. The Board solicits comment on whether issuers should be permitted to include losses and associated costs in the § 52(b)(1)(i) determination. Amounts charged to the issuer by a third party as a result of a violation of the account terms are deemed costs incurred by the issuer for purposes of § 52(b)(1)(i). Comment 52(b)(1)(i)-3. Proposed comments 52(b)(1)(i)-4 through -6 provide examples of the types of costs that an issuer may incur as a result of late payments, returned payments, and transactions that exceed the credit limit, as well as examples of fees that would represent a reasonable proportion of those costs. Each comment also lists the costs incurred by an issuer as a result of, respectively, late payments, returned payments and over-the-limit transactions:

• Late payments. Costs incurred by an 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). Comment 52(b)(1)(i)-4. The Board solicits comment on whether issuers incur other costs as a result of late payments.
• Returned payments. Costs incurred by an issuer as a result of returned payments include the costs associated with processing returned payments and reconciling the issuer’s systems and accounts to reflect returned payments, as well as the costs associated with notifying the consumer of the returned payment and arranging for a new payment. Comment 52(b)(1)(i)-5. The Board solicits comment on whether issuers incur other costs as a result of returned payments.
• Over-the-limit transactions. Costs incurred by an issuer as a result of over-the-limit transactions include the costs associated with determining whether to authorize over-the-limit transactions and the costs associated with notifying the consumer that the credit limit has been exceeded and arranging for payments to reduce the balance below the credit limit. Comment 52(b)(1)(i)-6. The Board solicits comment on whether issuers incur other costs as a result of over-the-limit transactions.

Fees based on deterrence. An issuer may impose a fee for violating the terms of an account if the issuer has determined that the dollar amount of the fee is reasonably necessary to deter that type of violation using an empirically derived, demonstrably and statistically sound model that reasonably estimates the effect of the amount of the fee on the frequency of violations. § 52(b)(1)(ii). The proposed rule does not require that penalty fees deter individual consumers from engaging in specific violations. Instead, a fee must be reasonably necessary to deter the type of violation for which the fee is imposed. Comment 52(b)(1)(ii)-1.

Model. A model that reasonably estimates a statistical correlation between the imposition of a fee and the frequency of a type of violation is not sufficient. In order to support a determination that the dollar amount of a fee is reasonably necessary to deter a particular type of violation, a model must reasonably estimate that, independent of other variables, the imposition of a lower fee amount would result in a substantial increase in the frequency of that type of violation. “The parameterization” of the model must identify a lower fee level above which additional fee increases have no marginal effect on the frequency of violations. Comment 52(b)(1)(ii)-2. For example, an issuer that charges a $35 late payment fee could not satisfy the requirements in § 52(b)(1)(ii) by developing a model that estimates that delinquencies will increase if no late payment fee is charged. Instead, the model must be able to reasonably estimate that delinquencies will increase substantially if a late payment fee of less than $35 is charged.

Testing. An issuer must test the effect of fee amounts that are lower and higher than the amount ultimately found to be reasonably necessary to deter a type of violation. To determine that a $20 fee is reasonably necessary, an issuer would test the deterrent effect of, for example, a $15 fee and a $25 fee. Issuers that cannot test fees by Aug. 22, 2010, would be required to base penalty fees on costs (consistent with § 52(b)(1)(i)) or to use the safe harbor in § 52(b)(3) (discussed below).

The Board solicits comment on whether issuers should be permitted to test the effect of penalty fees that exceed the amounts otherwise permitted by § 52(b)(1). The Board also solicits comment on whether limitations are necessary to ensure that such testing is legitimate. For example, testing of higher fee amounts could be limited to a representative sample of accounts that is no larger than reasonably necessary to make statistically sound estimates regarding the effect of the fee amount on the frequency of violations. We note that the model’s requirements are similar to those required of credit scoring models pursuant to provisions of Regulation B (Equal Credit Opportunity). We also note the difficulty for issuers of commenting on the viability of and creating such models within the 30-day comment period. The difficulties associated with developing and implementing a model may, in fact, lead most issuers to simply accept the safe harbor limitations, discussed below, as being the simplest and most cost-effective path.

