12334 Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 

FEDERAL RESERVE SYSTEM 

12 CFR Part 226 

[Regulation Z; Docket No. R–1384] 

Truth in Lending 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Proposed rule; request for 

public comment. 

SUMMARY: The Board proposes to amend 

Regulation Z, which implements the 

Truth in Lending Act, and the staff 

commentary to the regulation in order to 

implement provisions of the Credit Card 

Accountability Responsibility and 

Disclosure Act of 2009 that go into effect 

on August 22, 2010. In particular, the 

proposed rule would require that 

penalty fees imposed by card issuers be 

reasonable and proportional to the 

violation of the account terms. The 

proposed rule would also require credit 

card issuers to reevaluate at least every 

six months annual percentage rates 

increased on or after January 1, 2009. 

DATES: Comments must be received on 

or before April 14, 2010. Comments on 

the Paperwork Reduction Act analysis 

set forth in Section VII of this Federal 

Register notice must be received on or 

before May 14, 2010. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1384, by any 

of the following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Facsimile: (202) 452–3819 or (202) 

452–3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper form in Room MP–500 of the 

Board’s Martin Building (20th and C 

Streets, NW.) between 9 a.m. and 5 p.m. 

on weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Stephen Shin, Attorney, or Amy 

Henderson or Benjamin K. Olson, 

Senior Attorneys, Division of Consumer 

and Community Affairs, Board of 

Governors of the Federal Reserve 

System, at (202) 452–3667 or 452–2412; 

for users of Telecommunications Device 

for the Deaf (TDD) only, contact (202) 

263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Credit Card Act 

This proposed rule represents the 

third stage of the Board’s 

implementation of the Credit Card 

Accountability Responsibility and 

Disclosure Act of 2009 (Credit Card 

Act), which was signed into law on May 

22, 2009. Public Law 111–24, 123 Stat. 

1734 (2009). The Credit Card Act 

primarily amends the Truth in Lending 

Act (TILA) and establishes a number of 

new substantive and disclosure 

requirements to establish fair and 

transparent practices pertaining to openend consumer credit plans. 

The requirements of the Credit Card 

Act that pertain to credit cards or other 

open-end credit for which the Board has 

rulemaking authority become effective 

in three stages. First, provisions 

generally requiring that consumers 

receive 45 days’ advance notice of 

interest rate increases and significant 

changes in terms (new TILA Section 

127(i)) and provisions regarding the 

amount of time that consumers have to 

make payments (revised TILA Section 

163) became effective on August 20, 

2009 (90 days after enactment of the 

Credit Card Act). A majority of the 

requirements under the Credit Card Act 

for which the Board has rulemaking 

authority, including, among other 

things, provisions regarding interest rate 

increases (revised TILA Section 171), 

over-the-limit transactions (new TILA 

Section 127(k)), and student cards (new 

TILA Sections 127(c)(8), 127(p), and 

140(f)) become effective on February 22, 

2010 (9 months after enactment). 

Finally, two provisions of the Credit 

Card Act addressing the reasonableness 

and proportionality of penalty fees and 

charges (new TILA Section 149) and reevaluation by creditors of rate increases 

(new TILA Section 148) become 

effective on August 22, 2010 (15 months 

after enactment). The Credit Card Act 

also requires the Board to conduct 

several studies and to make several 

reports to Congress, and sets forth 

differing time periods in which these 

studies and reports must be completed. 

Implementation of Credit Card Act 

The Board is implementing the 

provisions of the Credit Card Act in 

stages, consistent with the statutory 

timeline established by Congress. On 

July 22, 2009, the Board published an 

interim final rule to implement the 

provisions of the Credit Card Act that 

became effective on August 20, 2009. 

See 74 FR 36077 (July 2009 Regulation 

Z Interim Final Rule). On January 12, 

2010, the Board issued a final rule 

adopting in final form the requirements 

of the July 2009 Regulation Z Interim 

Final Rule and implementing the 

provisions of the Credit Card Act that 

become effective on February 22, 2010. 

See 75 FR 7658 (February 2010 

Regulation Z Rule). This proposed rule 

implements the provisions of the Credit 

Card Act that become effective on 

August 22, 2010. 

II. Summary of Major Proposed 

Revisions 

A. Reasonable and Proportional Penalty 

Fees 

Statutory requirements. The Credit 

Card Act provides that ‘‘[t]he amount of 

any penalty fee or charge that a card 

issuer may impose with respect to a 

credit card account under an open end 

consumer credit plan in connection 

with any omission with respect to, or 

violation of, the cardholder agreement, 

including any late payment fee, overthe-limit fee, or any other penalty fee or 

charge, shall be reasonable and 

proportional to such omission or 

violation.’’ The Credit Card Act further 

directs the Board to issue rules that 

‘‘establish standards for assessing 

whether the amount of any penalty fee 

or charge * * * is reasonable and 

proportional to the omission or 

violation to which the fee or charge 

relates.’’ 

In issuing these rules, the Credit Card 

Act requires the Board to consider: (1) 

The cost incurred by the creditor from 

an omission or violation; (2) the 

deterrence of omissions or violations by 

the cardholder; (3) the conduct of the 

cardholder; and (4) such other factors as 

the Board may deem necessary or 

appropriate. The Credit Card Act 

authorizes the Board to establish 

‘‘different standards for different types 

of fees and charges, as appropriate.’’ 

Finally, the Act authorizes the Board to 

‘‘provide an amount for any penalty fee 

or charge * * * that is presumed to be 

reasonable and proportional to the 

omission or violation to which the fee 

or charge relates.’’ 

Cost incurred as a result of violations. 

The proposed rule permits an issuer to 

charge a penalty fee for a particular type 


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of violation (such as a late payment) if 

it has determined that the amount of the 

fee represents a reasonable proportion of 

the costs incurred by the issuer as a 

result of that type of violation. Thus, the 

proposed rule permits issuers to use 

penalty fees to pass on the costs 

incurred as a result of violations while 

ensuring that those costs are spread 

evenly among consumers so that no 

individual consumer bears an 

unreasonable or disproportionate share. 

The proposed rule provides guidance 

regarding the types of costs incurred by 

card issuers as a result of violations. For 

example, with respect to late payments, 

the proposed rule states that the costs 

incurred by a card issuer include 

collection costs, such as the cost of 

notifying consumers of delinquencies 

and resolving those delinquencies 

(including the establishment of workout 

and temporary hardship arrangements). 

In order to ensure that penalty fees are 

based on relatively current cost 

information, the proposed rule would 

require card issuers to re-evaluate their 

costs at least annually. 

Notably, the proposed rule states that, 

although higher rates of loss may be 

associated with particular violations, 

those losses and related costs (such as 

the cost of holding reserves against 

losses) are excluded from the cost 

analysis. 

Deterrence of violations. The Credit 

Card Act requires the Board to consider 

the deterrence of violations by the 

cardholder. Accordingly, as an 

alternative to basing penalty fees on 

costs, the proposed rule permits a card 

issuer to charge a penalty fee for a 

particular type of violation if it has 

determined that the amount of the fee is 

reasonably necessary to deter that type 

of violation. 

Because it would not be feasible to 

determine the specific amount 

necessary to deter a particular 

consumer, the proposed rule requires 

issuers that base their penalty fees on 

deterrence to use an empirically 

derived, demonstrably and statistically 

sound model that reasonably estimates 

the effect of the amount of the fee on the 

frequency of violations. In order to 

support a determination that the dollar 

amount of a fee is reasonably necessary 

to deter a particular type of violation, a 

model must reasonably estimate that, 

independent of other variables, the 

imposition of a lower fee amount would 

result in a substantial increase in the 

frequency of that type of violation. 

Consumer conduct. The Credit Card 

Act requires the Board to consider the 

conduct of the cardholder. The 

proposed rule does not require that each 

penalty fee be based on an assessment 

of the individual consumer conduct 

associated with the violation. Instead, 

the proposed rule takes consumer 

conduct into account in other ways. 

The proposed rule contains 

provisions specifically based on 

consumer conduct. First, the proposed 

rule prohibits issuers from imposing 

penalty fees that exceed the dollar 

amount associated with the violation. 

Thus, for example, a consumer who 

exceeds the credit limit by $5 could not 

be charged an over-the-limit fee of more 

than $5. Second, the proposed rule 

prohibits issuers from imposing 

multiple penalty fees based on a single 

event or transaction. 

Safe harbor. Consistent with the 

authority granted by the Credit Card 

Act, the proposed rule contains a safe 

harbor that provides a single penalty fee 

amount that will generally be sufficient 

to cover an issuer’s costs and to deter 

violations. Because the Board does not 

have sufficient information to determine 

the appropriate safe harbor amount at 

this time, the proposed rule does not 

provide a specific amount. Instead, the 

proposed rule requests that credit card 

issuers and other interested parties 

submit data regarding costs incurred as 

a result of violations and the deterrent 

effect of different fee amounts on 

violations. 

Because violations involving large 

dollar amounts may impose greater 

costs on the card issuer and require 

greater deterrence, the proposed safe 

harbor would also permit an issuer to 

impose a penalty fee that exceeds the 

specific safe harbor amount in certain 

circumstances. Specifically, the 

proposed safe harbor would permit an 

issuer to impose a penalty that does not 

exceed 5% of the dollar amount 

associated with the violation (up to a 

specific dollar limit). Thus, for example, 

if a $500 minimum payment was 

delinquent, the safe harbor would 

permit the card issuer to impose a $25 

late payment fee. 

B. Reevaluation of Rate Increases 

Statutory requirements. The Credit 

Card Act requires card issuers that 

increase an annual percentage rate 

applicable to a credit card account, 

based on the credit risk of the consumer, 

market conditions, or other factors, to 

periodically consider changes in such 

factors and determine whether to reduce 

the annual percentage rate. Creditors are 

required to perform this review no less 

frequently than once every six months, 

and must maintain reasonable 

methodologies for this evaluation. The 

statute requires card issuers to reduce 

the annual percentage rate that was 

previously increased if a reduction is 

‘‘indicated’’ by the review. However, the 

statute expressly provides that no 

specific amount of reduction in the rate 

is required. This provision is effective 

August 22, 2010 but requires that 

creditors review accounts on which an 

annual percentage rate has been 

increased since January 1, 2009. 

General rule. Consistent with the 

Credit Card Act, the proposed rule 

applies to card issuers that increase an 

annual percentage rate applicable to a 

credit card account, based on the credit 

risk of the consumer, market conditions, 

or other factors. For any rate increase 

imposed on or after January 1, 2009, the 

proposed rule requires card issuers to 

review changes in such factors no less 

frequently than once each six months 

and, if appropriate based on their 

review, reduce the annual percentage 

rate applicable to the account. The 

requirement to reevaluate rate increases 

applies both to increases in annual 

percentage rates based on factors 

specific to a particular consumer, such 

as changes in the consumer’s 

creditworthiness, and to increases in 

annual percentage rates imposed due to 

factors such as changes in market 

conditions or the issuer’s cost of funds. 

If based on its review a card issuer is 

required to reduce the rate applicable to 

an account, the proposed rule requires 

that the rate be reduced within 30 days 

after completion of the evaluation. 

Factors relevant to reevaluation of 

rate increases. The proposed rule sets 

forth guidance on the factors that a 

credit card issuer must consider when 

performing the reevaluation of a rate 

increase. Credit card underwriting 

standards can change over time and for 

various reasons. In some cases, the 

proposed rule would require card 

issuers to review a consumer’s account 

every six months for several years, and 

the issuer’s underwriting standards for 

its new and existing cardholders may 

change significantly during that time. 

Accordingly, the proposed rule would 

permit a card issuer to review either the 

same factors on which the rate increase 

was originally based, or to review the 

factors that the card issuer currently 

considers when determining the annual 

percentage rates applicable to its credit 

card accounts. 

Termination of obligation to 

reevaluate rate increases. The proposed 

rule requires that a card issuer continue 

to review a consumer’s account each six 

months unless the rate is reduced to the 

rate in effect prior to the increase. In 

some circumstances, the proposed rule 

may require card issuers to reevaluate 

rate increases each six months for an 

indefinite period. The proposal solicits 

comment on whether the obligation to 


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review the rate applicable to a 

consumer’s account should terminate 

after some specific time period elapses 

following the initial increase, for 

example after five years, as well as on 

whether there is significant benefit to 

consumers from requiring card issuers 

to continue reevaluating rate increases 

even after an extended period of time. 

III. Statutory Authority 

Section 2 of the Credit Card Act states 

that the Board ‘‘may issue such rules 

and publish such model forms as it 

considers necessary to carry out this Act 

and the amendments made by this Act.’’ 

In addition, the provisions of the Credit 

Card Act implemented by this proposal 

rule direct the Board to issue 

implementing regulations. See Credit 

Card Act § 101(c) (new TILA § 148) and 

§ 102(b) (new TILA § 149). Furthermore, 

these provisions of the Credit Card Act 

amend TILA, which mandates that the 

Board prescribe regulations to carry out 

its purposes and specifically authorizes 

the Board, among other things, to do the 

following: 

• Issue regulations that contain such 

classifications, differentiations, or other 

provisions, or that provide for such 

adjustments and exceptions for any 

class of transactions, that in the Board’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, 

facilitate compliance with the act, or 

prevent circumvention or evasion. 15 

U.S.C. 1604(a). 

• Exempt from all or part of TILA any 

class of transactions if the Board 

determines that TILA coverage does not 

provide a meaningful benefit to 

consumers in the form of useful 

information or protection. The Board 

must consider factors identified in the 

act and publish its rationale at the time 

it proposes an exemption for comment. 

15 U.S.C. 1604(f). 

• Add or modify information required 

to be disclosed with credit and charge 

card applications or solicitations if the 

Board determines the action is 

necessary to carry out the purposes of, 

or prevent evasions of, the application 

and solicitation disclosure rules. 15 

U.S.C. 1637(c)(5). 

• Require disclosures in 

advertisements of open-end plans. 15 

U.S.C. 1663. 

For the reasons discussed in this 

notice, the Board is using its specific 

authority under TILA and the Credit 

Card Act, in concurrence with other 

TILA provisions, to effectuate the 

purposes of TILA, to prevent the 

circumvention or evasion of TILA, and 

to facilitate compliance with TILA. 

IV. Section-by-Section Analysis 

Section 226.5a Credit and Charge Card 

Applications and Solicitations 

Section 226.6 Account-Opening 

Disclosures 

Sections 226.5a(a)(2)(iv) and 

226.6(b)(1)(i) address the use of bold 

text in, respectively, the application and 

solicitation table and the accountopening table. Currently, these 

provisions require that any fee or 

percentage amounts for late payment, 

returned payment, and over-the-limit 

fees be disclosed in bold text. However, 

these provisions also state that bold text 

shall not be used for any maximum 

limits on fee amounts unless the fee 

varies by state. 

As discussed in detail below with 

respect to the proposed amendments to 

Appendix G–18, disclosure of a 

maximum limit (or ‘‘up to’’ amount) will 

generally be necessary to accurately 

describe penalty fees that are consistent 

with the new substantive restrictions in 

proposed § 226.52(b). While the Board 

previously restricted the use of bold text 

for maximum fee limits in order to focus 

consumers’ attention on the fee or 

percentage amounts, the Board believes 

that—because the maximum limit will 

generally be the only amount disclosed 

for penalty fees—it is important to 

highlight that amount. 

Accordingly, the Board is proposing 

to amend §§ 226.5a(a)(2)(iv) and 

226.6(b)(1)(i) to require the use of bold 

text when disclosing maximum limits 

on fees. For consistency and to facilitate 

compliance, these amendments would 

apply to maximum limits for all fees 

required to be disclosed in the §§ 226.5a 

and 226.6 tables (including maximum 

limits for cash advance and balance 

transfer fees). The Board would also 

make conforming amendments to 

comment 5a(a)(2)–5.ii. 

Section 226.7 Periodic Statement 

Section 226.7(b)(11)(i)(B) requires 

card issuers to disclose the amount of 

any late payment fee and any increased 

rate that may be imposed on the account 

as a result of a late payment. If a range 

of late payment fees may be assessed, 

the card issuer may state the range of 

fees, or the highest fee and at the 

issuer’s option with the highest fee an 

indication that the fee imposed could be 

lower. Comment 7(b)(11)–4 clarifies that 

disclosing a late payment fee as ‘‘up to 

$29’’ complies with this requirement. 

Model language is provided in Samples 

G–18(B), G–18(D), G–18(F), and G– 

18(G). 

As discussed in greater detail below 

with respect to the proposed 

amendments to Appendix G, an ‘‘up to’’ 

disclosure will generally be necessary to 

accurately describe a late payment fee 

that is consistent with the substantive 

restrictions in proposed § 226.52(b). 

Accordingly, the Board is proposing to 

amend § 226.7(b)(11)(i)(B) to clarify that 

it is no longer optional to disclose an 

indication that the late payment fee may 

be lower than the disclosed amount. 

However, the Board notes that, 

consistent with § 226.52(b), a card issuer 

could disclose a range of late payment 

fees if, for example, the issuer chose not 

to impose a fee when a required 

minimum periodic payment below a 

certain amount is not received by the 

payment due date. As discussed in 

detail below, proposed § 226.52(b)(2)(i) 

would prohibit a card issuer from 

imposing a late payment fee that 

exceeds the amount of the delinquent 

minimum payment. A card issuer could 

choose to comply with this prohibition 

by only charging a late payment fee 

when the delinquent payment is above 

a certain amount. In these 

circumstances, the card issuer could 

disclose the late payment fee as a range. 

For example, if a card issuer chose not 

to impose a late payment fee when a 

payment that is less than $5 is late, the 

issuer could disclose its fee as a range 

from $5 to the maximum fee amount 

under the safe harbor in proposed 

§ 226.52(b)(3). 

