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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

Consumer Credit Regulation: 8.5.1.3 Secured Cards

Another product targeted at consumers with poor or nonexistent credit histories is the secured credit card. A secured credit card requires the consumer to maintain a deposit with the lender, which serves as collateral for the line of credit.337 The Truth in Lending Act generally prohibits a credit card lender from exercising a right of set-off against a consumer’s deposit account, but allows a consensual security interest if certain requirements are met.338

Consumer Credit Regulation: 8.5.1.4 Common Abuses

Prior to the establishment of the CFPB and the Credit CARD Act, the limited number of consumer protection actions taken by the federal banking regulators against credit card lenders largely focused on fee-harvester cards, primarily for bait-and-switch tactics.351 In addition, fee-harvester cards relied heavily on penalty fees, especially over-the-limit fees given that the available credit lines are so limited on these cards.352 Fee-harvester card issuers also engaged in plain old deception, such

Consumer Credit Regulation: 8.5.2.1 Prohibition of Fees and Security Deposits That Exceed 25% of the Credit Limit

The Credit CARD Act limits the percentage of an account’s credit limit that can be consumed by fees and security deposits charged to the account. The 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.367 For purposes of this restriction, a security deposit charged to a credit card account is considered a fee.368

Consumer Credit Regulation: 8.5.2.2.2 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.388 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.389

Consumer Credit Regulation: 8.5.2.2.3 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. To address this abuse, the Official Interpretations of Regulation Z provides that a security deposit that is charged to a credit card account is a fee for purposes of the 25% limit.394 Thus, these faux security deposits are now limited to 25% of the credit line.

Consumer Credit Regulation: 8.5.2.3 Intersection with Other Fee Prohibitions

The Credit CARD Act provides that its 25% limitations should not be interpreted to permit the imposition of fees otherwise prohibited by law.397 The official interpretations cite as example certain advance fees that FTC Telemarketing Rule398 prohibits a telemarketer from charging for helping a consumer obtain credit in certain circumstances.399 This provision should also apply to certain advance fees prohibited by some state laws, such as for credi

Consumer Credit Regulation: 8.5.3 Prior Regulatory Guidance on Subprime Credit Cards

Prior to the Credit CARD Act, the OCC had issued an advisory letter (now rescinded) identifying a number of practices that were potentially unfair or deceptive under the Federal Trade Commission Act, such as promoting credit cards with credit limits “up to” a specified dollar amount when the “up to” amount is essentially illusory, and offering promotional rates without disclosing significant limitations on those rates.401