Reevaluation of fees. An issuer must reevaluate its fee determination under § 52(b)(1)(i) or (b)(1)(ii) at least once every 12 months. § 52(b)(1)(iii). If the issuer determines that a lower fee is appropriate, the issuer must impose the lower fee within 30 days after completing the reevaluation; if a higher fee is appropriate, the issuer may impose the higher fee after complying with the notice requirements in § 9. The Board solicits comment on whether 12 months is an appropriate interval for the reevaluation.

Limitation on Fee Amounts

An issuer may not impose a fee based on violations of the account terms that exceeds the dollar amount associated with the violation at the time the fee is imposed. § 52(b)(2)(i)(A). Penalty fees that exceed the dollar amount associated with the violation are not deemed proportional to the consumer conduct that resulted in the violation. The proposal addresses the following examples:

• Late payments. The dollar amount associated with a late payment is the amount of the required minimum periodic payment that was not received on or before the payment due date. An issuer would thus be prohibited, for example, from charging a late payment fee of $39 based on a consumer’s failure to make a $20 required minimum periodic payment by the payment due date. Comment 52(b)(2)(i)-1.
• Returned payments. The dollar amount associated with a returned payment is the amount of the required minimum periodic payment due during the billing cycle in which the payment is returned to the issuer. If a returned payment has been resubmitted for payment by the issuer, the issuer may not impose a separate fee if the payment is again returned. Comment 52(b)(2)(i)-2. The Proposal appears to ignore situations where a returned payment is resubmitted by the issuer due to the request of the cardholder and not simply due to an issuer’s automated resubmission process. It seems illogical that an issuer should not be entitled to a subsequent penalty fee in such a circumstance.
• Over-the-limit transactions. The dollar amount associated with an over-the-limit transaction is the total amount of credit extended by the issuer in excess of that limit as of the date on which the over-the-limit fee is imposed. Although § 56(j)(1)(i) prohibits an issuer from imposing more than one over-the-limit fee per billing cycle, the issuer may choose the date during the billing cycle on which to impose the fee. Comment 52(b)(2)(i)-3.
• Other violations. An issuer may not impose a fee where there is no dollar amount associated with the violation; no dollar amounted is associated with declined transactions, account inactivity, and the closure or termination of an account. § 52(b)(2)(i)(B). However, the Board solicits comment on whether a prohibition on penalty fees for these types of transactions is appropriate. Our view is that an outright ban on the imposition of a fee for these types of transactions would indeed be inappropriate. While the exact cost for declining a transaction, or having an inactive account, may not be significant, issuers do bear the cost. While issuers, typically, have the right to close accounts at any time, cardholders may be willing to keep the account (and line) available for future use, by paying a fee. Would it not be better for the Board, perhaps within the context of a safe harbor, to establish maximum fees in such circumstances, even if they were only $1 or $2 per declination, or month of inactivity, etc.?
• Multiple violations. An issuer may not impose more than one penalty fee based on a single event. A safe harbor would permit issuers to comply with this requirement by imposing no more than one penalty fee during a billing cycle. §52(b)(2)(ii). Proposed comment 52(b)(2)(ii)-1 provides examples where multiple penalty fees would be prohibited, as well as examples of circumstances where multiple fees would be permitted.

Safe harbor. A penalty fee complies with the limitations set forth in §52(b)(1) if it is limited to the greater of: (x) a specific dollar amount to be determined by the Board for the final rule; or (y) 5 percent of the dollar amount associated with the violation of the account terms, up to a specific dollar amount (to be determined by the Board for the final rule), to be adjusted annually by the Board to reflect changes in the Consumer Price Index. § 52(b)(3) and Comment 52(b)(3)-2.