Section 226.9 Subsequent Disclosure 

Requirements 

9(c) Change in Terms 

9(c)(2) Rules Affecting Open-End (Not 

Home-Secured) Plans 

9(g) Increases in Rates Due to 

Delinquency or Default or as a Penalty 

The Credit Card Act added new TILA 

Section 148, which requires creditors 

that increase an annual percentage rate 

applicable to a credit card account 

under an open-end consumer credit 

plan, based on factors including the 

credit risk of the consumer, market 

conditions, or other factors, to consider 

changes in such factors in subsequently 

determining whether to reduce the 

annual percentage rate. New TILA 

Section 148 requires creditors to 

maintain reasonable methodologies for 

assessing these factors. The statute also 

sets forth a timing requirement for this 

review. Specifically, creditors are 

required to review, no less frequently 

than once every six months, accounts 

for which the annual percentage rate has 

been increased to assess whether these 

factors have changed. New TILA Section 

148 is effective August 22, 2010 but 

requires that creditors review accounts 


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1As discussed in the supplementary information 

to § 226.59, the proposed rule would require that 

rate increases imposed between January 1, 2009 and 

August 21, 2010 first be reviewed prior to February 

22, 2011 (six months after the effective date of new 

§ 226.59). 

on which the annual percentage rate has 

been increased since January 1, 2009.1

New TILA Section 148 requires 

creditors to reduce the annual 

percentage rate that was previously 

increased if a reduction is ‘‘indicated’’ by 

the review. However, new TILA Section 

148(c) expressly provides that no 

specific amount of reduction in the rate 

is required. The Board is proposing to 

implement the substantive requirements 

of new TILA Section 148 in a new 

§ 226.59, discussed elsewhere in this 

supplementary information. 

In addition to these substantive 

requirements, TILA Section 148 also 

requires creditors to disclose the reasons 

for an annual percentage rate increase 

applicable to a credit card under an 

open-end consumer credit plan in the 

notice required to be provided 45 days 

in advance of that increase. The Board 

proposes to implement the notice 

requirements in § 226.9(c) and (g), 

which are discussed in this section. As 

discussed in the February 2010 

Regulation Z Rule, card issuers are 

required to provide 45 days’ advance 

notice of rate increases due to a change 

in contractual terms pursuant to 

§ 226.9(c)(2) and of rate increases due to 

delinquency, default, or as a penalty not 

due to a change in contractual terms of 

the consumer’s account pursuant to 

§ 226.9(g). The additional notice 

requirements included in new TILA 

Section 148 are the same regardless of 

whether the rate increase is due to a 

change in the contractual terms or the 

exercise of a penalty pricing provision 

already in the contract; therefore for 

ease of reference the proposed notice 

requirements under § 226.9(c)(2) and (g) 

are discussed in a single section of this 

supplementary information. 

Consistent with the approach that the 

Board has taken in implementing other 

provisions of the Credit Card Act that 

apply to credit card accounts under an 

open-end consumer credit plan, the 

proposed changes to § 226.9(c)(2) and 

(g) would apply to ‘‘credit card accounts 

under an open-end (not home-secured) 

consumer credit plan’’ as defined in 

§ 226.2(a)(15). Therefore, home-equity 

lines of credit accessed by credit cards 

and overdraft lines of credit accessed by 

a debit card would not be subject to the 

new requirements to disclose the 

reasons for a rate increase implemented 

in § 226.9(c)(2) and (g). 

Section 226.9(c)(2)(iv) sets forth the 

content requirements for significant 

changes in account terms, including rate 

increases that are due to a change in the 

contractual terms of the consumer’s 

account. The Board is proposing to add 

a new § 226.9(c)(2)(iv)(A)(8) that 

requires a card issuer to disclose no 

more than four principal reasons for the 

rate increase for a credit card account 

under an open-end (not home-secured) 

credit plan, listed in their order of 

importance, in order to implement the 

notice requirements of new TILA 

Section 148. Comment 9(c)(2)(iv)–11 

would provide additional guidance on 

the required disclosure. Specifically 

comment 9(c)(2)(iv)–11 states that there 

is no minimum number of reasons that 

are required to be disclosed under 

§ 226.9(c)(2)(iv)(A)(8), but that the 

reasons disclosed are required to relate 

to and accurately describe the principal 

factors actually considered by the credit 

card issuer. The Board does not believe 

that it is appropriate to mandate 

disclosure of a minimum number of 

reasons, because rate increases may 

occur in different circumstances and the 

number of principal factors considered 

by the issuer could vary. For example, 

the rate increase could be the result of 

the consumer’s behavior on the account, 

such as making a late payment, and in 

that case there would be only one 

principal reason for the rate increase. In 

contrast, a card issuer could base a rate 

increase on several different reasons, for 

example, a decrease in the consumer’s 

credit score and changes in market 

conditions. In those circumstances, the 

card issuer would be required to 

disclose both principal reasons. 

However, as noted above, in order to 

avoid information overload, the 

regulation would limit the number of 

principal reasons to a maximum of four. 

The comment further notes that a card 

issuer may describe the reasons for the 

increase in general terms, by disclosing 

for example that a rate increase is due 

to ‘‘a decline in your creditworthiness’’ 

or ‘‘a decline in your credit score,’’ if the 

rate increase is triggered by a decrease 

of 100 points in a consumer’s credit 

score. Similarly, the comment notes that 

a notice of a rate increase triggered by 

a 10% increase in the card issuer’s cost 

of funds may be disclosed as ‘‘a change 

in market conditions.’’ The Board 

believes that this is the appropriate level 

of detail for this disclosure, because it 

would inform the consumer whether the 

rate increase is due to changes in the 

consumer’s creditworthiness or 

behavior on the account, which the 

consumer may be able to take actions to 

mitigate, or whether the increase is due 

to more general factors such as changes 

in market conditions. The Board 

believes that consumers may find more 

detailed information confusing, and 

that, accordingly, the benefit to 

consumers of such detailed information 

would not outweigh the operational 

burden associated with providing 

additional detail. 

The disclosure requirements of new 

§ 226.9(c)(2)(iv)(A)(8) are intended to be 

flexible, to reflect the Board’s 

understanding that different card issuers 

may consider different reasons, or may 

weigh similar reasons differently, in 

determining whether to raise the rate 

applicable to a consumer’s account. 

Proposed comment 9(c)(2)(iv)–11 notes 

that in some circumstances, it may be 

appropriate for a card issuer to combine 

the disclosure of several reasons in one 

statement. For example, assume that the 

rate applicable to a consumer’s account 

is being increased because a consumer 

made a late payment on the credit card 

account on which the rate increase is 

being imposed, made a late payment on 

a credit card account with another card 

issuer, and the consumer’s credit score 

decreased, in part due to such late 

payments. The card issuer may disclose 

the reasons for the rate increase as a 

decline in the consumer’s credit score 

and the consumer’s late payment on the 

account subject to the increase. Because 

the late payment on the credit card 

account with the other issuer also likely 

contributed to the decline in the 

consumer’s credit score, it is not 

required to be separately disclosed. 

Similarly, the Board proposes to add 

a new § 226.9(g)(3)(i)(A)(6) for rate 

increases due to delinquency, default, or 

as a penalty not due to a change in 

contractual terms of the consumer’s 

account pursuant to § 226.9(g). Proposed 

§ 226.9(g)(3)(i)(A)(6) would require a 

card issuer to disclose no more than 

four reasons for the rate increase, listed 

in their order of importance, for a credit 

card account under an open-end (not 

home-secured) credit plan. New 

comment 9(g)–7 would cross-reference 

comment 9(c)(2)(iv)–11 for guidance on 

disclosure of the reasons for a rate 

increase. 

The Board proposes to amend 

Samples G–18(F), G–18(G), G–20, and 

G–22 to incorporate examples of 

disclosures of the reasons for a rate 

increase as required by proposed 

§ 226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6). 

Section 226.52 Limitations on Fees 

52(b) Limitations on Penalty Fees 

Most credit card issuers will assess a 

penalty fee if a consumer engages in 

activity that violates the terms of the 

cardholder agreement or other 

requirements imposed by the issuer 


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12338 Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 

2The Board notes that some card issuers have 

recently announced that they will cease imposing 

fees for exceeding the credit limit. In addition, 

§ 226.56 prohibits card issuers from imposing such 

fees unless the consumer has consented to the 

issuer’s payment of transactions that exceed the 

credit limit. 

3U.S. Gov’t Accountability Office, Credit Cards: 

Increased Complexity in Rates and Fees Heightens 

Need for More Effective Disclosures to Consumers 

(Sept. 2006) (GAO Credit Card Report) at 5, 18–22, 

33, 72 (available at http://www.gao.gov/new.items/ 

d06929.pdf). 

4See GAO Credit Card Report at 72–73. 

5The Mintel data, which is derived from a 

representative sample of credit card solicitations, 

indicates that the average late payment fee was 

approximately $37 in January 2007 and remained 

at that level through May 2009. During the same 

period, the average over-the-limit fee increased 

from approximately $35 to approximately $36. In 

addition, the average returned-payment fee during 

this period increased from approximately $30 to 

approximately $32. 

6See The Pew Charitable Trusts, Still Waiting: 

‘‘Unfair or Deceptive’’ Credit Card Practices 

Continue as Americans Wait for New Reforms to 

Take Effect (Oct. 2009) (Pew Credit Card Report) at 

3, 12–13, 31–33 (available at http:// 

www.pewtrusts.org/uploadedFiles/ 

wwwpewtrustsorg/Reports/Credit_Cards/ 

Pew_Credit_Cards_Oct09_Final.pdf). As noted in 

the Pew Credit Card Report, the largest bank card 

issuers generally tier late payment fees based on the 

account balance (with a median fee of $39 applying 

when the account balance is $250 or more). 

Similarly, some bank card issuers tier over-the-limit 

fees (with the median fee of $39 applying when the 

account balance is $1,000 or more). In both cases, 

the balance necessary to trigger the highest penalty 

fee is significantly less than the average outstanding 

balance on active credit card accounts. See id. at 

12–13, 31. 7See Pew Credit Card Report at 3, 31–33. 8The Office of the Comptroller of the Currency 

(OCC), the Federal Deposit Insurance Corporation 

(FDIC), and the Office of Thrift Supervision (OTS). 

9E.g., Black’s Law Dictionary at 1272 (7th ed. 

1999); see also id. (‘‘It is extremely difficult to state 

what lawyers mean when they speak of 

‘reasonableness.’ ’’ (quoting John Salmond, 

Jurisprudence 183 n.(u) (Glanville L. Williams ed., 

10th ed. 1947)). 

10See, e.g., 42 U.S.C. 12112(b)(5) (defining the 

term ‘‘discriminate’’ to include ‘‘not making 

reasonable accommodations to the known physical 

or mental limitations of an otherwise qualified 

individual with a disability who is an applicant or 

employee’’); 28 U.S.C. 2412(b) (‘‘Unless expressly 

prohibited by statute, a court may award reasonable 

fees and expenses of attorneys * * * to the 

prevailing party in any civil action brought by or 

against the United States or any agency.’’); 43 U.S.C. 

1734(a) (‘‘Notwithstanding any other provision of 

law, the Secretary may establish reasonable filing 

and service fees and reasonable charges, and 

commissions with respect to applications and other 

documents relating to the public lands and may 

change and abolish such fees, charges, and 

commissions.’’). 

11E.g., Merriam-Webster’s Collegiate Dictionary at 

936 (10th ed. 1995). 

with respect to the account. For 

example, most agreements provide that 

a fee will be assessed if the required 

minimum periodic payment is not 

received on or before the payment due 

date or if a payment is returned for 

insufficient funds or for other reasons. 

Similarly, many agreements provide 

that a fee will be assessed if amounts are 

charged to the account that exceed the 

account’s credit limit.2 These fees have 

increased significantly over the past 

fifteen years. A 2006 report by the 

Government Accountability Office 

(GAO) found that late-payment and 

over-the-limit fees increased from an 

average of approximately $13 in 1995 to 

an average of approximately $30 in 

2005.3 The GAO also found that, over 

the same period, the percentage of 

issuer revenue derived from penalty fees 

increased to approximately 10%.4

According to data obtained by the 

Board from Mintel Comperemedia, the 

average late payment fee has increased 

to approximately $37 as of May 2009, 

while the average over-the-limit fee has 

increased to approximately $36.5 In 

addition, a July 2009 review of credit 

card application disclosures by the Pew 

Charitable Trusts found that the median 

late-payment and over-the-limit fees 

charged by the twelve largest bank card 

issuers were $39.6

However, it appears that many 

smaller credit card issuers charge 

significantly lower late-payment and 

over-the-limit fees. For example, the 

Board understands that some 

community bank issuers charge latepayment and over-the-limit fees that 

average between $17 to $25. In addition, 

the Board understands that many credit 

unions charge late-payment and overthe-limit fees of $20 on average. 

Similarly, the Pew Credit Card Report 

found that the median late-payment and 

over-the-limit fees charged by the 

twelve largest credit union card issuers 

were $20.7

The Credit Card Act creates a new 

TILA Section 149. Section 149(a) 

provides that ‘‘[t]he amount of any 

penalty fee or charge that a card issuer 

may impose with respect to a credit card 

account under an open end consumer 

credit plan in connection with any 

omission with respect to, or violation of, 

the cardholder agreement, including any 

late payment fee, over-the-limit fee, or 

any other penalty fee or charge, shall be 

reasonable and proportional to such 

omission or violation.’’ Section 149(b) 

further provides that the Board, in 

consultation with the other Federal 

banking agencies 8 and the National 

Credit Union Administration (NCUA), 

shall issue rules that ‘‘establish 

standards for assessing whether the 

amount of any penalty fee or charge 

* * * is reasonable and proportional to 

the omission or violation to which the 

fee or charge relates.’’ 

In issuing these rules, new TILA 

Section 149(c) requires the Board to 

consider: (1) The cost incurred by the 

creditor from such omission or 

violation; (2) the deterrence of such 

omission or violation by the cardholder; 

(3) the conduct of the cardholder; and 

(4) such other factors as the Board may 

deem necessary or appropriate. Section 

149(d) authorizes the Board to establish 

‘‘different standards for different types 

of fees and charges, as appropriate.’’ 

Finally, Section 149(e) authorizes the 

Board—in consultation with the other 

Federal banking agencies and the 

NCUA—to ‘‘provide an amount for any 

penalty fee or charge * * * that is 

presumed to be reasonable and 

proportional to the omission or 

violation to which the fee or charge 

relates.’’ 

As discussed below, the Board 

proposes to implement new TILA 

Section 149 in proposed § 226.52(b). In 

developing this proposal, the Board 

consulted with the other Federal 

banking agencies and the NCUA. 

Reasonable and Proportional Standard 

and Consideration of Statutory Factors 

As noted above, the Board is 

responsible for establishing standards 

for assessing whether a credit card 

penalty fee is reasonable and 

proportional to the violation for which 

it is imposed. New TILA Section 149 

does not define ‘‘reasonable and 

proportional,’’ nor is the Board aware of 

any generally accepted definition for 

those terms when used in conjunction 

with one another. As a separate legal 

term, ‘‘reasonable’’ has been defined as 

‘‘fair, proper, or moderate.’’ 9 Congress 

often uses a reasonableness standard to 

provide agencies or courts with broad 

discretion in implementing or 

interpreting a statutory requirement.10

The term ‘‘proportional’’ is seldom used 

by Congress and does not have a 

generally-accepted legal definition. 

However, it is commonly defined as 

meaning ‘‘corresponding in size, degree, 

or intensity’’ or as ‘‘having the same or 

a constant ratio.’’ 11 Thus, it appears that 

Congress intended the words 

‘‘reasonable and proportional’’ in new 

TILA Section 149(a) to require that there 

be a reasonable and generally consistent 

relationship between the dollar amounts 

of credit card penalty fees and the 

violations for which those fees are 

imposed, providing the Board with 

substantial discretion in implementing 

that requirement. 

However, in Section 149(c), Congress 

also set forth certain factors that the 

Board is required to consider when 

establishing standards for determining 

whether penalty fees are reasonable and 

proportional. Although Section 149(c) 

only requires consideration of these 


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12The Board acknowledges that a penalty fee is 

unlikely to have a deterrent effect in circumstances 

where consumers cannot avoid the violation of the 

account terms. However, deterrence is a required 

factor under new TILA Section 149(c), and there is 

evidence indicating that, as a general matter, 

penalty fees may deter future violations of the 

account terms. See Agarwal et al., Learning in the 

Credit Card Market (Feb. 8, 2008) (finding that, 

based on a study of four million credit card 

statements, a consumer who incurs a late payment 

fee is 40% less likely to incur a late payment fee 

during the next month, although this effect 

depreciates approximately 10% each month) 

(available at http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=1091623&download=yes). 

factors, the Board believes that they 

reflect Congressional intent with respect 

to the implementation of Section 149(a) 

and therefore provide useful measures 

for determining whether penalty fees are 

‘‘reasonable and proportional.’’ 

Accordingly, when implementing the 

reasonable and proportional 

requirement, the Board has been guided 

by these factors. In addition, pursuant to 

its authority under Section 149(c)(4) to 

consider ‘‘such other factors as the 

Board may deem necessary or 

appropriate,’’ the Board has considered 

the need for general regulations that can 

be consistently applied by card issuers 

and enforced by the Federal banking 

agencies, the NCUA, and the Federal 

Trade Commission. The Board has also 

considered the need for regulations that 

result in fees that can be effectively 

disclosed to consumers in solicitations, 

account-opening disclosures, and 

elsewhere. 

