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Truth in Lending: 7.8.2.1 25% Limit

The Credit CARD Act provides that the total amount of fees that a consumer is required to pay with respect to the account during the first year must not exceed 25% of the account’s credit limit.872 This 25% limit applies to both fees that the issuer charges to the account, as well as fees that the issuer requires the consumer to pay through other means.873 Thus, the issuer cannot avoid the 25% limit by requiring the consumer to pay an amount above 25% by direct payments to the issuer, such a

Truth in Lending: 7.8.2.2 Credit Limit for the Account

The Credit CARD Act’s limitation of 25% applies to the account’s initial credit limit, i.e., the limit in effect when the credit card account is first opened.880 However, if the lender increases the account’s limit during the year, the increase does not permit the lender to charge additional fees.881 Thus, for example, if the initial credit limit for the account is $400, the issuer cannot charge more than $100 in fees, even if the issuer increases the credit limit during the first year to $6

Truth in Lending: 7.8.2.3 Account Opening

For purposes of the 25% limit on fees, an account is considered “open” no earlier than the date on which it can be used to engage in transactions.885 The issuer may consider an account open on any of the following dates:886

Truth in Lending: 7.8.2.4.2 Excluded fees

The Credit CARD Act excludes certain fees from the 25% limit. These include late payment fees, over-the-limit fees, and fees for a returned payment.900 The Act itself only excludes fees for a payment returned for insufficient funds, but Regulation Z expands that exclusion to a fee for a payment returned for any reason.901

Truth in Lending: 7.8.2.4.3 Security deposits charged to the account

One type of abusive fee-harvester card involves a “secured” card in which the security deposit is charged to the card’s credit line, consuming most of the available credit for the account.904 To address this abuse, the official interpretations provide that a security deposit that is charged to a credit card account is a fee for purposes of the 25% limit.905 Thus, these faux security deposits are now limited to 25% of the credit line.

Truth in Lending: 7.8.2.5 Advance Fees

The Credit CARD Act provides that its 25% limitations should not be interpreted to permit the imposition of fees otherwise prohibited by law.907 The official interpretations cite as example certain advance fees that FTC Telemarketing Rule908 prohibits a telemarketer from charging for helping a consumer obtain credit in certain circumstances.909 This provision should also apply to certain advance fees prohibited by some state laws, such as for

Truth in Lending: 7.8.2.6 Applicability to Hybrid Prepaid-Credit Cards

The 25% limit on fees is applicable to hybrid prepaid-credit cards.920 Fees that are included in this 25% cap include any fees imposed on the separate credit feature other than a charge attributable to periodic interest,921 unless excluded as penalty fees or certain optional fees.922 Fees charged to the asset feature are also similarly covered, if they are “imposed as part of the plan” for purposes of the account opening disclosures.

Truth in Lending: 7.9.1 Introduction to FCBA

The Fair Credit Billing Act (FCBA)930 in 1974 added a number of important substantive protections for open-end credit to TILA.931 Most important are the billing error procedures at sections 1666 and 1666a, discussed in this section.

Truth in Lending: 7.9.2.3 Exemption for Transactions Governed by Regulation E

If an extension of credit involves an electronic fund transfer related to an overdraft line of credit agreement or an agreement between a consumer and a financial institution to extend credit to maintain a specified minimum balance in the consumer’s account, the error resolution procedures of Regulation E govern963 instead of Regulation Z.964 However, Regulation Z’s protections regarding withholding payment,965 adverse credit reports,

Truth in Lending: 7.9.2.4 Coverage of Third-Party Payment Intermediaries

The official interpretations provide that the billing error procedures apply generally to disputes about goods and services that are purchased using a third-party payment intermediary, such as a person-to-person internet payment service, if they are funded through use of a consumer’s open-end credit plan.979 An example of an internet payment service is PayPal.

Truth in Lending: 7.9.4.1 Definition of Billing Error

FCBA defines six types of errors as billing errors, and then adds a final category, “[a]ny other error described in regulations of the Bureau [the CFPB, formerly the FRB].”997 Regulation Z998 expands somewhat on the list in the statute.

Taking the statute and Regulation Z together, the following are defined as billing errors:

Truth in Lending: 7.9.5.1 General

The consumer must invoke the billing error procedures by sending a notice of billing error to the creditor in a timely and proper fashion.

Truth in Lending: 7.9.5.2 Timing of Notice

The consumer’s billing error notice must be received by the creditor no later than sixty days after the creditor first transmitted the first periodic statement that reflects the billing error.1035 The sixty-day period begins to run when the creditor first sends a statement to the consumer who alleges the billing error, regardless of any statements sent earlier to other obligors.1036 The statement must be an actual periodic statement; another document such as a letter does not constitute a “s

Truth in Lending: 7.9.5.3 Form of Notice

The billing error notice must be in writing.1052 Unlike the procedure for asserting claims and defenses or unauthorized use, an oral notice is not sufficient to trigger the billing error procedures.1053 If the creditor includes in its periodic statement a telephone number for billing errors, it must also clearly disclose that the consumer will not preserve billing error rights by using the telephone number.1054 However, if a creditor states i

Truth in Lending: 7.9.5.4 Content of Notice

The consumer’s billing error notice must include sufficient information to enable the creditor to identify the cardholder’s name and account number.1061 If only a correct account number is specified, or a unique name, or a name and social security number, or a name and a unique address is provided by the consumer, that information should be sufficient to enable the creditor to identify the consumer’s name and account number.1062

Truth in Lending: 7.9.5.5 Repeat Notices for the Same Error

If a consumer reasserts a billing error that the creditor has already responded to, investigated, and resolved, the creditor need not respond again.1074 This exemption only applies, however, if the consumer’s second notice claims “substantially the same” billing errors as the first.1075

Truth in Lending: 7.9.5.6 When Is a Second Billing Error Notice Permitted?

Complicated questions arise if an error appears in one periodic statement, but then is only partially rectified. For example, the creditor may delete an erroneous charge, but fail to delete the interest and other charges assessed upon it. Does the consumer’s first notice of billing error cover both the original error and the faulty correction of it? If the consumer did not send a written billing error notice when the error first appeared, can the consumer do so in response to the creditor’s faulty correction?

Truth in Lending: 7.9.6.1 General

Once the creditor receives the billing error notice, in writing, at the specified address, the creditor must execute certain procedures within a certain time frame.

Truth in Lending: 7.9.6.2 Acknowledgment of Receipt

First, the creditor or card issuer must acknowledge receipt of the billing error notice within thirty days of receiving it.1084 The creditor fulfills this requirement upon the mailing or transmission of an acknowledgment; the fact that the consumer never receives the acknowledgement does not violate the Act.1085 The creditor need not respond to a billing error notice if it has already investigated and resolved the error during the thirty-day time period.

Truth in Lending: 7.9.6.3 Right to Withhold Payment

The notice of the consumer’s billing rights must include a clear and conspicuous explanation of the right to withhold disputed amounts.1088 After the consumer gives notice of the billing error, the consumer may withhold payment of the amount in dispute and charges related thereto.1089 Alternatively, the consumer can pay the amount without waiving billing error rights;1090 paying the disputed amount does waive a separate TILA right, to assert