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Consumer Credit Regulation: 8.3.2.2.3 Sixty days’ delinquency exception

A lender may increase an APR, fee, or charge if it does not receive the consumer’s required minimum payment within sixty days after the due date for that payment.141 This increase may apply to the outstanding balance. As of 2018, about 9% of general purpose cardholders and about 4.5% of private label cardholders had at least one sixty-day or more delinquency in the preceding year.142

Consumer Credit Regulation: 8.3.2.2.4 Rate increases permitted on future transactions—advanced notice exception

Lenders are prohibited from increasing the APR, fees, or charges for any transactions during the first year of an account, even for new transactions.146 After the first year of an account, a lender may apply an increased APR, fee, or charge to transactions that occur fourteen days after giving notice of the increase.147 Regulation Z refers to this ability as “the advanced notice exception.”148

Consumer Credit Regulation: 8.3.3 Mandatory Re-Evaluation of Rate Increases

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 lender to re-evaluate that account every six months to determine whether the rate should be reduced.165 Lenders must have reasonable written policies and procedures to conduct these re-evaluations.166

Consumer Credit Regulation: 8.3.4 Double Cycle Billing

Double cycle billing is a method of calculating interest on credit cards that assesses the interest based on the account balance for the past two billing cycles.176 This method results in significantly higher interest being charged to the cardholder. In addition, it eliminates the benefit of the grace period if a cardholder moves from non-revolving to revolving status.

Consumer Credit Regulation: 8.4.1.1 Skyrocketing Fees

The Supreme Court’s decision in Smiley v. Citibank (South Dakota), N.A.,184 which nullified state law limits on fees for credit cards,185 resulted in the rapid growth of and reliance on fee income by credit card lenders. It also contributed significantly to the snowballing credit card debt of American consumers.

Consumer Credit Regulation: 8.4.2.1 General

In response to penalty fee abuses, the Credit CARD Act established a requirement that penalty fees be “reasonable and proportional” to the consumer’s omission or violation.210 The Act required the Federal Reserve Board to establish regulations to assess whether a penalty fee is reasonable and proportional, which the Board did.211 The Dodd-Frank Act transferred this rulemaking authority to the CFPB.212

Consumer Credit Regulation: 8.4.2.2.1 General

Credit card lenders are prohibited from imposing penalty fees unless the dollar amount of the fee is either (1) a reasonable proportion of the lenders’ total costs as a result of that type of violation or (2) is within the safe harbors that Regulation Z establishes.215

Consumer Credit Regulation: 8.4.3.2.1 Background

Over-the-limit fees are particularly unfair because the card lender technologically has the ability to decline over-the-limit transactions, but chooses to permit them and then reap penalty fee income.256 A few decades ago, credit card lenders did not require specific authorization of transactions under a certain amount due to costs.257 Thus, a cardholder had the ability to exceed his or her limit without the lender’s knowledge or permission.

Consumer Credit Regulation: 8.4.3.2.2 Impact of the Credit CARD Act

The Credit CARD Act addresses over-the-limit abuses by requiring that a consumer expressly elect or “opt in” to permitting the creditor to complete over-the-limit transactions before the lender can charge any over-the-limit fees.267 The Credit CARD Act also prohibits lenders from charging more than one over-the-limit fee per billing cycle and from charging the fee in more than two subsequent billing cycles unless the consumer obtains an additional extension of credit or goes below the limit and subsequently exceeds it.

Consumer Credit Regulation: 8.4.3.2.3 Opt-in requirement

The Credit CARD Act addresses over-the-limit abuses by requiring that a consumer expressly elect or “opt in” to permitting the lender to complete over-the-limit transactions before the lender can charge any over-the-limit fees.274 Specifically, the lender must:275

Consumer Credit Regulation: 8.4.3.2.4 Prohibited over-the-limit practices

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.287 The Credit CARD Act also required the issuance 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.288 Three other restrictions are established in Regulation Z pursuant to this authority.

Consumer Credit Regulation: 8.4.3.2.5 Other restrictions on over-the-limit fees

Over-the-limit fees are subject to the same requirement that they be reasonable and proportional in amount, i.e., that they be reasonably related to cost or within the safe harbors set by Regulation Z.298 Furthermore, Regulation Z caps over-the-limit fees at the total amount of credit extended by the lender in excess of the credit limit during the billing cycle in which the fee is imposed.299 Thus, if the credit limit is exceeded by $10 in one transaction and then by another $5 in another transa

Consumer Credit Regulation: 8.4.4.1 Balance Transfer Fees

Balance transfer fees can be insidious because they often involve consumers who have been carrying a large balance from month to month. Credit card lenders lured these consumers into transferring large balances by heavily advertising low or 0% APRs, but not disclosing the balance transfer fee as prominently. For example, a credit card solicitation would trumpet a “low 2.9% Fixed APR” for balance transfers using large type, but only disclose the balance transfer fee of 3% on the reverse page in 8-point type.

Consumer Credit Regulation: 8.5.1.1 The Subprime Market

A number of credit card products are targeted at the “subprime market,” which generally means consumers with lower credit scores and/or impaired credit histories. This category is divided by credit score into the categories of near prime (620 to 659), subprime (580 to 619) and deep subprime (under 580).316 In general, about 21% of cardholders have subprime credit scores, comprised of 8% in the near prime category, 6% in the subprime category, and 7% in the deep subprime category.317