As discussed below, when the 

statutory factors in Section 149(c) were 

in conflict, the Board found it necessary 

to give more weight to a particular factor 

or factors. In addition, while the Board 

has generally attempted to establish 

consistent relationships between the 

dollar amounts of penalty fees and the 

violations for which they are imposed, 

there are certain circumstances in which 

the Board believes that a particular 

factor or factors may warrant 

modifications to those relationships that 

could produce some degree of 

inconsistency. The Board is making 

these determinations pursuant to the 

authority granted by new TILA Section 

149 and existing TILA Section 105(a). In 

particular, as noted above, new TILA 

Section 149(d) provides that ‘‘the Board 

may establish different standards for 

different types of fees and charges, as 

appropriate.’’ 

Cost Incurred as a Result of Violations 

New TILA Section 149(c)(1) requires 

the Board to consider the cost incurred 

by the creditor from the violation. The 

Board believes that, for purposes of new 

TILA Section 149(a), the dollar amount 

of a penalty fee is reasonable and 

proportional to a violation if it 

represents a reasonable proportion of 

the total costs incurred by the issuer as 

a result of that type of violation across 

all consumers. This interpretation 

appears to be consistent with Congress’ 

intent insofar as it permits card issuers 

to use penalty fees to pass on the costs 

incurred as a result of violations while 

ensuring that those costs are spread 

evenly among consumers and that no 

individual consumer bears an 

unreasonable or disproportionate share. 

As discussed below, the Board also 

intends to adopt a safe harbor amount 

for penalty fees that the Board believes 

would be generally sufficient to cover 

issuers’ costs. 

The Board notes that the proposed 

rule would not require that a penalty fee 

be reasonable and proportional to the 

costs incurred as a result of a specific 

violation on a specific account. Such a 

requirement would force card issuers to 

wait until after a violation has occurred 

to determine the associated costs. In 

addition to being inefficient and overly 

burdensome for card issuers, this type of 

requirement would be difficult for 

regulators to enforce and would result 

in fees that could not be disclosed to 

consumers in advance. The Board does 

not believe that Congress intended this 

result. Instead, as discussed in greater 

detail below, the proposed rule would 

require card issuers to determine that 

their penalty fees represent a reasonable 

proportion of the total costs incurred by 

the issuer as a result of the type of 

violation (for example, late payments). 

Deterrence of Violations 

New TILA Section 149(c)(2) requires 

the Board to consider the deterrence of 

violations by the cardholder. The Board 

believes that a penalty fee is reasonable 

and proportional to a violation under 

new TILA Section 149(a) if the dollar 

amount of the fee is reasonably 

necessary to deter that type of violation. 

The Board believes that this 

interpretation is consistent with 

Congress’ intent because it will prevent 

consumers from being charged fees that 

unreasonably exceed—or are out of 

proportion to—their deterrent effect. As 

discussed below, the Board would also 

adopt a safe harbor amount for penalty 

fees that the Board believes would be 

generally sufficient to deter violations. 

The proposed rule does not require 

that penalty fees be calibrated to deter 

individual consumers from engaging in 

specific violations. The Board believes 

that this type of requirement would be 

unworkable because the amount 

necessary to deter a particular consumer 

from, for example, paying late may 

depend on the individual characteristics 

of that consumer (such as the 

consumer’s disposable income or other 

obligations) and other highly specific 

factors. Imposing such a requirement 

would create compliance, enforcement, 

and disclosure difficulties similar to 

those discussed above with respect to 

costs. Accordingly, as discussed in more 

detail below, the proposed rule would 

require that penalty fees be reasonably 

necessary to deter the type of violation, 

rather than a specific violation or an 

individual consumer.12

Consumer Conduct 

New TILA Section 149(c)(3) requires 

the Board to consider the conduct of the 

cardholder. As discussed above, the 

Board does not believe that Congress 

intended to require that each penalty fee 

be based on an assessment of the 

individual characteristics of the 

violation. Thus, the proposed rule 

would not require card issuers to 

examine the conduct of the individual 

consumer before imposing a penalty fee. 

The Board believes that—to the extent 

certain consumer conduct that violates 

the account terms or other requirements 

has the effect of increasing the costs 

incurred by the card issuer—fees 

imposed pursuant to the proposed rule 

would reflect that conduct because the 

issuer would be permitted to recover the 

increased cost. Similarly, the proposed 

rule takes consumer conduct into 

account by permitting issuers to charge 

penalty fees that are reasonably 

necessary to deter certain types of 

conduct that result in violations. Thus, 

because consideration of individual 

consumer conduct is not feasible and 

because general consumer conduct 

would be reflected in the cost and 

deterrence analyses, the Board’s general 

rule would not permit penalty fees to be 

based exclusively on consumer conduct. 

However, the Board considered 

consumer conduct when developing 

other provisions of the proposed rule. 

These provisions reflect the Board’s 

belief that Congress intended the 

amount of a penalty fee to bear a 

reasonable relationship to the 

magnitude of the violation. For 

example, a consumer who exceeds the 

credit limit by $5 should not be 

penalized to the same degree as a 

consumer who exceeds the limit by 

$500. Accordingly, the proposed rule 

would prohibit issuers from imposing 

penalty fees that exceed the dollar 

amount associated with the violation of 

the account terms or other requirements. 

Thus, a consumer who exceeds the 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
12340 Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 

13 It appears that Congress intended new TILA 

Section 149 to apply to all over-the-limit fees, even 

if the consumer has affirmatively consented to the 

payment of over-the-limit transactions pursuant to 

new TILA Section 127(k) and § 226.56. See new 

TILA § 149(a) (listing over-the-limit fees as an 

example of a penalty fee or charge). Furthermore, 

the Board has determined that the Credit Card Act’s 

restrictions on fees for over-the-limit transactions 

apply regardless of whether the card issuer 

characterizes the fee as a fee for a service or a fee 

for a violation of the account terms. See comment 

56(j)–1. 

14As discussed below, § 226.52(b)(2)(i)(B) would 

prohibit the imposition of fees for declined 

transactions, fees based on account inactivity, and 

fees based on the closure or termination of an 

account. 

credit limit by $5 could not be charged 

an over-the-limit fee of more than $5. 

The proposed rule would also 

establish a safe harbor permitting higher 

penalty fees when a large dollar amount 

is associated with the violation. 

Specifically, issuers would be permitted 

to impose penalty fees that do not 

exceed 5% of the dollar amount 

associated with the violation (up to a 

maximum amount). Thus, a consumer 

who exceeds the credit limit by $500 

could be charged an over-the-limit fee of 

$25. 

Furthermore, the proposed rule would 

prohibit issuers from imposing multiple 

penalty fees based on a single event or 

transaction. The Board believes that 

imposing multiple fees in these 

circumstances could be unreasonable 

and disproportionate to the conduct of 

the consumer because the same conduct 

may result in a single or multiple 

violations, depending on circumstances 

that may not be in the control of the 

consumer. For example, the proposed 

rule would prohibit issuers from 

charging a late payment fee and a 

returned payment fee based on a single 

payment. 

Finally, the Board solicits comment 

on whether there are additional 

methods for regulating the amount of 

credit card penalty fees based on the 

conduct of the consumer. In particular, 

the Board solicits comment on whether 

the safe harbor in § 226.52(b)(3) should 

permit issuers to base penalty fees on 

consumer conduct by: 

• Tiering the dollar amount of 

penalty fees based on the number of 

times a consumer engages in particular 

conduct during a specified period. For 

example, card issuers could be 

permitted to charge a fee for the second 

late payment during a 12-month period 

that is higher than the fee charged for 

the first late payment. 

• Imposing penalty fees in increments 

based on the consumer’s conduct. For 

example, card issuers could be 

permitted to charge a late payment fee 

of $5 each day after the payment due 

date until the required minimum 

periodic payment is received. Thus, a 

consumer who is only a day late would 

be charged $5 in late payment fees, 

while a consumer who is five days late 

would be charged $25. 

52(b)(1) General Rule 

Proposed § 226.52(b)(1) implements 

the general rule in new TILA Section 

149(a) by providing that a card issuer 

must not impose a fee for violating the 

terms or other requirements of a credit 

card account under an open-end (not 

home-secured) consumer credit plan 

unless the card issuer has determined 

that either: (1) The dollar amount of the 

fee represents a reasonable proportion of 

the total costs incurred by the card 

issuer as a result of that type of 

violation; or (2) the dollar amount of the 

fee is reasonably necessary to deter that 

type of violation. 

Because a card issuer is in the best 

position to determine the costs it incurs 

as a result of violations and the 

deterrent effect of its penalty fees, the 

Board believes that, as a general matter, 

it is appropriate to make card issuers 

responsible for determining that their 

fees comply with new TILA Section 

149(a) and § 226.52(b)(1). As discussed 

below, proposed § 226.52(b)(3) contains 

a safe harbor that is intended to reduce 

the burden of making these 

determinations. The Board notes that a 

card issuer that chooses to base its 

penalty fees on its own determinations 

(rather than on the safe harbor) must be 

able to demonstrate to the regulator 

responsible for enforcing compliance 

with TILA and Regulation Z that its 

determinations are consistent with 

§ 226.52(b)(1). 

As discussed above, it would be 

inefficient and overly burdensome to 

require card issuers to make 

individualized determinations with 

respect to the costs incurred as a result 

of each violation or the amount 

necessary to deter each violation. 

Instead, card issuers would be required 

to make these determinations with 

respect to the type of violation (for 

example, late payments), rather than a 

specific violation or an individual 

consumer. Although ‘‘the conduct of the 

cardholder’’ is a relevant consideration 

under new TILA Section 149(c)(3), 

proposed § 226.52(b)(1) would not 

require a card issuer to examine the 

conduct of the individual consumer 

with respect to a particular violation 

before imposing a penalty fee, nor 

would it permit an issuer to base the 

amount of a penalty fee solely on a 

consumer’s conduct. Instead, the Board 

believes that this factor supports the 

prohibitions in proposed § 226.52(b)(2) 

on penalty fees that exceed the dollar 

amount associated with the violation 

and the imposition of multiple penalty 

fees based on a single event or 

transaction. 

Proposed comment 52(b)–1 would 

clarify that, for purposes of § 226.52(b), 

a fee is 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. This comment provides 

the following examples of fees that are 

subject to the limitations in—or 

prohibited by—§ 226.52(b): (1) Late 

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; (2) 

returned-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; (3) any fee or charge 

for an over-the-limit transaction as 

defined in § 226.56(a), to the extent the 

imposition of such a fee or charge is 

permitted by § 226.56; 13 (4) any fee or 

charge for a transaction that the card 

issuer declines to authorize; and (5) any 

fee imposed by a card issuer based on 

account inactivity (including the 

consumer’s failure to use the account for 

a particular number or amount of 

transactions or a particular type of 

transaction) or the closure or 

termination of an account.14

Proposed comment 52(b)–1 would 

also provide the following examples of 

fees to which § 226.52(b) does not 

apply: (1) Balance transfer fees; (2) cash 

advance fees; (3) foreign transaction 

fees; (4) annual fees and other fees for 

the issuance or availability of credit 

described in § 226.5a(b)(2), except to the 

extent that such fees are based on 

account inactivity; (4) fees for insurance 

described in § 226.4(b)(7) or debt 

cancellation or debt suspension 

coverage described in § 226.4(b)(10) 

written in connection with a credit 

transaction, provided that such fees are 

not imposed as a result of a violation of 

the account terms or other requirements; 

(5) fees for making an expedited 

payment (to the extent permitted by 

§ 226.10(e)); (6) fees for optional 

services (such as travel insurance); and 

(7) fees for reissuing a lost or stolen 

card. 

In addition, proposed comment 52(b)– 

1 would clarify that § 226.52(b) does not 

apply to charges attributable to an 

increase in an annual percentage rate 

based on an act or omission that violates 

the account terms. Currently, many 

credit card issuers apply an increased 


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15For example, revised TILA Section 171(a) and 

(b) and new TILA Section 172 explicitly distinguish 

between annual percentage rates, fees, and finance 

charges. 

16The Board also notes that prior versions of the 

Credit Card Act contained language that would 

have limited the amount of penalty rate increases, 

but that language was removed prior to enactment. 

See S. 414 § 103 (introduced Feb. 11, 2009) 

(proposing to create a new TILA § 127(o) requiring 

that ‘‘[t]he amount of any fee or charge that a card 

issuer may impose in connection with any omission 

with respect to, or violation of, the cardholder 

agreement, including any late payment fee, over the 

limit fee, increase in the applicable annual 

percentage rate, or any similar fee or charge, shall 

be reasonably related to the cost to the card issuer 

of such omission or violation’’) (emphasis added) 

(available at http://thomas.loc.gov). 

17For example, data submitted to the Board 

during the comment period for the January 2009 

FTC Act Rule indicated that more than 93% of 

accounts that were over the credit limit or 

delinquent twice in a twelve month period did not 

charge off during the subsequent twelve months. 

See Federal Reserve Board Docket No. R–1314: 

Exhibit 5, Table 1a to Comment from Oliver I. 

Ireland, Morrison Foerster LLP (Aug 7, 2008) (Argus 

Analysis) (presenting results of analysis by Argus 

Information & Advisory Services, LLC of historical 

data for consumer credit card accounts believed to 

represent approximately 70% of all outstanding 

consumer credit card balances). Furthermore, 

because collections generally continue after the 

account has been charged off, an account that has 

been charged off is not necessarily a total loss. 

18The Board recognizes that this is not 

necessarily the case for charge card accounts, which 

generally impose an annual fee but not interest 

charges because the balance must be paid in full 

each billing cycle. As discussed below, the Board 

solicits comment on whether a different approach 

should be taken with these types of accounts. 

19See revised TILA § 171; new TILA § 172; see 

also § 226.55. 

20This rule was issued jointly with the OTS and 

NCUA under the Federal Trade Commission Act to 

protect consumers from unfair acts or practices with 

respect to consumer credit card accounts. See 74 FR 

5521–5528. 

annual percentage rate (or penalty rate) 

based on certain violations of the 

account terms. Application of this 

increased rate can result in increased 

interest charges. However, the Board 

does not believe that Congress intended 

the words ‘‘any penalty fee or charge’’ in 

new TILA Section 149(a) to apply to 

penalty rate increases. 

Elsewhere in the Credit Card Act, 

Congress expressly referred to increases 

in annual percentage rates when it 

intended to address them.15 In fact, the 

Credit Card Act contains several 

provisions that specifically limit the 

ability of card issuers to apply penalty 

rates. Revised TILA Section 171 

prohibits application of penalty rates to 

existing credit card balances unless the 

account is more than 60 days 

delinquent. See revised TILA 

§ 171(b)(4); see also § 226.55(b)(4). 

Furthermore, if an account becomes 

more than 60 days delinquent and a 

penalty rate is applied to an existing 

balance, the card issuer must terminate 

the penalty rate if it receives the 

required minimum payments on time 

for the next six months. See revised 

TILA § 171(b)(4)(B); § 226.55(b)(4)(ii). 

With respect to new transactions, new 

TILA § 172(a) generally prohibits card 

issuers from applying penalty rates 

during the first year after account 

opening. See also § 226.55(b)(3)(iii). 

Subsequently, the card issuer must 

provide 45 days advance notice before 

applying a penalty rate to new 

transactions. See new TILA § 127(i); 

§ 226.9(g). Finally, once a penalty rate is 

in effect, the card issuer generally must 

review the account at least once every 

six months thereafter and reduce the 

rate if appropriate. See new TILA § 148; 

proposed § 226.59. These protections— 

in combination with the lack of any 

express reference to penalty rate 

increases in new TILA Section 149— 

indicate that Congress did not intend to 

apply the ‘‘reasonable and proportional’’ 

standard to increases in annual 

percentage rates.16

Proposed comment 52(b)–2 would 

clarify that a card issuer may round any 

fee that complies with § 226.52(b) to the 

nearest whole dollar. For example, if the 

proposed rule permits a card issuer to 

impose a late payment fee of $21.50, the 

card issuer may round that amount up 

to the nearest whole dollar and impose 

a late payment fee of $22. However, if 

the permissible late payment fee were 

$21.49, the card issuer would not be 

permitted to round that amount up to 

$22, although the card issuer could 

round that amount down and impose a 

late payment fee of $21. 

Proposed comment 52(b)(1)–1 would 

clarify that the fact that a card issuer’s 

fees for violating the account terms are 

comparable to fees assessed by other 

card issuers is not sufficient to satisfy 

the requirements of § 226.52(b)(1). 

Instead, a card issuer must make its own 

determinations whether the amounts of 

its fees represent a reasonable 

proportion of the total costs incurred by 

the issuer or are reasonably necessary to 

deter violations. 

A. Fees Based on Costs 

Proposed comment 52(b)(1)(i)–1 

would clarify that a card issuer is not 

required to base its fees on the costs 

incurred as a result of a specific 

violation of the account terms or other 

requirements. Instead, for purposes of 

§ 226.52(b)(1)(i), a card issuer must have 

determined that a fee for violating the 

account terms or other requirements 

represents a reasonable proportion of 

the costs incurred by the card issuer as 

a result of that type of violation. The 

factors relevant to this determination 

include: (1) The number of violations of 

a particular type experienced by the 

card issuer during a prior period; and 

(2) the costs incurred by the card issuer 

during that period as a result of those 

violations. In addition, the card issuer 

may, at its option, base its fees on a 

reasonable estimate of changes in the 

number of violations of that type and 

the resulting costs during an upcoming 

period. 

