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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

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

Truth in Lending: 7.5.3.3.3 No more than three over-the-limit fees for the same transaction

After the issuer imposes an over-the-limit fee, the Credit CARD Act prohibits issuers from charging over-the-limit fees 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.586 This means the issuer may not charge more than three over-the-limit fees for the same over-the-limit transaction.587 This prohibition applies even though the consumer has not paid enough of the balance to reduce it

Truth in Lending: 7.5.3.3.4 Requirement to replenish the credit line

A card issuer may not impose an over-the-limit fee solely because of the issuer’s failure to promptly replenish the consumer’s available credit line after the consumer’s payment is credited to the account.594 The consumer’s payment should be credited to the account pursuant to the rules in Regulation Z’s payment crediting rules.595

Truth in Lending: 7.5.3.3.6 Interest or fees cannot trigger over-the-limit fees

A card issuer may not impose an over-the-limit fee or charge if a consumer exceeds the credit limit solely because of fees or interest.601 The fees or interest that are covered by this prohibition include any charges that are “imposed as part of the plan,” including penalty fees, fees for issuance or availability of credit, and fees for credit insurance or debt cancellation coverage.602

Truth in Lending: 7.6.2.1 General

The Credit CARD Act imposes underwriting requirements for the first time on credit card issuers. The Act imposes a general requirement, applicable to all consumers, that an issuer may not open a credit card account or increase a credit limit unless the issuer considers the ability of the consumer to make the required minimum payments.616 The card issuer’s consideration of ability-to-repay must be based on both the consumer’s income or assets, and the consumer’s current obligations.617