The Board solicits comment to assist it in determining the specific dollar amounts in (x) and (y). With respect to (x), information that the Board will consider includes the range of penalty fees currently imposed by issuers; penalty fees imposed with respect to deposit accounts and non-credit card consumer credit accounts; state and local laws; and regulations in the United Kingdom. The Board requests commenters to provide, for each type of violation, data regarding the costs incurred as a result of that type of violation (itemized by the type of cost), and the dollar amounts reasonably necessary to deter violations and the methods used to determine those amounts. With respect to (y), the Board solicits comment on the appropriate upper limit, as well as the 5 percent figure.

The Board also solicits comment on its overall approach to determining the safe harbor. Specifically, the Board solicits comment on whether the safe harbor should permit issuers to base penalty fees on consumer conduct by:

• Tiering the dollar amount of penalty fees based on the number of times a consumer engages in particular conduct during a specified period. For example, the second late payment during a 12-month period would attract a higher fee than the first late payment.
• Imposing penalty fees in increments based on the consumer’s conduct. For example, a late payment fee of $5 would be charged each day after the payment due date until the required minimum periodic payment is received.

Reevaluation of Rate Increases

The Act

New TILA Section 148(a) requires a creditor who increases the rate applicable to a credit card account under an open end consumer credit plan, on or after Jan. 1, 2009, based on factors including the credit risk of the obligor, market conditions or other factors, to consider changes in those factors in subsequently determining whether to reduce the annual percentage rate for such obligor. Section 148(b) requires a creditor to maintain reasonable methodologies for assessing the factors described in Section 148(a) and, at least every six months, to review accounts subject to rate increases since Jan. 1, 2009, in order to assess whether those factors have changed (including whether any risk has declined). If a rate reduction is indicated by the review, the creditor must lower the rate; if a rate increase is indicated by the review, the creditor may raise the rate so long as it provides a statement of the reasons for the increase in the requisite change in terms notice.

Regulation Z

The Board proposes to implement TILA Section 148 in § 59, § 9(c)(2) and § 9(g) of Regulation Z. § 59(a) sets forth the general rule regarding reevaluation of rate increases; § 59(b) addresses the maintenance of policies and procedures to reevaluate rate increases; § 59(c) governs the timing of reevaluations; and § 59(d) sets forth factors to consider when reevaluating rate increases. § 59(e) sets forth a special timing rule for issuers that increase a rate pursuant to § 55(b)(4) (i.e., increases due to delinquencies). § 59(f) terminates the obligation to reevaluate rate increases in certain circumstances. §59(g) addresses reevaluation of rates on card accounts acquired by an issuer. § 59(h) sets forth exceptions to the requirements of § 59(a). Finally, § 9(c)(2) and § 9(g) govern disclosure of the reasons for a rate increase.

General rule. If an issuer, on or after Jan. 1, 2009, increases a rate that applies to a card account, based on the credit risk of the consumer, market conditions or other factors, that issuer must review changes in such factors and, if appropriate, reduce the rate applicable to the account. § 59(a)(1). This obligation is limited to rate increases for which 45 days’ advance notice is required under § 9(c)(2) or (g) (i.e., no reevaluation is necessary for fluctuations of a variable rate, rate increases due to the expiration of a promotional plan, etc.). The general rule applies both to increases based on circumstances specific to a consumer, such as changes in the consumer’s creditworthiness, and to increases due to factors such as changes in market conditions or the issuer’s cost of funds. Comment 59(a)-1. An issuer must reevaluate increases only if the increased rate is actually imposed on the account. For example, if an issuer increases a penalty rate that could apply, but the consumer has not triggered the penalty rate, the requirements of § 59 do not apply until such increased rate actually applies to a balance on the card account. Comment 59(a)-2.