For example, a card issuer could 

satisfy § 226.52(b)(1)(i) by determining 

that its late payment fee represents a 

reasonable proportion of the total costs 

incurred by the card issuer as a result 

of late payments based on the number 

of delinquencies it experienced in the 

past twelve months, the costs incurred 

as a result of those delinquencies, and 

a reasonable estimate about changes in 

delinquency rates and the costs incurred 

as a result of delinquencies during a 

subsequent period of time (such as the 

next twelve months). As discussed 

below, proposed comments 52(b)(1)(i)–4 

through –6 would provide more detailed 

examples of the types of costs that a 

card issuer may incur as a result of late 

payments, returned payments, and 

transactions that exceed the credit limit 

as well as examples of fees that would 

represent a reasonable proportion of 

those costs. 

Proposed comment 52(b)(1)(i)–2 

would clarify that, although higher rates 

of loss may be associated with particular 

violations of the account terms, those 

losses and associated costs (such as the 

cost of holding reserves against losses) 

are excluded from the § 226.52(b)(1)(i) 

cost analysis. Although an account 

cannot become a loss without first 

becoming delinquent, delinquencies 

and associated losses may be caused by 

a variety of factors (such 

unemployment, illness, and divorce). 

Furthermore, it appears that most 

violations of the account terms do not 

actually result in losses.17

In addition, the Board understands 

that, as a general matter, card issuers 

currently do not price for the risk of loss 

through penalty fees; instead, issuers 

generally price for risk through upfront 

annual percentage rates and penalty rate 

increases.18 However, the Credit Card 

Act generally prohibits penalty rate 

increases during the first year after 

account opening and with respect to 

existing balances.19 The Board imposed 

similar limitations in January 2009, 

reasoning that pricing for risk using 

upfront rates rather than penalty rate 

increases would promote transparency 

and protect consumers from 

unanticipated increases in the cost of 

credit.20 For these same reasons, the 

Board is concerned that—if card issuers 


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21The Board notes that this proposed approach is 

consistent with the conclusions reached by the 

United Kingdom’s Office of Fair Trading in its 

statement of the principles that credit card issuers 

must follow in setting default charges. See Office of 

Fair Trading (United Kingdom), Calculating Fair 

Default Charges in Credit Card Contracts: A 

Statement of the OFT’s Position (April 2006) (OFT 

Credit Card Statement) at 1, 19–22 (‘‘[W]e fail to see 

how [losses] can legitimately be said to have been 

caused in any legally relevant sense by a particular 

default of the consumer given that * * * most 

defaulters do not default again in any given year, 

let alone are their accounts written off at a later 

stage.’’); see also id. at 25 (‘‘[I]t is preferable for 

credit card providers’ costs to be covered * * * by 

the overall interest rate charged for using the card. 

That rate is most likely to be in the forefront of the 

minds of consumers when entering contracts, and 

the figure is one which readily enables the 

consumer to compare the advantages (or otherwise) 

of signing up for one credit card rather than 

another. The transparency of core terms such as the 

interest rate payable on the card enhances the 

ability of consumers to compare and contrast the 

various credit cards on offer in the market and is 

therefore likely to bring about competitive 

downward pressure on the rates, and hence costs 

involved. It is therefore preferable, from the point 

of view of making markets work well that if credit 

card companies want to recover costs associated 

with default from their customers, they should do 

so by virtue of the overall interest rate payable for 

credit on the card.’’) (available at http:// 

www.oft.gov.uk/shared_oft/reports/ 

financial_products/oft842.pdf). The Board is aware 

that a recent opinion by the Supreme Court of the 

United Kingdom has called into question aspects of 

the OFT’s legal authority to regulate prices paid by 

consumers for banking services. See Office of Fair 

Trading v. Abbey Nat’l Plc and Others (Nov. 25, 

2009) (available at http:// 

www.supremecourt.gov.uk/decided-cases/docs/ 

UKSC_2009_0070_Judgment.pdf). However, this 

opinion does not appear to affect the OFT’s 

authority to regulate default charges, which was the 

basis for the Credit Card Statement. See OFT Credit 

Card Statement at 10–17. Regardless, this question 

does not affect the Board’s legal authority (and 

mandate) to regulate credit card penalty fees under 

new TILA Section 149. Accordingly, while the 

Board does not find the OFT Credit Card Statement 

to be dispositive on any particular point, the Board 

believes that the OFT’s findings with respect to 

credit card penalty fees warrant consideration, 

along with other factors. 

were permitted to begin recovering 

losses and associated costs through 

penalty fees rather than upfront rates— 

transparency in credit card pricing 

would be reduced.21 Nevertheless, the 

Board solicits comment on whether card 

issuers should be permitted to include 

losses and associated costs in the 

§ 226.52(b)(1)(i) determination. 

Proposed comment 52(b)(1)(i)–3 

would clarify that, as a general matter, 

amounts charged to the card issuer by 

a third party as a result of a violation of 

the account terms are costs incurred by 

the card issuer for purposes of 

§ 226.52(b)(1)(i). For example, if a card 

issuer is charged a specific amount by 

a third party for each returned payment, 

that amount is a cost incurred by the 

card issuer as a result of returned 

payments. However, if the amount is 

charged to the card issuer by an affiliate 

or subsidiary of the card issuer, the card 

issuer must have determined for 

purposes of § 226.52(b)(1)(i) that the 

amount represents a reasonable 

proportion of the costs incurred by the 

affiliate or subsidiary as a result of the 

type of violation. For example, if an 

affiliate of a card issuer provides 

collection services to the card issuer for 

delinquent accounts, the card issuer 

must determine that the amount charged 

to the card issuer by the affiliate for 

such services represents a reasonable 

proportion of the costs incurred by the 

affiliate as a result of late payments. 

Proposed comment 52(b)(1)(i)–4 

would clarify the application of 

proposed § 226.52(b)(1)(i) to late 

payment fees. In addition to providing 

illustrative examples, the comment 

would state that, for purposes of 

§ 226.52(b)(1)(i), the costs incurred by a 

card issuer as a result of late payments 

include the costs associated with the 

collection of late payments, such as the 

costs associated with notifying 

consumers of delinquencies and 

resolving delinquencies (including the 

establishment of workout and temporary 

hardship arrangements). The Board 

solicits comment on whether card 

issuers incur other costs as a result of 

late payments. 

Proposed comment 52(b)(1)(i)–5 

would clarify the application of 

proposed § 226.52(b)(1)(i) to returnedpayment fees. The comment would state 

that, for purposes of § 226.52(b)(1)(i), 

the costs incurred by a card issuer as a 

result of returned payments include the 

costs associated with processing 

returned payments and reconciling the 

card issuer’s systems and accounts to 

reflect returned payments as well as the 

costs associated with notifying the 

consumer of the returned payment and 

arranging for a new payment. The 

comment would also provide 

illustrative examples. As above, the 

Board solicits comment on whether card 

issuers incur other costs as a result of 

returned payments. 

Proposed comment 52(b)(1)(i)–6 

would clarify the application of 

proposed § 226.52(b)(1)(i) to over-thelimit fees. In addition to providing 

illustrative examples, the comment 

would state that, for purposes of 

§ 226.52(b)(1)(i), the costs incurred by a 

card issuer as a result of over-the-limit 

transactions include the costs associated 

with determining whether to authorize 

over-the-limit transactions and the costs 

associated with notifying the consumer 

that the credit limit has been exceeded 

and arranging for payments to reduce 

the balance below the credit limit. The 

Board solicits comment on whether card 

issuers incur other costs as a result of 

over-the-limit transactions. 

B. Fees Based on Deterrence 

Proposed comment 52(b)(1)(ii)–1 

would clarify that § 226.52(b)(1)(ii) does 

not require a card issuer to determine 

that a fee for violating the account terms 

or other requirements is necessary to 

deter violations by a specific consumer 

or with respect to a specific account. 

Instead, for purposes of 

§ 226.52(b)(1)(ii), a card issuer must 

determine that a fee is reasonably 

necessary to deter the type of violation 

for which the fee is imposed. 

Because it would not be feasible to 

determine the specific amount 

necessary to deter a particular consumer 

from violating the account terms or 

other requirements, § 226.52(b)(1)(ii) 

would require issuers that base their 

penalty fees on deterrence to use an 

empirically derived, demonstrably and 

statistically sound model that 

reasonably estimates the effect of the 

amount of the fee on the frequency of 

violations. Proposed comment 

52(b)(1)(ii)–2 clarifies that a model that 

reasonably estimates a statistical 

correlation between the imposition of a 

fee and the frequency of a type of 

violation is not sufficient to satisfy the 

requirements of § 226.52(b)(1)(ii). The 

Board acknowledges that, as a general 

matter, the imposition of a fee for 

particular behavior (such as paying late) 

can reduce the frequency of that 

behavior. However, the frequency of 

violations may also be influenced by 

other factors (such as unemployment 

rates). In addition, consistent with the 

intent of new TILA Section 149, 

proposed § 226.52(b)(1)(ii) requires the 

issuer to determine that the dollar 

amount of the fee is reasonably 

necessary to deter violations. 

Thus, the proposed comment clarifies 

that, in order to support a determination 

that the dollar amount of a fee is 

reasonably necessary to deter a 

particular type of violation, a model 

must reasonably estimate that, 

independent of other variables, the 

imposition of a lower fee amount would 

result in a substantial increase in the 

frequency of that type of violation. In 

addition, the parameterization of the 

model must be sufficiently flexible to 

allow for the identification of a lower 

fee level above which additional fee 

increases have no marginal effect on the 

frequency of violations. In other words, 

a card issuer that currently charges a 

$35 late payment fee could not satisfy 

the requirements in § 226.52(b)(1)(ii) by 

developing a model that estimates that 

delinquencies will increase if no late 

payment fee is charged. Instead, the 

issuer’s model must be able to 

reasonably estimate that delinquencies 


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Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 12343 

will increase substantially if a late 

payment fee of less than $35 is charged. 

The Board understands that, in order 

to develop the empirically-derived 

estimates required by § 226.52(b)(1)(ii), 

card issuers must have data regarding 

the effect of different fee amounts on the 

frequency of violations. Specifically, in 

order to comply with § 226.52(b)(1)(ii), 

it will be necessary for a card issuer to 

test the effect of fee amounts that are 

lower and higher than the amount 

ultimately found to be reasonably 

necessary to deter a type of violation. 

For example, in the process of 

determining that a $20 fee is reasonably 

necessary to deter a particular type of 

violation, a card issuer may need to test 

the deterrent effect of an $15 fee and a 

$25 fee. 

Some card issuers may be able to 

gather the necessary data by testing the 

deterrent effect of different fee amounts 

prior to the August 22, 2010 effective 

date for new TILA Section 149. Issuers 

that cannot do so would be required to 

base their penalty fees on costs 

consistent with § 226.52(b)(1)(i) or to 

use the safe harbor in § 226.52(b)(3). 

However, the Board does not believe 

that these issuers should be 

permanently foreclosed from gathering 

the data necessary to base their penalty 

fees on deterrence. Furthermore, as 

discussed below with respect to 

§ 226.52(b)(1)(iii), card issuers that base 

their fees on deterrence will be required 

to reevaluate those fees annually and 

will therefore need to gather updated 

data. 

Accordingly, the Board solicits 

comment on whether it is appropriate to 

permit card issuers to test the effect of 

penalty fee amounts that exceed the 

amounts otherwise permitted by 

§ 226.52(b)(1). In addition, the Board 

solicits comment on whether limitations 

are necessary to ensure that such testing 

is legitimate. For example, testing of 

higher fee amounts could be limited to 

a representative sample of accounts that 

is no larger than reasonably necessary to 

make statistically-sound estimates 

regarding the effect of the amount of the 

fee on the frequency of violations. 

Similarly, testing could be limited to a 

period of time that is no longer than 

reasonably necessary to make such 

estimates. 

C. Reevaluation of Fees 

Proposed § 226.52(b)(1)(iii) provides 

that a card issuer must reevaluate its 

determination under § 226.52(b)(1)(i) or 

(b)(1)(ii) at least once every twelve 

months. If as a result of the reevaluation 

the card issuer determines that a lower 

fee is consistent with § 226.52(b)(1)(i) or 

(b)(1)(ii), the card issuer must begin 

imposing the lower fee within 30 days 

after completing the reevaluation. If the 

card issuer instead determines that a 

higher fee is consistent with 

§ 226.52(b)(1)(i) or (b)(1)(ii), the card 

issuer may begin imposing the higher 

fee after complying with the notice 

requirements in § 226.9. This provision 

is intended to ensure that card issuers 

impose penalty fees based on relatively 

current cost or deterrence information. 

However, the Board does not wish to 

encourage frequent changes in penalty 

fees, which could reduce predictability 

for consumers. Accordingly, the Board 

solicits comment on whether twelve 

months is an appropriate interval for the 

reevaluation. 

52(b)(2) Prohibited Fees 

Section 226.52(b)(2) would prohibit 

credit card penalty fees that the Board 

believes to be inconsistent with new 

TILA Section 149. In particular, these 

prohibitions are intended to ensure 

that—consistent with new TILA Section 

149(c)(3)—penalty fees are generally 

reasonable and proportional to the 

conduct of the cardholder. 

A. Fees That Exceed Dollar Amount 

Associated With Violation 

Section 226.52(b)(2)(i)(A) would 

prohibit fees based on violations of the 

account terms that exceed the dollar 

amount associated with the violation at 

the time the fee is imposed. The Board 

believes that this prohibition is 

consistent with Congress’ intent to 

prohibit penalty fees that are not 

reasonable and proportional to the 

violation. Specifically, penalty fees that 

exceed the dollar amount associated 

with the violation do not appear to be 

proportional to the consumer conduct 

that resulted in the violation. For 

example, the Board believes that 

Congress did not intend to permit 

issuers to impose a $35 over-the-limit 

fee when a consumer has exceeded the 

credit limit by $5. 

The Board recognizes the possibility 

that a card issuer could incur costs as 

a result of a violation that exceed the 

dollar amount associated with that 

violation. However, the Board does not 

believe this will be the case in most 

circumstances. Furthermore, to the 

extent an issuer cannot recover all of its 

costs from violations involving small 

dollar amounts, proposed § 226.52(b)(1) 

permits the issuer to recover those costs 

by spreading them evenly among all 

other consumers who engage in that 

type of violation. In addition, the 

proposed limitation may encourage card 

issuers either to undertake efforts to 

reduce the costs incurred as a result of 

violations that involve small dollar 

amounts or to build those costs into 

upfront rates and fees, which will result 

in greater transparency for consumers 

regarding the cost of using their credit 

card accounts. 

An argument could be made that 

prohibiting penalty fees from exceeding 

the dollar amount associated with the 

violation will result in fees that are not 

sufficient to deter violations. However, 

the need for deterrence may be less 

pronounced with respect to violations 

involving small dollar amounts. 

Furthermore, the Board believes that 

consumers may be unlikely to change 

their behavior in reliance on this 

limitation. Penalty fees will still have a 

deterrent effect in these circumstances 

because a card issuer would be 

permitted to impose a fee that equals the 

dollar amount associated with the 

violation (so long as that fee is 

otherwise consistent with § 226.52(b)). 

See examples in proposed comment 

52(b)(2)(i)–1 through –3. 

Finally, the Board recognizes that 

proposed § 226.52(b)(2)(i)(A) would 

require card issuers to charge 

individualized penalty fees insofar as 

the amount of the fee is tied to the dollar 

amount associated with the particular 

violation. However, unlike 

individualized consideration of cost, 

deterrence, or consumer conduct, 

§ 226.52(b)(2)(i)(A) would require a 

mathematical determination that issuers 

should generally be able to program 

their systems to perform automatically. 

Thus, it does not appear that 

compliance with § 226.52(b)(2)(i)(A) 

would be overly burdensome. 

Nevertheless, the Board solicits 

comment on the compliance burden 

associated with this provision. 

As discussed below, the proposed 

commentary and § 226.52(b)(2)(i)(B) 

provide guidance regarding the dollar 

amounts associated with specific 

violations of the account terms or other 

requirements. Consistent with the intent 

of proposed § 226.52(b)(2)(i), the Board 

generally clarifies the dollar amount 

associated with a violation in terms of 

the consumer conduct that resulted in 

the violation. The Board requests 

comment on whether additional 

guidance is needed regarding the dollar 

amounts associated with other types of 

violations. 

1. Dollar Amount Associated With Late 

Payments 

Proposed comment 52(b)(2)(i)–1 

would clarify that the dollar amount 

associated with a late payment is the 

amount of the required minimum 

periodic payment that was not received 

on or before the payment due date. 

Thus, § 226.52(b)(2)(i)(A) prohibits a 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
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22Although this concern could also be addressed 

under the prohibition on multiple fees based on a 

single event or transaction in § 226.52(b)(2)(ii), that 

provision permits issuers to comply by imposing no 

more than one penalty fee per billing cycle. Thus, 

if imposition of an additional returned-payment fee 

were not prohibited under § 226.52(b)(2)(i), the card 

issuer could impose that fee by resubmitting a 

payment that is returned late in a billing cycle 

immediately after the start of the next cycle. 

23The Board considered whether the dollar 

amount associated with extensions of credit in 

excess of the credit limit should be the total amount 

of credit extended by the card issuer in excess of 

that limit as of the last day of the billing cycle. 

However, in the February 2010 Regulation Z Rule, 

the Board determined with respect to § 226.56(j)(1) 

that this approach could delay the generation and 

mailing of the periodic statement, thereby impeding 

issuers’ ability to comply with the 21-day 

requirement for mailing statements in advance of 

the payment due date. 

card issuer from imposing a late 

payment fee that exceeds the amount of 

the required minimum periodic 

payment on which that fee is based. For 

example, a card issuer would be 

prohibited from charging a late payment 

fee of $39 based on a consumer’s failure 

to make a $20 required minimum 

periodic payment by the payment due 

date. 

