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Truth in Lending: 7.5.2.1 General

In response to penalty fee abuses, the Credit CARD Act establishes a requirement that penalty fees be “reasonable and proportional” to the consumer’s omission or violation.377

Truth in Lending: 7.2.3.5.1 Definition

The Credit CARD Act limits increases in the APR, fees, or charges that are applied to the “outstanding” balance.”158 This is defined as the amount owed on a credit card account as of the fourteenth day after the issuer provides a change-in-terms or penalty rate notice increasing the APR, fee, or charge.159 Regulation Z also refers to this balance as the “protected balance,” and defines it slightly differently as “the amount owed for a category of transactions to which an increased annual per

Truth in Lending: 7.2.3.5.3 Repayment protections for protected balances

To prevent the issuer from requiring accelerated payment of the protected balance, the issuer is limited in how much it can change the repayment terms of that balance. The issuer must provide the consumer with one of the following methods or formulas for repaying the protected balance, or a method that is no less favorable:175

Truth in Lending: 7.2.3.6 Workout or Temporary Hardship Arrangement Exception

In some cases, an issuer will reduce an APR for a delinquent or financially distressed consumer pursuant to a workout or temporary hardship arrangement.187 An issuer is permitted to increase an APR, fee, or finance charge if the consumer fails to comply with the terms of the workout or temporary arrangement, or after the consumer has completed the arrangement.188

Truth in Lending: 7.2.4.1 General Rule

Generally, a credit card issuer may increase an APR for future transactions pursuant to a change-in-terms or penalty rate notice.213 However, even for future transactions, the issuer is not permitted to increase the APR during the first year after an account is opened.214

Truth in Lending: 7.2.5.1 General

If the interest rate on a credit card account has been increased based on risk, market conditions, or other factors, the Credit CARD Act requires the card issuer to re-evaluate that account every six months to determine whether the rate should be reduced.225 Issuers must have reasonable written policies and procedures to conduct these re-evaluations.226

Truth in Lending: 7.5.2.2 Scope

The penalty fee rule applies to:

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.384

Therefore, penalty rates or increases in the interest rate are not covered by the rule.

Examples of penalty fees covered by the rule are:385

Truth in Lending: 7.5.2.3.1 General

Credit card issuers are prohibited from imposing penalty fees unless the dollar amount of the fee is either (1) a reasonable proportion of the issuers’ total costs as a result of that type of violation or (2) is within the safe harbors that Regulation Z establishes.391 Deterrence and consumer conduct are not separate factors but are implicit in the safe harbor.392

Truth in Lending: 7.5.2.3.2 Fees based on costs

The issuer may impose a fee for violating the “terms or other requirements” of an account if the issuer has determined that the fee “represents a reasonable proportion of the total costs incurred by the card issuer as a result of that type of violation.”401 The issuer may round the fee up or down to the nearest dollar.402

Truth in Lending: 7.5.2.3.3 Safe harbors

As permitted by the Credit Card Act, Regulation Z establishes a safe harbor for penalty fees.417 Instead of analyzing its costs, an issuer may impose penalty fees based on safe harbors established in Regulation Z.

Truth in Lending: 7.5.2.4 Prohibited Fees

Even if a penalty fee is properly determined on the basis of costs, or is within the safe harbor amounts, there are certain prohibitions that apply regardless.431 A penalty fee cannot exceed the dollar amount associated with the violation or omission.432 For example, despite the $30 safe harbor, the issuer can only charge a $15 late fee if a $15 minimum payment is late. Similarly, the issuer can only charge a $15 over-the-limit fee if the credit limit is exceeded by only $15.

Truth in Lending: 7.5.2.5.1 Late fees

Late payment fees are subject to the general penalty fee provisions, which apply to “[l]ate 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.”441 However, in mid-2022, the CFPB opened a rulemaking asking whether to change the penalty fee provisions specifically with respect to late fees,442 discussed further in

Truth in Lending: 7.5.2.5.2 Returned payment fees

The penalty fee rule applies to “[r]eturned 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.”458 An issuer may not charge both a late payment fee and a returned payment fee with respect to the same payment.459 However, an issuer may charge a returned payment fee if a payment is returned, even if the minimum payment is received on time.460

Truth in Lending: 7.5.2.5.3 Over-the-limit fees

The penalty fee rule applies to any fee or charge for an over-the-limit transaction, as defined in the section regulating opt-in for over-the-limit transactions, to the extent permitted by that section.469 The opt-in requirements and other prohibitions that apply to over-the-limit fees are discussed at § 7.5.3, infra.

Truth in Lending: 7.5.2.5.4 Decline access check fees

The penalty fee rule applies to “[a]ny fee imposed by a card issuer if payment on a check that accesses a credit card account is declined.”484 The official interpretations provide rules for and gives examples of decline access check fees.485 Thus, such fees are apparently permitted, even though fees for declining other transactions, such as point-of-service or ATM transactions, are not.486 Neither Regulation Z nor the official interpretations

Truth in Lending: 7.5.2.5.5 Declined transaction fees

In general, the penalty fee rule applies to “[a]ny fee or charge for a transaction that the card issuer declines to authorize.”492 However, declined transaction fees are specifically prohibited pursuant to the rule prohibiting fees for which no amount is associated with the violation.493 Regulation Z specifically states that no dollar amount is associated with “transactions that the card issuer declines to authorize.”494 However, Regulation Z

Truth in Lending: 7.5.2.5.6 Inactivity fees

In general, the penalty rule applies to “[a]ny 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).”500 However, inactivity fees are specifically banned, pursuant to the rule banning fees for which no amount is associated with the violation.501 No dollar amount is deemed to be associated with such violations.

Truth in Lending: 7.5.2.6 Account Closure or Termination Fees

In general, the rule applies to “[a]ny fee imposed by a card issuer based on the closure or termination of an account.”505 However, account closure or termination fees are specifically banned, pursuant to the rule banning fees for which no amount is associated with the violation.506 No dollar amount is deemed to be associated with such violations.507

Truth in Lending: 7.5.3.1 Over-the-Limit Fee Abuses

Prior to the Credit CARD Act, over-the-limit fees had become particularly unfair because the card lender technologically would have the ability to decline over-the-limit transactions, but chose to permit them and then reap penalty fee income.510 Credit card issuers would typically “pad” the nominal credit limit. For example, if a credit card account had a formal limit of $2,000, the card lender might increase the effective credit limit up to $2,500.

Truth in Lending: 7.5.3.2.1 General

The Credit CARD Act addresses over-the-limit abuses by requiring that a consumer expressly elect or “opt in” to permitting the issuer to complete over-the-limit transactions before the lender can charge any over-the-limit fees.512 Specifically, the issuer must:513