Rate reductions – timing. If an issuer is required to reduce the rate applicable to an account pursuant to § 59(a)(1), the rate must be reduced no later than 30 days after completion of the reevaluation. § 59(a)(2). The Board solicits comment on the operational issues associated with rate reductions and whether to apply a different timing standard for how promptly rate changes must be implemented. For rate increases that took effect on or after Jan. 1, 2009, and prior to Aug. 22, 2010, § 59(a) requires an issuer to review changes in factors and reduce the rate, as appropriate, if the rate increase would require 45 days’ advance notice under current § 9(c)(2) or (g). Comment 59(a)-3. The Board solicits comment on appropriate transition guidance for issuers in conducting reviews of rate increases imposed prior to Aug. 22, 2010. In circumstances where a rate reduction is required, an issuer need not decrease the rate to the rate in effect prior to the increase. Instead, the decreased rate must be determined based upon the issuer’s reasonable policies and procedures. Comment 59(b)-1 (the comment also provides an example). We assume issuers will generally have difficulty with a 30-day timeframe for rate reductions, given the usual issues related to cycle time, lead time, testing, etc. Of course, this provision will not pass a “fairness” test given the requirements of a 60-day delinquency and 45-day notice before an issuer can increase a rate on an existing balance due to delinquency.

Policies and procedures. An issuer must have reasonable written policies and procedures in place to review the factors described in § 59. Because the Proposal does not explain the nature of “reasonable” policies and procedures, the Board solicits comment on whether guidance is necessary regarding whether an issuer’s policies and procedures are “reasonable.” We believe guidance is necessary. Without it, issuers will be subject to the vagaries of the examination process, including the possibility (probability?) that examiners at different institutions (whether or not from the same regulatory agency) will have their own subjective opinions as to what “reasonable” is.

Reevaluations – timing. An issuer must review changes in factors in accordance with § 59(a) and (d) at least once every six months after the initial rate increase. § 59(c). The issuer may review all of its accounts at the same time every six months, may review each account once each six months on a rolling basis based on the date on which the rate was increased for that account or may otherwise review each account not less frequently than once every six months. Comment 59(c)-1. Comment 59(c)-2 provides an example. The first review of rate increases that took effect on or after Jan. 1, 2009, and prior to Aug. 22, 2010, must be conducted prior to Feb. 22, 2011. Comment 59(c)-3.

Factors. An issuer is not required to base its review on the same factors on which a rate increase was based. Instead, it could base its review on factors that it currently uses when determining the rates applicable to its consumers’ credit card accounts. § 59(d). An issuer that reviews factors it currently considers in determining rates may change those factors from time to time. When an issuer changes such factors, for a brief transition period, it may review the set of factors it considered immediately prior to the change in factors or may consider the new factors. Comment 59(d)-1. The Board solicits comment on whether to establish a safe harbor for what constitutes a “brief transition period.” A review need not result in existing accounts being subject to the same rates and rate structure as imposed on new accounts, even if the issuer evaluates the same factors for both types of accounts. Comment 59(d)-2. If an issuer evaluates different factors in determining the rates for different types of card accounts, it must review those factors that it considers in determining rates for the consumer’s specific type of account. Comment 59(d)-3. For example, an issuer may review different factors in determining the rate that applies to rewards cards with annual fees than it reviews in determining the rates for cards without rewards and annual fees. However, card accounts with similar features that are offered for similar purposes must be reviewed using the same factors.

Rate increases subject to § 55(b)(4). When an issuer applies a penalty rate after not receiving a consumer’s required payment within 60 days after the due date, § 55(b)(4)(ii) requires the issuer to reduce the rate to the one that applied prior to the increase if the consumer makes the first six consecutive required minimum periodic payments on time after the effective date of the increase. In light of this rule, an issuer is not required to review factors in accordance with § 59(a) prior to the sixth payment due date following the effective date of such a rate increase. At that time, if the rate has not been decreased based on receipt of six consecutive timely payments, the issuer must review factors for subsequent six-month periods. § 59(e).