2. Dollar Amount Associated With 

Returned Payments 

Proposed comment 52(b)(2)(i)–2 

would clarify that, for purposes of 

§ 226.52(b)(2)(i)(A), the dollar amount 

associated with a returned payment is 

the amount of the required minimum 

periodic payment due during the billing 

cycle in which the payment is returned 

to the card issuer. Thus, 

§ 226.52(b)(2)(i)(A) prohibits a card 

issuer from imposing a returnedpayment fee that exceeds the amount of 

that required minimum periodic 

payment. 

For example, assume that the billing 

cycles for an account begin on the first 

day of the month and end on the last 

day of the month and that the payment 

due date is the twenty-fifth day of the 

month. A minimum payment of $20 is 

due on March 25. The card issuer 

receives a check for $100 on March 23, 

which is returned to the card issuer for 

insufficient funds on March 26. Section 

226.52(b)(2)(i)(A) would prohibit the 

card issuer from imposing a returnedpayment fee that exceeds $20. However, 

assume instead that the card issuer 

receives the $100 check on March 31 

and the check is returned for 

insufficient funds on April 2. The 

minimum payment due on April 25 is 

$30. Section 226.52(b)(2)(i)(A) would 

prohibit the card issuer from imposing 

a returned-payment fee that exceeds 

$30. 

The Board considered whether the 

dollar amount associated with the 

required minimum periodic payment 

should be the amount of the returned 

payment itself. However, some returned 

payments may substantially exceed the 

amount of the required minimum 

periodic payment, which would result 

in § 226.52(b)(2)(i)(A) permitting a 

returned-payment fee that substantially 

exceeds the late payment fee. For 

example, if the required minimum 

periodic payment is $20 and the 

consumer makes a $100 payment that is 

returned, § 226.52(b)(2)(i)(A) would 

have limited the late payment fee to $20 

but permitted a $100 returned-payment 

fee. In addition to being anomalous, this 

result would be inconsistent with the 

intent of new TILA Section 149. 

Accordingly, the Board believes the 

better approach is to define the dollar 

amount associated with a returned 

payment as the required minimum 

periodic payment due when the 

payment is returned. 

As a general matter, a card issuer 

should be readily able to determine the 

required minimum periodic payment 

due during the billing cycle in which 

the payment is returned because that 

payment must be disclosed on the 

periodic statement provided shortly 

after the start of each cycle. However, it 

is possible that, in certain 

circumstances, this approach could 

result in a short delay in the imposition 

of a returned-payment fee. For example, 

assume that the billing cycles for an 

account begin on the first day of the 

month and end on the last day of the 

month, that periodic statements are 

mailed on the third day of the month, 

and that the required minimum periodic 

payment is due on the twenty-fifth day 

of the month. If a payment is returned 

on March 1, the card issuer may not yet 

have determined the required minimum 

periodic payment due on March 25. 

However, the card issuer must 

determine the amount of the payment 

prior to sending the periodic statement 

on March 3. Furthermore, regardless of 

whether the fee is imposed on March 1 

or March 3, it will be reflected on the 

periodic statement sent on April 3. 

Thus, in these circumstances, it does 

not appear that the short delay in the 

imposition of the fee would be 

significantly detrimental to the issuer or 

the consumer. 

Proposed comment 52(b)(2)(i)–2 

would also clarify that, if a payment has 

been returned and is submitted again for 

payment by the card issuer, there is no 

separate or additional dollar amount 

associated with a subsequent return of 

that payment. Thus, as discussed below, 

§ 226.52(b)(2)(i)(B) prohibits a card 

issuer imposing an additional returnedpayment fee in these circumstances. It 

would be inconsistent with the Board’s 

understanding of the consumer conduct 

factor in new TILA Section 149(c)(3) to 

permit a card issuer to generate 

additional returned-payment fees by 

resubmitting a returned payment 

because resubmission does not involve 

any additional conduct by the 

consumer.22

3. Dollar Amount Associated With 

Extensions of Credit In Excess of Credit 

Limit 

Proposed comment 52(b)(2)(i)–3 

would clarify that the dollar amount 

associated with extensions of credit in 

excess of the credit limit is the total 

amount of credit extended by the card 

issuer in excess of that limit as of the 

date on which the over-the-limit fee is 

imposed. The comment would further 

clarify that, although § 226.56(j)(1)(i) 

prohibits a card issuer from imposing 

more than one over-the-limit fee per 

billing cycle, the card issuer may choose 

the date during the billing cycle on 

which to impose an over-the-limit fee.23

For example, assume that the billing 

cycles for a credit card account with a 

credit limit of $5,000 begin on the first 

day of the month and end on the last 

day of the month. Assume also that, 

consistent with § 226.56, the consumer 

has affirmatively consented to the 

payment of transactions that exceed the 

credit limit. On March 1, the account 

has a $4,950 balance. On March 6, a $60 

transaction is charged to the account, 

increasing the balance to $5,010. If the 

card issuer chooses to impose an overthe-limit fee on March 6, 

§ 226.52(b)(2)(i)(A) would prohibit the 

card issuer from imposing an over-thelimit fee that exceeds $10. 

However, assume instead that the 

card issuer chooses not to impose an 

over-the-limit fee on March 6. On March 

25, a $5 transaction is charged to the 

account, increasing the balance to 

$5,015. If the card issuer chooses to 

impose an over-the-limit fee on March 

25, § 226.52(b)(2)(i)(A) would prohibit 

the card issuer from imposing an overthe-limit fee that exceeds $15. 

4. Dollar Amounts Associated With 

Other Types of Violations 

Section 226.52(b)(2)(i)(B) would 

prohibit the imposition of penalty fees 

in circumstances where there is no 

dollar amount associated with the 

violation. In particular, 

§ 226.52(b)(2)(i)(B) would specifically 

prohibit a card issuer from imposing a 

fee based on a transaction that the issuer 

declines to authorize. Although the 

imposition of fees based on declined 

transactions does not appear to be 


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widespread at present, the Board 

believes that it is important to address 

this issue in this rulemaking. A card 

issuer may decline to authorize a 

transaction because, for example, the 

transaction would have exceeded the 

credit limit for the account. Unlike overthe-limit transactions, however, 

declined transactions do not result in an 

extension of credit. Thus, there does not 

appear to be any dollar amount 

associated with a declined transaction. 

In addition, it does not appear that the 

imposition of a fee for a declined 

transaction can be justified based on the 

costs incurred by the card issuer. Unlike 

returned payments, it is not necessary 

for a card issuer to incur costs 

reconciling its systems or arranging for 

a new payment when a transaction is 

declined. Furthermore, the Board 

understands that card issuers generally 

use a single automated system for 

determining whether transactions 

should be authorized or declined. Thus, 

to the extent that card issuers incur 

costs designing and administering such 

systems, they are permitted to recover 

those costs through over-the-limit fees. 

See proposed comment 52(b)(1)(i)–6. 

However, the Board solicits comment on 

whether a prohibition on penalty fees in 

these circumstances is appropriate. 

In addition, proposed 

§ 226.52(b)(2)(i)(B) specifically prohibits 

a card issuer from imposing a penalty 

fee based on account inactivity or the 

closure or termination of an account. 

The Board believes that this prohibition 

is warranted because there does not 

appear to be any dollar amount 

associated with this consumer conduct. 

The Board understands that card issuers 

may receive less revenue from accounts 

that are not used for a significant 

number of transactions or are inactive or 

closed. The Board also understands that 

card issuers incur costs associated with 

the administration of such accounts 

(such as providing periodic statements 

or other required disclosures). However, 

because card issuers incur these costs 

with respect to all accounts, the Board 

does not believe that they constitute a 

dollar amount associated with a 

violation. As above, however, the Board 

solicits comment on whether it is 

appropriate to prohibit penalty fees in 

these circumstances. 

B. Multiple Fees Based On a Single 

Event or Transaction 

Section 226.52(b)(2)(ii) would 

prohibit card issuers from imposing 

more than one penalty fee based on a 

single event or transaction, although 

issuers would be permitted to comply 

with this requirement by imposing no 

more than one penalty fee during a 

billing cycle. As discussed above, the 

Board believes that imposing multiple 

fees based on a single event or 

transaction is unreasonable and 

disproportionate to the conduct of the 

consumer because the same conduct 

may result in a single or multiple 

violations, depending on how the card 

issuer categorizes the conduct or on 

circumstances that may not be in the 

control of the consumer. For example, if 

a consumer submits a payment that is 

returned for insufficient funds or for 

other reasons, the consumer should not 

be charged both a returned payment fee 

and a late payment fee. Similarly, in 

these circumstances, it does not appear 

that multiple fees are reasonably 

necessary to deter the single event or 

transaction that caused the violations. 

The Board understands that a card 

issuer may incur greater costs as a result 

of an event or transaction that causes 

multiple violations than an event or 

transaction that causes a single 

violation. Using the example above, 

assume that the card issuer incurs costs 

as a result of the late payment and costs 

as a result of the returned payment. If 

the card issuer imposes a late payment 

fee, § 226.52(b)(2)(ii) would prohibit the 

issuer from recovering the costs 

incurred as a result of the returned 

payment by also charging a returnedpayment fee. However, in these 

circumstances, § 226.52(b)(1)(i) permits 

the issuer to recover those costs by 

spreading them evenly among all other 

consumers whose payments are 

returned. 

Proposed comment 52(b)(2)(ii)–1 

provides additional examples of 

circumstances where multiple penalty 

fees would be prohibited, as well as 

examples of circumstances where 

multiple fees would be permitted. For 

instance, assume that the credit limit for 

an account is $1,000. On March 31, the 

balance on the account is $975 and the 

card issuer has not received the $20 

required minimum periodic payment 

due on March 25. On that same date 

(March 31), a $50 transaction is charged 

to the account, which increases the 

balance to $1,025. Section 

226.52(b)(2)(i)(A) would permit the card 

issuer to impose a late payment fee of 

$20 and an over-the-limit fee of $25 

(assuming that these amounts comply 

with the requirements of § 226.52(b)(1) 

or the safe harbor in § 226.52(b)(3)). 

Section 226.52(b)(2)(ii) would not 

prohibit the imposition of both fees 

because those fees are based on different 

events or transactions (payment not 

being received on or before the payment 

due date and the $25 extension of credit 

in excess of the credit limit). 

Notwithstanding this guidance, the 

Board understands that determining 

whether multiple violations are caused 

by a single event or transaction will be 

operationally difficult for card issuers. 

Accordingly, in order to facilitate 

compliance, § 226.52(b)(2)(ii) permits a 

card issuer to avoid the burden 

associated with making such 

determinations by charging no more 

than one penalty fee per billing cycle. 

The Board believes that this approach 

will generally provide at least the same 

degree of protection for consumers as 

prohibiting multiple fees based on a 

single event or transaction because fees 

imposed in different billing cycles will 

generally be caused by different events 

or transactions. 

52(b)(3) Safe Harbor 

As discussed above, new TILA 

Section 149(e) authorizes the Board to 

provide amounts for penalty fees that 

are presumed to be reasonable and 

proportional to the violation. The Board 

acknowledges that specific safe harbor 

amounts cannot be entirely consistent 

with the factors listed in new TILA 

Section 149(c) insofar as the costs 

incurred as a result of violations, the 

amount necessary to deter violations, 

and the consumer conduct associated 

with violations will vary depending on 

the issuer, the consumer, the type of 

violation, and other circumstances. 

However, as discussed above, it would 

not be feasible to implement new TILA 

Section 149 based on individualized 

determinations. Instead, the Board 

believes that establishing a generally 

applicable safe harbor will facilitate 

compliance by issuers and increase 

consistency and predictability for 

consumers. 

Accordingly, § 226.52(b)(3) would 

provide a safe harbor that may be used 

to comply with the requirement in 

§ 226.52(b)(1) that a card issuer 

determine that its penalty fees either 

represent a reasonable proportion of the 

total costs incurred by the card issuer as 

a result of violations or are reasonably 

necessary to deter violations. However, 

the Board does not have sufficient 

information to determine the 

appropriate amount at this time. 

Accordingly, rather than proposing a 

specific dollar amount, the Board is 

requesting comment regarding an 

amount that is generally consistent with 

the requirements in § 226.52(b)(1). 

A. Information Considered by the Board 

As discussed below, in developing the 

proposed safe harbor approach, the 

Board considered a variety of relevant 

information. First, the Board considered 

the dollar amounts of penalty fees 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
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24See Bank Fees: Federal Banking Regulators 

Could Better Ensure That Consumers Have 

Required Disclosure Documents Prior to Opening 

Checking or Savings Accounts, GAO Report 08–281, 

at 14 (January 2008) (GAO Bank Fees Report); see 

also ‘‘Consumer Overdraft Fees Increase During 

Recession: First-Time Phenomenon,’’ Press release, 

Moebs $ervices (July 15, 2009) (Moebs 2009 Pricing 

Survey Press Release) (available at: http:// 

www.moebs.com/AboutUs/Pressreleases/tabid/58/ 

ctl/Details/mid/380/ItemID/65/Default.aspx) 

(reporting an average overdraft fee of $26). 

25See GAO Bank Fees Report at 16. Another 

recent survey suggests that the cost difference in 

overdraft fees between small and large institutions 

may be larger than reported by the GAO. See Moebs 

2009 Pricing Survey Press Release (reporting that 

banks with more than $50 billion in assets charged 

on average $35 per overdrawn check compared to 

$26 for all institutions). 

26See Cal. Fin. Code § 4001(a)(1)–(2). 

27See id. § 4001(a)(3). 

28See Mass. Ann. Laws ch. 140 § 114B. 

29See Me. Rev. Stat. Ann. tit. 9–A, § 2–502(1); see 

also Minn. Stat. §§ 48.185(d), 53C.08(1)(c), and 

604.113(2)(a) (generally limiting late payment fees 

on open-end credit plans to the greater of $5 or 5% 

of the amount past due if the account is more than 

10 days past due and limiting returned-payment 

and over-the-limit fees to $30). 

30OFT Credit Card Statement at 1. 

31OFT Credit Card Statement at 27–28. 

32OFT Credit Card Statement at 29. 

currently charged by card issuers. 

Although credit card penalty fees 

appear to be approximately $32 to $37 

on average, many smaller card issuers 

(such as community banks and credit 

unions) charge penalty fees of 

approximately $20. The Board 

understands that—rather than basing 

penalty fees solely on costs and 

deterrence—card issuers currently 

consider a number of additional factors, 

including the need to maintain or 

increase overall revenue. Nevertheless, 

the discrepancy between the fees 

charged by large and small issuers 

suggests that—although violations of the 

account terms or other requirements 

likely impact different types of card 

issuers to different degrees—fees that 

are substantially lower than the current 

average may be sufficient to cover the 

costs incurred as a result of those 

violations and to deter such violations. 

Second, the Board considered the 

dollar amounts of penalty fees charged 

with respect to deposit accounts and 

consumer credit accounts other than 

credit cards. As a general matter, these 

fees appear to be significantly lower 

than average credit card penalty fees, 

which also indicates that lower credit 

card penalty fees may adequately reflect 

the cost of violations and deter future 

violations. For example, according to a 

recent report by the GAO, the average 

overdraft and insufficient funds fee 

charged by depository institutions was 

just over $26 per item in 2007.24

Notably, the GAO also reported that 

large institutions on average charged 

between $4 and $5 more for overdraft 

and insufficient funds fees compared to 

smaller institutions.25 Similarly, the 

Board understands that, for many homeequity lines of credit, the late payment 

fee, returned-payment fee, and over-thelimit fee is $25 (although in some cases 

those fees may be set by state law). 

However, for most closed-end mortgage 

loans and some home-equity lines of 

credit and automobile installment loans, 

the late payment fee is 5% of the 

overdue payment. 

Third, the Board considered state and 

local laws regulating penalty fees. As 

above, except in the case of late 

payment fees that are a percentage of the 

overdue amount, it appears that state 

and local laws that specifically address 

penalty fees generally limit those fees to 

amounts that are significantly lower 

than the current average for credit card 

penalty fees. For example, California 

law does not permit credit and charge 

card late payment fees unless the 

account is at least five days’ past due 

and then limits the fee to an amount 

between $7 and $15, depending on the 

number of days the account is past due 

and whether the account was previously 

past due.26 In addition, California law 

does not permit over-the-limit fees 

unless the credit limit is exceeded by 

the lesser of $500 or 20% of the limit 

and then restricts the fee to $10.27

Massachusetts law limits delinquency 

charges for all open-end credit plans to 

the lesser of $10 or 10% of the 

outstanding balance and permits such 

fees only when the account is more than 

15 days past due.28 Maine law generally 

limits delinquency charges for 

consumer credit transactions and openend credit plans to the lesser of $10 or 

5% of the unpaid amount.29 Finally, the 

Board understands some state and local 

laws governing late payment fees for 

utilities permit only fixed fee amounts 

(ranging between $5 and $25), while 

others limit the fee to a percentage of 

the amount past due (ranging from 1% 

to 10%) or some combination of the two 

(for example, the greater of $20 or 5% 

of the amount past due). 

Fourth, the Board considered the safe 

harbor threshold for credit card default 

charges established by the United 

Kingdom’s Office of Fair Trading (OFT) 

in 2006. As a general matter, the OFT 

concluded that—under the laws and 

regulations of the United Kingdom— 

provisions in credit card agreements 

authorizing default charges ‘‘are open to 

challenge on grounds of unfairness if 

they have the object of raising more in 

revenue than is reasonably expected to 

be necessary to recover certain limited 

administrative costs incurred by the 

credit card issuer.’’ 30 In order to ‘‘help 

encourage a swift change in market 

practice,’’ the OFT stated that it would 

regard charges set below a monetary 

threshold of £12 as ‘‘either not unfair, or 

insufficiently detrimental to the 

economic interests of consumers in all 

the circumstances to warrant regulatory 

intervention at this time.’’ 31 The OFT 

explained that, in establishing its 

threshold, it took into account 

‘‘information * * * on the banks’ 

recoverable costs includ[ing] not only 

direct costs but also indirect costs that 

have to be allocated on the basis of 

judgment.’’ 32 The OFT did not, 

however, disclose this cost information, 

nor does it appear that the OFT 

considered the need to deter violations 

of the account terms or the relationship 

between the amount of the fee and the 

conduct of the cardholder (which the 

Board is required to do). Based on 

average annual exchange rates, £12 has 

been equivalent to approximately $18 to 

$24 (based on annual averages) since the 

OFT announced its monetary threshold 

in April 2006. 

