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Truth in Lending: 7.2.4.2 When Is an Account Considered Newly Opened Versus a Substitution
Situations may arise in which a consumer already has a credit card account with an issuer, and then opens a second account with the same issuer or its affiliate or subsidiary.
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: 7.2.5.2 Timing and Length of Obligation
Issuers are required to conduct rate re-evaluation every six months.232 The issuer has the option of:
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: 7.5.3.2.2 Initial notice of right to opt in
The Credit CARD Act requires the CFPB to prescribe a notice of any over-the-limit fee.529 As set forth in Regulation Z, the required initial notice of the right to opt in must include the following three items.
Truth in Lending: 7.5.3.2.3 Method of election; reasonable opportunity to opt in
A card issuer has the option of permitting the consumer to opt in either in writing, orally, and/or electronically.546 However, for whatever method the issuer permits for opting in, the issuer must permit consumers to use the same methods to revoke the opt-in.547 For example, if a card issuer permits a consumer to opt in by telephone, it must also allow the consumer to revoke that consent by telephone.548
Truth in Lending: 7.5.3.2.4 The consumer’s opt-in
The consumer may opt in to over-the-limit fee imposition at any time.553 The Credit CARD Act provides that the opt-in will be effective until the consumer revokes it;554 however, Regulation Z permits the issuer to make the opt-in ineffective at any time by ceasing to pay over-the-limit transactions for that consumer.555 The issuer may do so for any reason, such as in order to respond to changes in the consumer’s credit risk.
Truth in Lending: 7.5.3.2.5 Confirmation of opt-in
If the consumer opts in to payment of over-the-limit transactions, the issuer must provide a written confirmation.564 The issuer may send an electronic confirmation if the consumer agrees.565 The confirmation must be provided no later than the first periodic statement sent after the consumer has opted in.566
Truth in Lending: 7.5.3.2.6 Right to revoke consent
The consumer is permitted at any time to revoke their consent or opt-in to payment of over-the-limit transactions.572 The issuer must disclose this right to revoke the consent in any periodic statement that reflects the imposition of any over-the-limit fee.573 This disclosure must be in writing.574 It must also list the methods to revoke the opt-in.575
Truth in Lending: 7.5.3.3.1 Overview
In addition to requiring the consumer to consent or opt in to payment of over-the-limit transactions, the Credit CARD Act prohibits two other over-the-limit fee practices.579 Furthermore, the Credit CARD Act requires the promulgation of regulations to prevent unfair or deceptive acts or practices in connection with the manipulation of credit limits designed to increase over-the-limit fees.580 Thus, Regulation Z includes three other restrictions on over-the-limit fee practices.
Truth in Lending: 7.5.3.3.2 No more than one over-the-limit fee per billing cycle
The Credit CARD Act prohibits issuers from charging more than one over-the-limit fee during a billing cycle.582 Furthermore, the issuer may only impose the fee if the credit limit is actually exceeded during the billing cycle,583 and the consumer consented to payment of over-the-limit transactions.584 Thus, the issuer cannot impose a recurring or periodic fees for paying over-the-limit transactions, such as a monthly “over-the-limit protectio