Termination of obligation to review factors. The obligations under § 59(a) cease to apply if an issuer reduces a previously increased rate to one equal to or less than the rate applicable immediately prior to the increase, or, if the prior rate was a variable rate, to a rate equal to or less than a variable rate determined by the same index and margin that applied prior the increase. § 59(f). The Board solicits comment on (x) whether the obligation to reevaluate rate increases should terminate after some specific time period following the initial increase, and (y) whether there is significant benefit to consumers from requiring issuers to continue reviewing factors under § 59 even after an extended period of time. We believe the obligation to reevaluate should cease after three years. It is doubtful that, after such a lengthy period, a substantial number of cardholders would have improved their credit histories. Five years may be an appropriate fall-back position.

Acquired accounts.

General rule. The obligation to reevaluate rate increases applies to acquired accounts. § 59(g)(1). Consistent with § 59(d), an acquiring issuer may review either the factors that the original issuer considered when imposing the rate increase or the factors that the acquiring issuer currently considers. If an acquiring issuer does not know whether acquired accounts were subject to rate increases, then it may comply with § 59(g)(1) by reevaluating the rates on all of its acquired accounts.

Review of all acquired accounts. If the issuer reviews all of the acquired accounts using factors that it currently uses in determining applicable rates, as soon as reasonably practicable after acquisition, then the issuer need only subsequently review rate increases that are imposed as a result of that initial review. § 59(g)(2)(i). Additionally, the issuer need not review rate increases for such accounts that took effect prior to the acquisition. § 59(g)(2)(ii). Comment 59(g)(2)-1 sets forth an example of a review performed pursuant to § 59(g)(2). However, if as a result of the issuer’s review of all of its acquired accounts pursuant to § 59(g)(2), an account is subject to a penalty rate, the requirements to review the account under § 59(a) apply. § 59(g)(2)(iii). Comment 59(g)(2)-2 sets forth an example.

Comments. The Board solicits comment on whether § 59(g) appropriately addresses acquired accounts and on any alternatives that would balance the burden on issuers against consumer benefit. The Board also solicits comment on whether additional guidance is necessary regarding the requirement that the review of acquired accounts occur “as soon as reasonably practicable” after the acquisition of those accounts. We remain concerned about individual examiner determinations as to “reasonableness.” Portfolio acquisitions have their own set of issues, including the acquirer’s ability to understand individual acquired account history. We believe that the Board should specify a time period within which a post-acquisition review need be completed. We would suggest six (6) months to review and an additional two (2) months to implement any rate reductions.

Exceptions. The Proposal permits two exceptions to the requirements of § 59(a). First, when a rate decreased in accordance with the Servicemembers Civil Relief Act (SCRA) is raised after the SCRA ceases to apply, pursuant to § 55(b)(6), the increased rate may not exceed the rate that applied prior to the decrease. Therefore, rate increases made in accordance with § 55(b)(6) are excluded from reevaluation under § 59(a). § 59(h)(1). Second, § 59(a) does not apply to charged off accounts. § 59(h)(2).

Change in terms notices. If, as a result of a rate reevaluation, an issuer increases a rate, the change in terms notice sent pursuant to § 9(c)(2) must disclose no more than four principal reasons for the rate increase, listed in their order of importance. § 9(c)(2)(iv)(A)(8). However, the issuer may disclose any number of reasons so long as they relate to and accurately describe the principal factors actually considered. Comment 9(c)(2)(iv)-11. An issuer may describe the reasons for an increase in general terms by disclosing, for example, that a rate increase is due to “a decline in your creditworthiness” or “a decline in your credit score,” if the rate increase is triggered by a decrease of 100 points in a consumer’s credit score. Similarly, a notice of a rate increase triggered by a 10 percent increase in the issuer’s cost of funds may be disclosed as “a change in market conditions.” When applicable, an issuer may combine the disclosure of several reasons in one statement. A new § 9(g)(3)(i)(A)(6), relating to change in terms notices for penalty rates, would contain rules and restrictions analogous to those set forth in § 9(c)(2)(iv)(A)(8). New Comment 9(g)-7 would cross-reference Comment 9(c)(2)(iv)-11.