The Board requests that commenters 

submit additional relevant information 

that will assist the Board in establishing 

a safe harbor amount or amounts for 

credit card penalty fees. In particular, to 

the extent possible, commenters are 

asked to provide, for each type of 

violation of the terms or other 

requirements of a credit card account, 

data regarding the costs incurred as a 

result of that type of violation (itemized 

by the type of cost). In addition, 

commenters are asked to provide, if 

known, the dollar amounts reasonably 

necessary to deter violations and the 

methods used to determine those 

amounts. 

B. Proposed Safe Harbor 

If a card issuer imposes a penalty fee 

pursuant to the safe harbor in proposed 

§ 226.52(b)(3), that fee would be limited 

to the greater of: (1) A specific dollar 

amount; or (2) 5% of the dollar amount 

associated with the violation of the 

account terms or other requirements (up 

to a specific dollar amount). This 

approach is generally consistent with 

state laws that permit penalty fees to be 

the greater of a dollar amount or a 

percentage of the amount past due. 

Proposed § 226.52(b)(3) is intended to 

provide a single penalty fee amount that 

is generally consistent with the 

requirements of § 226.52(b)(1) and 

would be imposed for most violations. 

Card issuers would be permitted to use 

the 5% safe harbor to impose a higher 

fee when the dollar amount associated 


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33Proposed comments 52(b)(2)–1 and 52(b)(3)–1 

would clarify that the safe harbor in § 226.52(b)(3) 

would not permit a card issuer to impose a fee that 

is prohibited by § 226.52(b)(2). For example, if 

§ 226.52(b)(2)(i) prohibits the card issuer from 

imposing a late payment fee that exceeds $15, the 

card issuer could not use the safe harbor in 

§ 226.52(b)(3) to impose a higher fee. 

34The approach set forth in this proposed 

comment is similar to § 226.5a(b)(3), which sets a 

$1.00 threshold for disclosure of the minimum 

interest charge but provides that the threshold will 

be adjusted periodically to reflect changes in the 

Consumer Price Index. 

35Consistent with proposed § 226.52(b)(2)(i), 

proposed comment 52(b)(3)–3 clarifies the meaning 

of ‘‘dollar amount associated with the violation’’ 

with respect to late payments, returned payments, 

and extensions of credit in excess of the credit 

limit. As above, the Board requests comment on 

whether guidance is needed regarding the dollar 

amount associated with other type of violations. 

36As discussed in proposed comment 52(b)(3)–2, 

this upper limit would also be adjusted annually 

based on changes in the Consumer Price Index. 

with the violation is large, although that 

fee could not exceed a specified upper 

limit. For example, if the specific safe 

harbor amount were $20, the safe harbor 

would not permit a card issuer to 

impose a fee that exceeds $20 unless the 

dollar amount associated with the 

violation was more than $400. In 

addition, if the upper limit were $40, a 

card issuer could not impose a fee that 

exceeds $40 under the safe harbor even 

if the dollar amount associated with the 

violation was more than $800.33

Section 226.52(b)(3)(i) would provide 

that a card issuer generally complies 

with the requirements of § 226.52(b)(1) 

if the amount of the fee does not exceed 

a specific amount. As noted above, the 

Board is requesting comment on the 

appropriate amount. This amount 

would be adjusted annually by the 

Board to reflect changes in the 

Consumer Price Index. Proposed 

comment 52(b)(3)–2 states that the 

Board will calculate each year a price 

level adjusted safe harbor fee using the 

Consumer Price Index in effect on June 

1 of that year. When the cumulative 

change in the adjusted minimum value 

derived from applying the annual 

Consumer Price level to the current safe 

harbor fee amount has risen by a whole 

dollar, the safe harbor fee amount will 

be increased by $1.00. In contrast, when 

the cumulative change in the adjusted 

minimum value derived from applying 

the annual Consumer Price level to the 

current safe harbor fee amount has 

decreased by a whole dollar, the safe 

harbor fee amount will be decreased by 

$1.00. The comment also states that the 

Board will publish adjustments to the 

safe harbor fee.34

Section 226.52(b)(3)(ii) would 

generally permit a card issuer to impose 

a penalty fee that does not exceed 5% 

of the dollar amount associated with the 

violation.35 Because violations 

involving substantial dollar amounts 

may impose greater costs on card 

issuers, require greater deterrence, and 

involve more serious conduct by the 

consumer, § 226.52(b)(3)(ii) would 

generally permit a card issuer to impose 

a penalty fee in excess of the specific 

safe harbor amount in § 226.52(b)(3)(i), 

so long as that fee does not exceed 5% 

of the dollar amount associated with the 

violation. 

However, the Board is concerned 

that—even when a substantial dollar 

amount is associated with a violation— 

a penalty fee over a certain dollar 

amount could generally be inconsistent 

with the factors in new TILA Section 

149(c) because the fee could 

substantially exceed the costs incurred 

by the card issuer as a result of that type 

of violation and the amount reasonably 

necessary to deter such violations. 

Furthermore, the Board does not believe 

that Congress intended new TILA 

Section 149 to authorize the imposition 

of penalty fees that are significantly 

higher than those currently charged by 

credit card issuers. Accordingly, a fee 

imposed pursuant to § 226.52(b)(3)(ii) 

could not exceed a specific dollar 

amount. The Board requests comment 

on the appropriate upper limit.36

The Board solicits comment on the 

general safe harbor approach in 

proposed § 226.52(b)(3). The Board also 

solicits comment on the appropriate 

dollar amounts for proposed 

§ 226.52(b)(3)(i) and the upper limit in 

proposed § 226.52(b)(3)(ii). Finally, the 

Board solicits comment on whether 5% 

is the appropriate percentage for 

proposed § 226.52(b)(3)(ii). As noted 

above, the Board encourages 

commenters to provide data supporting 

their submissions. 

Application of Proposed § 226.52(b) to 

Charge Card Accounts 

For purposes of Regulation Z, a charge 

card is a credit card on an account for 

which no periodic rate is used to 

compute a finance charge. See 

§ 226.2(a)(15)(iii). Charge cards are 

typically products where outstanding 

balances cannot be carried over from 

one billing cycle to the next and are 

payable when the periodic statement is 

received. See § 226.5a(b)(7). The Board 

understands that—unlike conventional 

credit card accounts—issuers do not use 

upfront annual percentage rates to 

manage risk on charge card accounts. 

Charge card accounts typically require 

payment of an annual fee, although it is 

unclear whether these fees are based on 

the risk. 

The Board solicits comment on the 

methods used by issuers to manage risk 

with respect to charge card accounts. 

The Board also solicits comment on 

whether any adjustments to proposed 

§ 226.52(b) are necessary to permit 

charge card issuers to manage risk. 

Section 226.56 Requirements for Overthe-Limit Transactions 

Section 226.56(e)(1)(i) provides that, 

in the notice informing consumers that 

their affirmative consent (or opt-in) is 

required for the card issuer to pay overthe-limit transactions, the issuer must 

disclose the dollar amount of any fees 

or charges assessed by the issuer on a 

consumer’s account for an over-the-limit 

transaction. Model language is provided 

in Model Forms G–25(A) and G–25(B). 

Comment 56(e)–1 states that, if the 

amount of an over-the-limit fee may 

vary, such as based on the amount of the 

over-the-limit transaction, the card 

issuer may indicate that the consumer 

may be assessed a fee ‘‘up to’’ the 

maximum fee. For the reasons discussed 

below with respect to Model Forms G– 

25(A) and G–25(B), the Board proposes 

to amend comment 56(e)–1 to refer to 

those model forms for guidance on how 

to disclose the amount of the over-thelimit fee consistent with the substantive 

restrictions in proposed § 226.52(b). 

In addition, because proposed 

§ 226.52(b) would impose additional 

substantive limitations on over-the-limit 

fees, the Board proposes to add a crossreference to § 226.52(b) in new comment 

56(j)–6. 

Section 226.59 Reevaluation of Rate 

Increases 

As discussed in the supplementary 

information to § 226.9(c)(2) and (g), the 

Credit Card Act added new TILA 

Section 148, which requires creditors 

that increase an annual percentage rate 

applicable to a credit card account 

under an open-end consumer credit 

plan, based on factors including the 

credit risk of the consumer, market 

conditions, or other factors, to consider 

changes in such factors in subsequently 

determining whether to reduce the 

annual percentage rate. Creditors are 

required to maintain reasonable 

methodologies for assessing these 

factors. The statute also sets forth a 

timing requirement for this review. 

Specifically, at least once every six 

months, creditors are required to review 

accounts as to which the annual 

percentage rate has been increased to 

assess whether these factors have 

changed. New TILA Section 148 is 

effective August 22, 2010 but requires 

that creditors review accounts on which 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
12348 Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 

an annual percentage rate has been 

increased since January 1, 2009. 

New TILA Section 148 requires 

creditors to reduce the annual 

percentage rate that was previously 

increased if a reduction is ‘‘indicated’’ by 

the review. However, new TILA Section 

148(c) expressly provides that no 

specific amount of reduction in the rate 

is required. The Board is proposing to 

implement the substantive requirements 

of new TILA Section 148 in new 

§ 226.59. 

In addition to these substantive 

requirements, TILA Section 148 also 

requires creditors to disclose the reasons 

for an annual percentage rate increase 

applicable to a credit card under an 

open-end consumer credit plan in the 

notice required to be provided 45 days 

in advance of that increase. The Board 

proposes to implement the notice 

requirements of new TILA Section 148 

in § 226.9(c)(2) and (g), which are 

discussed in the supplementary 

information to § 226.9. 

Proposed § 226.59 would apply to 

‘‘credit card accounts under an open-end 

(not home-secured) consumer credit 

plan’’ as defined in § 226.2(a)(15), 

consistent with the approach the Board 

has taken to other provisions of the 

Credit Card Act that apply to credit card 

accounts. Therefore, home-equity lines 

of credit accessed by credit cards and 

overdraft lines of credit accessed by a 

debit card would not be subject to the 

new substantive requirements regarding 

reevaluation of rate increases. 

59(a) General Rule 

Proposed § 226.59(a) sets forth the 

general rule regarding the reevaluation 

of rate increases. Proposed § 226.59(a)(1) 

generally mirrors the statutory language 

of TILA Section 148 and states that if a 

card issuer increases an annual 

percentage rate that applies to a credit 

card account under an open-end (not 

home-secured) consumer credit plan, 

based on the credit risk of the consumer, 

market conditions, or other factors, or 

increased such a rate on or after January 

1, 2009, the card issuer must review 

changes in such factors and, if 

appropriate based on its review of such 

factors, reduce the annual percentage 

rate applicable to the account. Proposed 

§ 226.59(a)(1) would limit this 

obligation to rate increases for which 45 

days’ advance notice is required under 

§ 226.9(c)(2) or (g). The Board believes 

that this limitation is appropriate and 

necessary for consistency with the 

approach Congress adopted in new 

TILA Section 171(b), which sets forth 

the exceptions to the 45-day notice 

requirement for rate increases and 

significant changes in terms. The Board 

believes that Congress did not intend for 

card issuers to have to reevaluate rate 

increases in those circumstances where 

no advance notice is required, for 

example, rate increases due to 

fluctuations in the index for a properlydisclosed variable rate plan or rate 

increases due to the expiration of a 

properly-disclosed introductory or 

promotional rate. The Board also notes 

that creditors do not consider factors in 

connection with the expiration of a 

promotional rate or an increase in a 

variable rate due to fluctuations in the 

index on which that rate is based. Thus, 

the Board believes that coverage of such 

rate increases by § 226.59 would be 

inconsistent with the purposes of new 

TILA Section 148. Accordingly, the 

Board is proposing this limitation to the 

scope of § 226.59(a) using its authority 

under TILA Section 105(a) to provide 

for adjustments and exceptions for any 

class of transactions as necessary to 

effectuate the purposes of TILA. 15 

U.S.C. 1604(a). 

Proposed comment 59(a)–1 would 

clarify that § 226.59(a) applies both to 

increases in annual percentage rates 

imposed on a consumer’s account based 

on circumstances specific to that 

consumer, such as changes in the 

consumer’s creditworthiness, and to 

increases in annual percentage rates 

applied to the account due to factors 

such as changes in market conditions or 

the issuer’s cost of funds. The Board 

believes that this is consistent with the 

intent of TILA Section 148, which is 

broad in scope and specifically notes 

‘‘market conditions’’ as a factor for 

which rate increases need to be 

reevaluated. The Board believes that 

Congress intended for new TILA Section 

148 to apply broadly to most types of 

rate increases, and is not limited to 

those rate increases based on an 

individual consumer’s conduct on the 

account or creditworthiness. The Board 

notes that as discussed below in the 

supplementary information to 

§ 226.59(d), a card issuer is not required 

under § 226.59(a) to evaluate the same 

factors it considered in connection with 

the rate increase, but may evaluate those 

factors that it currently uses in 

determining the annual percentage rates 

applicable to its accounts. For example, 

if a card issuer raised a rate based on 

market conditions, the card issuer may 

review all relevant factors, including the 

credit risk of the consumer, current 

market conditions, the card issuer’s cost 

of funds, and other factors, in 

determining whether a rate reduction is 

required for the account. 

Proposed comment 59(a)–2 clarifies 

that a card issuer must review changes 

in factors under § 226.59(a) only if the 

increased rate is actually imposed on 

the consumer’s account. For example, if 

a card issuer increases the penalty rate 

applicable to a consumer’s credit card 

but the consumer’s account has no 

balances that are currently subject to the 

penalty rate, the card issuer is required 

to provide a notice pursuant to 

§ 226.9(c)(2) of the change in terms, but 

the requirements of § 226.59 do not 

apply. If the consumer’s actions later 

trigger application of the penalty rate, 

the card issuer must provide 45 days’ 

advance notice pursuant to § 226.9(g) 

and must, upon imposition of the 

penalty rate, begin to periodically 

review and consider factors to 

determine whether a rate reduction is 

appropriate under § 226.59. The Board 

believes that this approach is 

appropriate because until an increased 

rate is imposed on the consumer’s 

account, the consumer incurs no costs 

associated with that increased rate. For 

example, requiring a review of a 

consumer’s account if the penalty rate 

was increased but the consumer’s 

account has no balance subject to the 

penalty rate would have no benefit to 

the consumer but would place a 

continuing burden on the card issuer. In 

addition, the Credit Card Act and 

Regulation Z contain additional 

protections for consumers against 

prospective rate increases, including the 

general prohibition on increasing the 

rate applicable to an outstanding 

balance set forth in § 226.55 and the 45- 

day advance notice requirements in 

§ 226.9(c)(2) and (g). Finally, once an 

increased rate is imposed on the 

consumer’s account, the card issuer 

would then be subject to the 

requirements of § 226.59. 

Proposed § 226.59(a)(2) states that if a 

card issuer is required to reduce the rate 

applicable to an account pursuant to 

§ 226.59(a)(1), the card issuer must 

reduce the rate not later than 30 days 

after completion of the evaluation 

described in § 226.59(a)(1). The Board 

believes that the intent of new TILA 

Section 148 is to ensure that the rates on 

consumers’ accounts be reduced 

promptly when the card issuer’s review 

of factors indicates that a rate reduction 

is appropriate. The Board solicits 

comment on the operational issues 

associated with reducing the rate 

applicable to a consumer’s account and 

whether a different timing standard for 

how promptly rate changes must be 

implemented should apply. 

Proposed comment 59(a)–3 clarifies 

how § 226.59(a) applies to certain rate 

increases imposed prior to the effective 

date of the rule. Section 226.59(a) and 

new TILA Section 148 require that card 

issuers reevaluate rate increases that 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 12349 

occurred between January 1, 2009 and 

August 21, 2010. Proposed comment 

59(a)–3 states that for increases in 

annual percentage rates on or after 

January 1, 2009 and prior to August 22, 

2010, § 226.59(a) requires a card issuer 

to review changes in factors and reduce 

the rate, as appropriate, if the rate 

increase is of a type for which 45 days’ 

advance notice would currently be 

required under § 226.9(c)(2) or (g). The 

requirements of § 226.9(c)(2) and (g), 

which were first effective on August 20, 

2009 and modified by the February 2010 

Regulation Z Rule were not applicable 

during the entire period from January 1, 

2009 to August 21, 2010. Therefore, the 

relevant test for purposes of proposed 

§ 226.59(a)(1) and comment 59(a)–3 

would be whether the rate increase is or 

was of a type for which 45 days’ 

advance notice pursuant to § 226.9(c)(2) 

or (g) would currently be required. 

Comment 59(a)–3 would further 

illustrate this requirement by stating, for 

example, that the requirements of 

§ 226.59 would not apply to a rate 

increase due to an increase in the index 

by which a properly-disclosed variable 

rate is determined in accordance with 

§ 226.9(c)(2)(v)(C) or if the increase 

occurs upon expiration of a specified 

period of time and disclosures 

complying with § 226.9(c)(2)(v)(B) have 

been provided. 

