As reported in our March 4, 2010 Alert, the Federal Reserve Board (Board) has published a proposed rule amending Regulation Z to implement Sections 101(c) (the interest rate “look back” and decrease requirement) and 102(b) (regarding “reasonable and proportional” penalty fees) of the Credit Card Accountability Responsibility and Disclosure Act of 2009, which become effective August 22, 2010. The Board invites comment on or before 30 days after publication in the Federal Register. Significant issues on which the Board has requested comment are summarized below.

Penalty Fees

The Board solicits comment on the safe harbor approach in proposed Section 226.52(b)(3), which would permit a penalty fee of the greater of (i) a specific dollar amount or (ii) 5% of the dollar amount associated with the violation (up to a maximum amount). The Board specifically asks for comment on (and any data supporting) the appropriate dollar amount, percentage and maximum amount. The Board also seeks data regarding (i) costs incurred as a result of each type of violation of the terms of a credit card agreement (itemized by the type of cost) and (ii) dollar amounts reasonably necessary to deter violations and methods used to determine those amounts, if known.

In addition, the Board asks whether issuers should be permitted to:

  • Base penalty fees on consumer conduct by (i) tiering fee amounts based on the number of violations (e.g., charging a higher fee for the second late payment in a 12-month period) or (ii) imposing incremental fees (e.g., a fee of $5 for each day a payment is late);
  • Include losses and associated costs in the determination under proposed Section 226.52(b)(1)(i) (i.e., fees based on the issuer’s determination of costs and not the safe harbor); and
  • Test the effect of fee amounts exceeding amounts otherwise permitted by proposed Section 226.52(b)(1)(ii) (i.e., fees based on the issuer’s determination of deterrence and not the safe harbor).

Other specific questions related to penalty fees include:

  • What costs do issuers incur as a result of late payments, returned payments and over-the-limit transactions?
  • Is 12 months an appropriate interval for the reevaluation of penalty fee amounts under proposed Section 226.52(b)(1)(iii)?
  • What compliance burdens would result from the prohibition on fees that exceed the dollar amount associated with the violation under proposed Section 226.52(b)(2)(i)(A)?
  • Is additional guidance needed regarding the dollar amounts associated with violations other than late payments, returned payments and extensions of credit in excess of the credit limit?
  • Is a prohibition on penalty fees appropriate where there is no dollar amount associated with the violation (see proposed Section 226.52(b)(2)(i)(B)), and specifically when an issuer imposes a fee based on (i) declined transactions, (ii) account inactivity or (iii) account closure or termination?
  • What methods do issuers use to manage risk with respect to charge card accounts?
  • Are any adjustments to proposed Section 226.52(b) necessary to permit charge card issuers to manage risk?

Rate “Look Back” and Decrease

The Board solicits comment on the operational issues associated with reducing rates, appropriate transition guidance for reviewing increases imposed prior to August 22, 2010 and whether:

  • A timing standard other than that proposed in Section 226.59(a)(2) for how promptly rate changes must be implemented (i.e., 30 days after completion of the evaluation) should apply;
  • Additional guidance is needed regarding what policies and procedures are “reasonable” under proposed Section 226.59(b);
  • An express safe harbor is needed for a “brief transition period” following a change in factors considered in evaluating accounts under Section 226.59(a) and (d);
  • The “look back” obligation should terminate after some specific time period (e.g., after five years);
  • Consumers would significantly benefit from requiring card issuers to continue reviewing factors under proposed Section 226.59 even after an extended period of time;
  • Proposed Section 226.59(g) appropriately addresses acquired accounts and if any alternatives would better balance the burden on card issuers against consumer benefit; and
  • Additional guidance is needed regarding the requirement to review acquired accounts “as soon as reasonably practicable” after the acquisition.

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  • Judy Scheiderer and