Conforming Changes

As discussed above, § 52(b) establishes new substantive limitations on penalty fees amounts. Specifically, certain penalty fees will not be permitted to exceed the safe harbor amount to be determined in § 52(b)(3)(ii). Therefore, the Proposal would require issuers to disclose only the safe harbor penalty fee in disclosures mandated by Regulation Z. The Board solicits comment on the proposed model language as well as alternative methods for disclosing penalty fees. We note that the Board continues to believe that there are limits to how much information the general public can absorb from disclosures. While the safe harbor disclosure will typically overstate the penalty fee, it appears to be a reasonable compromise with no harm resulting to either issuers or potential cardholders.

Applications and solicitations and account-opening disclosures. Samples G-10(B), G-10(C), G-17(B) and G-17(C) contain model language for applications and solicitations and account-opening disclosures. Under the Proposal, the model language in these Samples would be revised to disclose late payment fees, returned payment fees and over-the-limit fees as “up to $XX,” where “XX” represents the maximum fee under the safe harbor proposed in § 52(b)(3)(ii). Additionally, §§ 5a(a)(2)(iv) and 6(b)(1)(i) would be revised to require bold text when disclosing maximum limits on fees in solicitation and application account-opening tables (including maximum limits for cash advance and balance transfer fees).

Periodic statements. Samples G-18(B), G-18(D), G-18(F) and G-18(G) contain model language for periodic statements. Under the Proposal, the model language in these Samples for disclosure of the late payment warning required pursuant to § 7(b)(11)(i)(B) would be revised to read as follows: “If we do not receive your minimum payment by the date listed above, you may have to pay a late fee of up to $XX and your APRs may be increased up to the Penalty APR of $28.99 percent,” where “XX” represents the maximum fee under the safe harbor proposed in § 52(b)(3)(ii). Additionally, § 7(b)(11)(i)(B) would be revised so that issuers would no longer have the option to disclose that a late payment fee may be lower than the disclosed amount.

Change in terms notices. Sample G-21 contains model language for change in terms notices. Under the Proposal, the model language in this Sample would be revised to disclose late payment fees, returned payment fees and over-the-limit fees as “up to $XX,” where “XX” represents the maximum fee under the safe harbor proposed in § 52(b)(3)(ii).

Over-the-limit transactions. Model Forms G-25(A) and G-25(B) contain model language for consent to over-the-limit transactions and for revocation of such consent, respectively. § 56(e)(1)(i) requires both notices to disclose the amount of any fees assessed for an over-the-limit transaction. Under the Proposal, the model language in these Model Forms would be revised to disclose such fees as “up to $XX,” where “XX” represents the maximum fee under the safe harbor proposed in § 52(b)(3)(ii), even though the maximum fee would generally overstate the actual fee imposed. New Comment 56(e)-1 would be revised to refer to Model Forms G-25(A) and G-25(B) for guidance on how to disclose the amount of an over-the-limit fee consistent with the restrictions in § 52(b).

Conclusion

We believe the Board’s effort in drafting the Proposal is generally balanced, although, on the whole, it still favors the consumer. The good news is that both the provisions regarding reasonable fees and reevaluation of rate increases are subject only to administrative enforcement. While this may not stop class action lawyers from litigating based on UDAP claims, it will pose a significant obstacle to success in any such litigation.

As indicated above, the Board has solicited a number of comments related to the Proposal. If you would like any assistance in providing your own comment letter to the Board, please let us know.

The Proposal can be found here. The Act can be found here.

If you have any comments or would like more information, please contact Robert Birnbaum, James H. Mann, Scot D. Tucker or Andrew Owens.