The Board understands that the 

requirement to review changes in factors 

in connection with rate increases that 

occurred prior to the effective date of 

this rule may impose a substantial 

burden on card issuers that raised 

interest rates applicable to consumers’ 

accounts prior to the enactment of the 

Credit Card Act or prior to the effective 

date of this rule. However, the Board 

believes that this requirement is 

necessary to effectuate the intent of new 

TILA Section 148, which expressly 

requires a review of rate increases 

imposed on or after January 1, 2009. As 

discussed further in this supplementary 

information, the Board’s proposal would 

permit a card issuer to review either the 

factors that it used in increasing the rate 

applicable to the consumer’s account or 

the factors that the card issuer currently 

uses in determining the annual 

percentage rates applicable to its credit 

card accounts. The Board solicits 

comment on appropriate transition 

guidance for card issuers in conducting 

reviews of rate increases imposed prior 

to August 22, 2010. 

59(b) Policies and Procedures 

Proposed § 226.59(b) provides, 

consistent with new TILA Section 148, 

that a card issuer must have reasonable 

policies and procedures in place to 

review the factors described in § 226.59. 

Section 226.59(b) would further require 

that these policies and procedures be 

written. The Board is not proposing to 

prescribe specific policies and 

procedures that issuers must use in 

order to conduct this analysis. The 

Board believes that a requirement that 

such policies and procedures be 

reasonable will ensure that issuers 

undertake due consideration of these 

factors in order to determine whether a 

rate reduction is required on a 

consumer’s account. The Board believes 

that a more prescriptive rule could 

unduly burden creditors and raise safety 

and soundness concerns for financial 

institutions. In addition, the particular 

factors that are the most predictive of 

the credit risk of a particular consumer 

or portfolio of consumers, and the 

appropriate manner in which to weigh 

those factors, may change over time. 

Moreover, the factors can vary greatly 

among institutions. For example, 

underwriting standards for private label 

or retail credit cards will differ from the 

standards used for general purpose 

credit card accounts. The Board solicits 

comment on whether more guidance is 

necessary regarding whether a card 

issuer’s policies and procedures are 

‘‘reasonable.’’ 

Proposed comment 59(b)–1 notes, 

consistent with TILA Section 148, that 

even in circumstances where a rate 

reduction is required, § 226.59 does not 

require that a card issuer decrease the 

rate to the annual percentage rate that 

was in effect prior to the rate increase 

giving rise to the obligation to 

periodically review the consumer’s 

account. The comment notes that the 

amount of the rate decrease that is 

required must be determined based 

upon the issuer’s reasonable policies 

and procedures. Proposed comment 

59(b)–1 sets forth an illustrative 

example, which assumes that a 

consumer’s rate on new purchases is 

increased from a variable rate of 15.99% 

to a variable rate of 23.99% based on the 

consumer’s making a required minimum 

periodic payment five days late. The 

consumer then makes all of the 

payments required on the account on 

time for the six months following the 

rate increase. The comment notes that 

the card issuer is not required to 

decrease the consumer’s rate to the 

15.99% that applied prior to the rate 

increase, but that the card issuer’s 

policies and procedures for performing 

the review required by § 226.59(a) must 

be reasonable and should take into 

account any reduction in the 

consumer’s credit risk based upon the 

consumer’s timely payments. 

The Board notes that the requirements 

of proposed § 226.59 are different from, 

and operate in addition to, the 

requirements of § 226.55(b)(4). Section 

226.55(b)(4) addresses a consumer’s 

right to cure the application of an 

increased rate by making the first six 

minimum payments on time after the 

effective date of the increase, when the 

rate increase is the result of a 

delinquency of more than 60 days. The 

Board notes that it may appear to be an 

anomalous result that a consumer 

whose rate is increased based on a 

payment received five days late cannot 

automatically cure the application of the 

increased rate by making six timely 

minimum payments, while a consumer 

whose account is more than 60 days 

delinquent has that right under 

§ 226.55(b)(4). 

The Board believes that this is the 

appropriate reading of TILA Sections 

148 and 171(b)(4), for two reasons. First, 

a rate increase based on a consumer’s 

making a payment that is five days late 

can only apply to new transactions. 

Therefore, a consumer has the ability to 

mitigate the impact of the rate increase 

by reducing the number of new 

transactions in which he or she engages. 

In contrast, a creditor may increase the 

rate on both existing balances and new 

transactions when a consumer makes a 

payment that is more than 60 days late. 

Second, new TILA Section 171(b)(4) 

expressly provides for the cure right 

implemented in § 226.55(b)(4) only for 

payments that are more than 60 days 

late. Congress could have, but did not, 

adopt an analogous cure provision for 

delinquencies of less than 60 days. The 

Board believes that for other violations 

of the account terms, Congress intended 

for the review of factors in TILA Section 

148 to be the means by which rate 

decreases, when appropriate, are 

required in circumstances other than 

delinquencies of more than 60 days. 

59(c) Timing 

Proposed § 226.59(c) clarifies the 

timing requirements for the reevaluation 

of rate increases pursuant to § 226.59(a). 

Consistent with new TILA Section 

148(b)(2), a card issuer that is subject to 

§ 226.59(a) must review changes in 

factors in accordance with § 226.59(a) 

and (d) not less frequently than once 

every six months after the initial rate 

increase. Proposed comment 59(c)–1 

would clarify that an issuer has 

flexibility in determining exactly when 

to engage in this review for its accounts. 

Specifically, comment 59(c)–1 would 

provide that an issuer may review all of 

its accounts at the same time every six 

months, may review each account once 

each six months on a rolling basis based 


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on the date on which the rate was 

increased for that account, or may 

otherwise review each account not less 

frequently than once every six months. 

The Board believes that as long as the 

consideration of factors required for 

each account subject to § 226.59 is 

performed at least once every six 

months, it is appropriate to provide 

flexibility to card issuers to decide upon 

a schedule for reviewing their accounts. 

Proposed comment 59(c)–2 sets forth 

an example of the timing requirements 

in § 226.59(c). The example assumes 

that a card issuer increases the rates 

applicable to one half of its credit card 

accounts on June 1, 2010, and increases 

the rates applicable to the other half of 

its credit card accounts on September 1, 

2010. The card issuer may review the 

rate increases for all of its credit card 

accounts on or before December 1, 2010, 

and at least every six months thereafter. 

In the alternative, the card issuer may 

first review the rate increases for the 

accounts that were repriced on June 1, 

2010 on or before December 1, 2010, 

and may first review the rate increases 

for the accounts that were repriced on 

September 1, 2010 on or before March 

1, 2011. 

Proposed comment 59(c)–3 clarifies 

the timing requirement for increases in 

annual percentage rates applicable to a 

credit card account under an open-end 

(not home-secured) consumer credit 

plan on or after January 1, 2009 and 

prior to August 22, 2010. Proposed 

comment 59(c)–3 states that § 226.59(c) 

requires that the first review for such 

rate increases be conducted prior to 

February 22, 2011. The Board believes 

that this clarification is consistent with 

the general timing standard under new 

TILA Section 148, which requires that 

rate increases generally be reevaluated 

at least once every six months. The 

Board believes, therefore, that six 

months from the effective date of TILA 

Section 148, or February 22, 2011, is the 

appropriate date by which the initial 

review of rate increases that occurred 

prior to the effective date of the final 

rule must take place. 

59(d) Factors 

Proposed 226.59(d) provides 

clarification on the factors that a credit 

card issuer must consider when 

performing the consideration of a 

consumer’s account under § 226.59(a). 

The Board is aware that credit card 

underwriting standards can change over 

time and for a number of reasons. Under 

some circumstances, a card issuer may 

be required to continue to review a 

consumer’s account each six months for 

several years, and the issuer’s 

underwriting standards for its new and 

existing cardholders may change 

significantly during that time. As a 

result, proposed § 226.59(d) would 

provide that a card issuer is not required 

to base its review under § 226.59(a) on 

the same factors on which a rate 

increase was based. A card issuer would 

be permitted to review either the same 

factors on which the rate increase was 

originally based, or to review the factors 

that it currently uses when determining 

the annual percentage rates applicable 

to its consumers’ credit card accounts. 

The Board believes that it is appropriate 

to permit card issuers to review the 

factors they currently consider in 

advancing credit to new consumers, 

because a review of these factors may 

result in the consumer receiving any 

reduced rate that he or she would 

receive if applying for a new credit card 

with the same card issuer. The Board 

believes that competition for new 

consumers is an incentive that may lead 

an issuer to lower its rates, and if the 

rates on existing consumers’ accounts 

are assessed using the same factors used 

for new consumers, existing customers 

of a card issuer may also benefit from 

competition in the market. 

Proposed comment 59(d)–1 clarifies 

the requirements of § 226.59(d) in the 

circumstances where a creditor has 

recently changed the factors that it 

evaluates in determining annual 

percentage rates applicable to its credit 

card accounts. The proposed comment 

notes that a creditor that complies with 

§ 226.59(a) by reviewing the factors it 

currently considers in determining the 

annual percentage rates applicable to its 

credit card accounts may change those 

factors from time to time. The comment 

clarifies that when a creditor changes 

the factors it considers in determining 

the annual percentage rates applicable 

to its credit card accounts from time to 

time, it may comply with § 226.59(a) for 

a brief transition period by reviewing 

the set of factors it considered 

immediately prior to the change in 

factors, or may consider the new factors. 

For example, a creditor changes the 

factors it uses to determine the rates 

applicable to new credit card accounts 

on January 1, 2011. The creditor reviews 

the rates applicable to its existing 

accounts that have been subject to a rate 

increase pursuant to § 226.59(a) on 

January 25, 2011. The creditor complies 

with § 226.59(a) by reviewing, at its 

option, either the factors that it 

considered on December 31, 2010 when 

determining the rates applicable to its 

new credit card accounts, or may 

consider the factors that it considers as 

of January 25, 2011. The Board notes 

that this provision is intended to permit 

a card issuer to consider its prior set of 

factors only for a brief period after it 

changes the factors it uses to determine 

the rates applicable to new accounts, for 

operational reasons. Accordingly, the 

Board solicits comment on whether the 

rule should establish an express safe 

harbor for what constitutes a brief 

transition period following a change in 

factors, for example, 30 days or 60 days. 

The Board is not proposing a list of 

particular factors that card issuers must 

consider. Similarly, the Board is not 

proposing to prohibit the consideration 

of other factors. The Board believes that 

a prescriptive rule that sets forth certain 

factors or excludes other factors could 

inadvertently harm consumers, in part 

by constraining card issuers’ ability to 

design or utilize new underwriting 

models and products that could 

potentially benefit consumers. The 

Board believes that the requirement that 

a card issuer consider either the factors 

it currently uses in determining the 

annual percentage rate to apply to its 

credit card accounts or the factors that 

it originally used to increase the annual 

percentage rate will ensure that the 

factors considered in connection with 

the reduction of rates will parallel the 

factors an issuer considers when 

determining whether to increase a rate. 

Proposed comment 59(d)–2 clarifies 

that the review of factors need not result 

in existing accounts being subject to the 

same rates and rate structure as a 

creditor imposes on new accounts, even 

if a creditor evaluates the same factors 

for both types of accounts. For example, 

the comment notes that a creditor may 

offer variable rates on new accounts that 

are computed by adding a margin that 

depends on various factors to the value 

of the LIBOR index. The account that 

the creditor is required to review 

pursuant to § 226.59(a) may have 

variable rates that were determined by 

adding a different margin, depending on 

different factors, to the prime rate. In 

performing the review required by 

§ 226.59(a), the creditor may review the 

factors it uses to determine the rates 

applicable to its new accounts. If a rate 

reduction is required, however, the 

creditor need not base the variable rate 

for the existing account on the LIBOR 

index but may continue to use the prime 

rate. The amount of the rate on the 

existing account after the reduction, 

however, as determined by adding the 

prime rate and margin, must be 

comparable to the rate, as determined by 

adding the margin and LIBOR, charged 

on a new account (except for any 

promotional rate) for which the factors 

are comparable. 

Proposed comment 59(d)–3 provides 

additional clarification on how an issuer 

should identify the factors to consider 


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when evaluating whether a rate 

reduction is required. Comment 59(d)– 

3 states that if a card issuer evaluates 

different factors in determining the 

applicable annual percentage rates for 

different types of credit card plans, it 

must review those factors that it 

considers in determining annual 

percentage rates for the consumer’s 

specific type of credit card plan. The 

Board believes that this clarification is 

appropriate to ensure that a credit card 

issuer considers only those factors that 

are relevant to the consumer’s specific 

type of credit card account rather than 

factors for a different product that may 

be underwritten based on different 

information. Proposed comment 59(d)– 

3 sets forth several examples to 

illustrate what constitute ‘‘types’’ of 

credit card plans. For example, a card 

issuer may review different factors in 

determining the annual percentage rate 

that applies to credit card plans for 

which the consumer pays an annual fee 

and receives rewards points than it 

reviews in determining the rates for 

credit card plans with no annual fee and 

no rewards points. Similarly, a card 

issuer may review different factors in 

determining the annual percentage rate 

that applies to private label credit cards 

than it reviews in determining the rates 

applicable to credit cards that can be 

used at a wider variety of merchants. 

However, a card issuer must review the 

same factors for credit card accounts 

with similar features that are offered for 

similar purposes and may not consider 

different factors for each of its 

individual credit card accounts. 

59(e) Rate Increases Subject to 

§ 226.55(b)(4) 

Proposed § 226.59(e) sets forth a 

special timing rule for card issuers that 

increase a rate pursuant to § 226.55(b)(4) 

based on the card issuer not receiving 

the consumer’s required minimum 

periodic payment within 60 days after 

the due date for that payment. In such 

circumstances, § 226.55(b)(4)(ii) requires 

a card issuer to reduce the annual 

percentage rate to the rate that applied 

prior to the increase if the consumer 

makes the first six consecutive required 

minimum periodic payments on time 

after the effective date of the increase. 

The Board believes that new TILA 

Section 171(b)(4)(B), as implemented in 

§ 226.55(b)(4)(ii), provides the 

appropriate mechanism for lenders to 

use in determining whether to reduce 

the rate on an account that has become 

more than 60 days delinquent, during 

the period immediately following the 

effective date of the increase. The Board 

understands that consumers whose 

accounts are more than 60 days 

delinquent pose a significantly greater 

risk of nonpayment than consumers 

who make timely payments or payments 

that are, for example, one day late. The 

statute therefore sets forth one clear 

method that establishes consumers’ 

rights for a rate increase caused by the 

consumer’s failure to make a minimum 

payment within 60 days of the due date 

for that payment. The Board believes 

that in light of the statutory cure 

mechanism, as implemented in 

§ 226.55(b)(4)(ii), the requirement to 

review an account under § 226.59(a) 

should not apply during the first six 

billing periods following a rate increase 

based on a delinquency of more than 60 

days. The Board notes that the cure 

mechanism implemented in 

§ 226.55(b)(4)(ii) is a stronger right than 

the requirement that card issuers review 

consumers’ accounts pursuant to 

§ 226.59. Section 226.55(b)(4)(ii) 

requires that the rate be reduced to the 

rate that was in effect prior to the rate 

increase, if the consumer makes the next 

six required minimum periodic 

payments on time. In contrast, new 

TILA Section 148 and proposed § 226.59 

do not require in all circumstances that 

the rate be reduced to the rate that was 

in effect prior to the rate increase. 

Accordingly, § 226.59(e) would 

provide that a card issuer is not required 

to review factors in accordance with 

§ 226.59(a) prior to the sixth payment 

due date following the effective date of 

the rate increase when the rate increase 

results from a consumer’s account 

becoming more than 60 days 

delinquent. At that time, if the rate has 

not been decreased based on the 

consumer making six consecutive 

timely minimum payments, the issuer 

would be required to begin performing 

a review of factors for subsequent sixmonth periods. The Board believes that 

it is appropriate that a creditor review 

a consumer’s account after the cure right 

expires under § 226.59(a) if the 

consumer’s rate has not been reduced, 

because a consumer’s credit risk or 

other factors might change after the cure 

period expires, warranting a rate 

reduction at that time. 

59(f) Termination of Obligation to 

Review Factors 

TILA Section 148 does not expressly 

state when the obligation to review 

changes in factors and determine 

whether to reduce the annual 

percentage rate applicable to a 

consumer’s credit card account 

terminates. The Board believes that the 

intent of TILA Section 148 is not to 

impose a permanent requirement on 

card issuers to review changes in factors 

for a consumer’s account even after the 

annual percentage rate applicable to the 

account has been reduced to the original 

rate. The statutory requirement applies 

once the card issuer has increased an 

annual percentage rate applicable to a 

consumer’s account but does not apply 

to accounts on which an annual 

percentage rate has not been increased. 

The Board believes that if Congress had 

intended for all card issuers to review 

the annual percentage rates applicable 

to all of their accounts indefinitely, this 

would be expressly provided for in 

TILA Section 148. Therefore, proposed 

§ 226.59(f) would state that the 

obligation to review factors under 

§ 226.59(a) ceases to apply if the issuer 

reduces the annual percentage rate to a 

rate equal to or less than the rate 

applicable immediately prior to the 

increase, or, if the rate applicable 

immediately prior to the increase was a 

variable rate, to a rate equal to or less 

than a variable rate determined by the 

same index and margin that applied 

prior the increase. 

The Board is aware that proposed 

§ 226.59 could require card issuers to 

review the annual percentage rates 

applicable to certain credit card 

accounts for an extended period of time. 

Under the proposed rule, an issuer 

would be required to continue to review 

a consumer’s account each six months 

unless and until the rate is reduced to 

the rate in effect prior to the increase. 

In some circumstances, this could mean 

that the review required by § 226.59(a) 

would need to occur each six months 

for an indefinite period. The Board is 

concerned that an obligation to continue 

to review the rate applicable to a 

consumer’s account many years after the 

rate increase occurred would impose 

significant burden on issuers, and might 

not have a significant benefit to 

consumers. For example, a card issuer 

might increase the rate applicable to a 

consumer’s account based on market 

conditions in year one. If those market 

conditions do not change and the 

review of factors each six months 

pursuant to § 226.59(a) does not 

otherwise require that the consumer’s 

rate be decreased, an issuer could be 

required to continue reviewing the 

consumer’s account ten or even twenty 

years after the initial increase. The 

Board solicits comment on whether the 

obligation to review the rate applicable 

to a consumer’s account should 

terminate after some specific time 

period elapses following the initial 

increase, for example after five years. 

The Board also solicits comment on 

whether there is significant benefit to 

consumers from requiring card issuers 

to continue reviewing factors under 


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§ 226.59 even after an extended period 

of time. 

59(g) Acquired Accounts 

Proposed § 226.59(g) addresses 

existing credit card accounts acquired 

by a card issuer. Section 226.59(g)(1) 

sets forth the general rule that, except as 

provided in § 226.59(g)(2), the 

obligation to review changes in factors 

in § 226.59(a) applies even to such 

acquired accounts. Consistent with the 

rule in § 226.59(d), a card issuer may 

review either the factors that the 

original issuer considered when 

imposing the rate increase, or may 

review the factors that the acquiring 

card issuer currently considers in 

determining the annual percentage rates 

applicable to its credit card accounts. 

The Board notes that in some cases, a 

card issuer may not know whether 

accounts that it acquired were subject to 

a rate increase by the prior issuer. In 

these cases, a card issuer complying 

with § 226.59(g)(1) may choose to 

review factors in accordance with 

§ 226.59(a) for all of its acquired 

accounts rather than seeking to identify 

just those accounts to which a rate 

increase was applied. 

Proposed § 226.59(g)(2) sets forth an 

alternate means for compliance with 

§ 226.59 for accounts acquired by a card 

issuer. The Board is proposing 

§ 226.59(g)(2) using its authority under 

TILA Section 105(a) to provide for 

adjustments and exceptions for any 

class of transactions as necessary to 

effectuate the purposes of TILA. 15 

U.S.C. 1604(a). Proposed § 226.59(g)(2) 

applies if a card issuer reviews all of the 

credit card accounts it acquires, as soon 

as reasonably practicable after the 

acquisition of such accounts, in 

accordance with the factors that it 

currently uses in determining the rates 

applicable to its credit card accounts. 

Following the card issuer’s initial 

review of its acquired accounts, 

proposed § 226.59(g)(2)(i) provides that 

the card issuer generally is required to 

review changes in factors for those 

acquired accounts in accordance with 

§ 226.59(a) only for rate increases that 

are imposed as a result of that review. 

Similarly, § 226.59(g)(2)(ii) provides that 

the card issuer generally is not required 

to review changes in factors in 

accordance with § 226.59(a) for any rate 

increases made prior to the card issuer’s 

acquisition of such accounts. 

The Board believes that this 

alternative means of compliance is 

important because, as noted above, card 

issuers may not have full information 

regarding rate increases imposed by the 

prior issuer, when it acquires a new 

portfolio of accounts. If a card issuer 

does not know the rate that initially 

applied to the accounts it acquires, it 

would be required to continue to review 

its accounts indefinitely, without the 

opportunity to cease reviewing those 

accounts under § 226.59(f) once the rate 

is reduced to the rate that initially 

applied. The Board is proposing an 

alternative means of compliance rather 

than an exception for acquired accounts, 

because it believes that coverage of 

these accounts is consistent with the 

purposes of new TILA Section 148. 

However, the Board believes that if a 

card issuer reviews all of the accounts 

that it acquires in accordance with the 

factors that it currently uses in 

determining the rates applicable to its 

credit card accounts, this will ensure 

that acquired accounts are subject to the 

same rates that would apply if the 

consumer opened a new credit card 

account with the acquiring issuer 

(except for any promotional rates). The 

Board believes that this will promote 

fair pricing of consumers’ accounts 

when they are acquired by a new card 

issuer. If the card issuer raises the rate 

applicable to a consumer’s account as a 

result of that review, it will have full 

information about the rate that applied 

prior to that increase and therefore the 

requirements of § 226.59(a) would apply 

with regard to that rate increase. The 

Board solicits comment on whether 

§ 226.59(g) appropriately addresses 

acquired accounts and on any 

alternatives that would balance the 

burden on card issuers against 

consumer benefit. The Board also 

solicits comment on whether additional 

guidance is necessary regarding the 

requirement that the review of acquired 

accounts occur ‘‘as soon as reasonably 

practicable’’ after the acquisition of 

those accounts. 

Comment 59(g)(2)–1 sets forth an 

example of the alternative means of 

compliance in § 226.59(g)(2). The 

example assumes that a card issuer 

acquires a portfolio of accounts that 

currently are subject to annual 

percentage rates of 12%, 15%, and 18%. 

As soon as reasonably practicable after 

the acquisition of such accounts, the 

card issuer reviews all of these accounts 

in accordance with the factors that it 

currently uses in determining the rates 

applicable to its credit card accounts. As 

a result of that review, the card issuer 

decreases the rate on the accounts that 

are currently subject to a 12% annual 

percentage rate to 10%, leaves the rate 

applicable to the accounts currently 

subject to a 15% annual percentage rate 

at 15%, and increases the rate 

applicable to the accounts currently 

subject to a rate of 18% to 20%. 

Proposed § 226.59(g)(2) requires the 

card issuer to review, no less frequently 

than once every six months, the 

accounts for which the rate has been 

increased to 20%. The card issuer is not 

required to review the accounts subject 

to 10% and 15% rates pursuant to 

§ 226.59, unless and until the card 

issuer makes a subsequent rate increase 

applicable to those accounts. 

In addition to the general rule in 

§ 226.59(g)(2)(i) and (g)(2)(ii), the Board 

is proposing § 226.59(g)(2)(iii), which 

provides that if as a result of the card 

issuer’s review, an account is subject to, 

or continues to be subject to, an 

increased rate as a penalty or due to the 

consumer’s delinquency or default, the 

requirements to review the account 

under § 226.59(a) would apply. The 

Board is aware that penalty rates are 

often much higher than the standard 

rates that apply to consumers’ credit 

card accounts and that the imposition of 

a penalty rate for an extended period of 

time can be very costly to a consumer. 

The Board believes that the 

requirements to review accounts under 

§ 226.59(a) should apply if a card issuer 

imposes, or continues to impose, a 

penalty rate on an acquired account. 

The Board believes that this treatment is 

consistent with the purposes of new 

TILA Section 148, which specifically 

mentions the credit risk of the consumer 

as a factor giving rise to the obligation 

to review the rate on an account. 

Comment 59(g)(2)–2 sets forth an 

example of the requirements of 

proposed § 226.59(g)(2)(iii) for acquired 

accounts. A card issuer acquires a 

portfolio of accounts that currently are 

subject to standard annual percentage 

rates of 12% and 15%. In addition, 

several acquired accounts are subject to 

a penalty rate of 24%. As soon as 

reasonably practicable after the 

acquisition of such accounts, the card 

issuer reviews all of these accounts in 

accordance with the factors that it 

currently uses in determining the rates 

applicable to its credit card accounts. As 

a result of that review, the card issuer 

leaves the standard rates applicable to 

the accounts at 12% and 15%, 

respectively. The card issuer decreases 

the rate applicable to the accounts 

currently at 24% to its penalty rate of 

23%. Section 226.59(g)(2) requires the 

card issuer to review, no less frequently 

than once every six months, the 

accounts that are subject to a penalty 

rate of 23%. The card issuer is not 

required to review the accounts subject 

to 12% and 15% rates pursuant to 

§ 226.59(a), unless and until the card 

issuer makes a subsequent rate increase 

applicable to those accounts. 


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37 50 U.S.C. app. 527(a)(1)(B) applies to 

obligations or liabilities that do not consist of a 

mortgage, trust deed, or other security in the nature 

of a mortgage. 

38The Board also considered combining the ‘‘up 

to’’ disclosure with the method currently used for 

disclosing cash advance and balance transfer fees. 

For example, late payment fees would be disclosed 

as ‘‘either up to $20 or 5% of the minimum 

payment, whichever is greater (maximum fee: $40).’’ 

However, the Board is concerned that this 

disclosure would be too complex to provide 

consumers with useful information about the 

amount of penalty fees. 

The Board notes that any rate 

increases the acquiring card issuer 

makes as a result of its review pursuant 

to § 226.59(g)(2) are subject to the 

substantive and notice requirements 

regarding rate increases in §§ 226.9 and 

226.55. Proposed § 226.59(g)(2) contains 

an express cross-reference to those 

sections. 

59(h) Exceptions 

The Board is proposing two 

exceptions to the requirements of 

§ 226.59, using its authority under TILA 

Section 105(a), which are set forth in 

§ 226.59(h). The first exception applies 

to rate increases imposed when the 

requirement to reduce rates pursuant to 

the Servicemembers Civil Relief Act 

(SCRA), 50 U.S.C. app. 501 et seq., 

ceases to apply. Specifically, 50 U.S.C. 

app. 527(a)(1) provides that ‘‘[a]n 

obligation or liability bearing interest at 

a rate in excess of 6 percent per year 

that is incurred by a servicemember, or 

the servicemember and the 

servicemember’s spouse jointly, before 

the servicemember enters military 

service shall not bear interest at a rate 

in excess of 6 percent. * * *’’ With 

respect to credit card accounts, this 

restriction applies during the period of 

military service. See 50 U.S.C. app. 

527(a)(1)(B).37

The Board believes that it is not 

appropriate to require a card issuer to 

perform an ongoing review of the rates 

on an account, when the rate increase is 

a reinstatement of a prior rate that was 

temporarily reduced to comply with the 

SCRA. Proposed § 226.59(h)(1) provides 

that the requirements of § 226.59 do not 

apply to increases in an annual 

percentage rate that was previously 

decreased pursuant to 50 U.S.C. app. 

527, provided that such a rate increase 

is made in accordance with 

§ 226.55(b)(6). Section 226.55(b)(6) 

provides that the rate may be increased 

when the SCRA ceases to apply, but that 

the increased rate may not exceed the 

rate that applied prior to the decrease. 

The second proposed exception 

applies to charged off accounts. 

Proposed § 226.59(h)(2) provides that 

the requirements of § 226.59 do not 

apply to accounts that the card issuer 

has charged off in accordance with loanloss provisions. The Board understands 

that for safety and soundness reasons, 

card issuers charge off accounts that 

have serious delinquencies, typically of 

180 days or six months. For such 

accounts, full payment is due 

immediately. The Board understands, 

therefore, that there should be no 

further activity on these accounts, and 

therefore believes that the requirement 

to review the rate every six months 

should not apply. 

Appendix G—Open-End Model Forms 

and Clauses 

For consistency with the substantive 

limitations in proposed § 226.52(b), the 

Board is proposing to amend the model 

language in Appendix G for the 

disclosure of late payment fees, overthe-limit fees, and returned-payment 

fees. 

Samples G–10(B) & G–10(C)— 

Applications and Solicitations Samples 

(Credit Cards) (§ 226.5a(b)) 

Samples G–17(B) & G–17(C)—AccountOpening Samples (§ 226.6(b)(2)) 

Sections 226.5a and 226.6 require 

creditors to disclose late payment fees, 

over-the-limit fees, and returnedpayment fees in, respectively, the 

application and solicitation disclosures 

and the account-opening disclosures. 

See §§ 226.5a(b)(9), (b)(10), (b)(12); 

§§ 226.6(b)(2)(viii), (b)(2)(ix), (b)(2)(xi). 

Model language is provided in Samples 

G–10(B) and G–10(C) and G–17(B) and 

G–17(C). The model language generally 

reflects current fee practices by 

disclosing specific amounts for over-thelimit and returned-payment fees, while 

disclosing a lower late payment fee if 

the account balance is less than or equal 

to a specified amount ($1,000 in the 

model forms) and a higher fee if the 

account balance is more than that 

amount. 

As discussed above, proposed 

§ 226.52(b) would establish new 

substantive restrictions on the amount 

of credit card penalty fees, including 

late payment fees, over-the-limit fees, 

and returned-payment fees. If adopted, 

these restrictions would change the way 

penalty fees are disclosed. Accordingly, 

for consistency with § 226.52(b), the 

Board is proposing to amend the model 

language in Samples G–10(B) and G– 

10(C) and G–17(B) and G–17(C) to 

disclose late payment fees, over-thelimit fees, and returned-payment fees as 

‘‘up to $XX.’’ In this model language, 

$XX represents the maximum fee under 

the safe harbor in proposed 

§ 226.52(b)(3)(ii). 

The Board recognizes that, because 

the maximum safe harbor fee only 

applies when a large dollar amount is 

associated with the violation, this 

disclosure will generally overstate the 

amount of the penalty fee. For example, 

if the maximum fee were $40, the card 

issuer would disclose the amount of its 

penalty fees as ‘‘up to $40.’’ However, 

§ 226.52(b)(3)(ii) would not actually 

permit the issuer to impose a $40 

penalty fee unless 5% of the dollar 

amount associated with the violation 

was greater than or equal to $40—in 

other words, the dollar amount 

associated with the violation would 

have to be $800 or more. Nevertheless, 

a consumer who incorrectly assumes 

that a $40 penalty fee will be imposed 

for all violations of the account terms or 

other requirements will not be harmed 

if—when a violation actually occurs—a 

lower penalty fee is imposed. 

Furthermore, disclosing the highest 

possible penalty fee under the safe 

harbor in § 226.52(b)(3) may deter 

consumers from violating the account 

terms or other requirements, which 

would be consistent with the intent of 

new TILA Section 149 (as stated in 

Section 149(c)(2)). 

The Board is also concerned that 

providing additional detail could 

increase consumer confusion and would 

not substantially improve the accuracy 

of the model disclosure. In particular, 

the Board considered whether the 

method used in Samples G–10(B) and 

G–10(C) and G–17(B) and G–17(C) for 

disclosing cash advance and balance 

transfer fees should be applied to 

penalty fees. For example, Sample G– 

10(C) discloses the balance transfer fee 

as ‘‘[e]ither $5 or 3% of the amount of 

each transfer, whichever is greater 

(maximum fee: $100).’’ Similarly, using 

as examples a safe harbor amount of $20 

and a maximum safe harbor fee of $40, 

late payment fees could be disclosed as 

‘‘either $20 or 5% of the minimum 

payment, which is greater (maximum 

fee: $40).’’ However, although this 

disclosure would provide more detail 

than a disclosure of ‘‘up to $40,’’ it 

would not inform consumers that, 

consistent with $ 226.52(b)(2)(i), a $20 

late payment fee could not be imposed 

if the delinquent minimum payment is 

$15. Thus, a more detailed disclosure 

could create an appearance of accuracy 

that is not justified.38 Nevertheless, the 

Board solicits comment on the proposed 

model language as well as alternative 

methods for disclosing penalty fees. 


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Samples G–18(B), G–18(D), G–18(F), and 

G–18(G)—Periodic Statement Forms 

(§ 226.7(b)) 

As noted above, § 226.7(b)(11)(i)(B) 

requires cards issuers to disclose the 

amount of any late payment fee and any 

increased rate that may be imposed on 

the account as a result of a late payment. 

The model language in Sample G–18(B) 

states: ‘‘Late Payment Warning: If we do 

not receive your minimum payment by 

the date listed above, you may have to 

pay a $35 late fee and your APRs may 

be increased up to the Penalty APR of 

28.99%.’’ This language is restated in 

Samples G–18(D), G–18(F), and G– 

18(G). Consistent with the proposed 

amendments to Samples G–10(B), G– 

10(C), G–17(B), and G–17(C), the Board 

is proposing to amend the late payment 

warning in Samples G–18(B), G–18(D), 

G–18(F), and G–18(G) to read as follows: 

‘‘If we do not receive your minimum 

payment by the date listed above, you 

may have to pay a late fee of up to $XX 

and your APRs may be increased up to 

the Penalty APR of 28.99%.’’ 

Sample G–21—Change-in-Terms 

Sample (Increase in Fees) (§ 226.9(c)(2)) 

The Board proposes to amend the 

model language in Sample G–21 

disclosing a change in a late payment 

fee for consistency with the proposed 

amendments to Samples G–10(B), G– 

10(C), G–17(B), and G–17(C). 

Model Form G–25(A)—Consent Form for 

Over-the-Limit Transactions (§ 226.56) 

Model Form G–25(B)—Revocation 

Notice for Periodic Statement Regarding 

Over-the-Limit Transactions (§ 226.56) 

As noted above, § 226.56(e)(1)(i) 

provides that, in the notice informing 

consumers that they must affirmatively 

consent (or opt in) to the card issuer’s 

payment of over-the-limit transactions, 

the card issuer must disclose the dollar 

amount of any fees or charges assessed 

by the issuer on a consumer’s account 

for an over-the-limit transaction. Model 

language is provided in Model Forms 

G–25(A) and G–25(B). For consistency 

with proposed § 226.52(b) and the 

proposed amendments to Samples G– 

10(B), G–10(C), G–17(B), and G–17 (C) 

discussed above, the Board proposes to 

revise Model Forms G–25(A) and G– 

25(B) to disclose the amount of the overthe-limit fee as ‘‘up to $XX.’’ 

V. Comment Period 

The consumer protections in new 

TILA Sections 148 and 149 go into effect 

on August 22, 2010. See new TILA 

Section 148(d); new TILA Section 

149(b). Accordingly, the Board must 

issue the final rule implementing those 

provisions sufficiently in advance of 

August 22 to permit card issuers to 

make the necessary changes to bring 

their systems and practices into 

compliance. Thus, in order to ensure 

that the Board has adequate time to 

analyze the comments received on the 

proposed rule, the Board is requiring 

that those comments be submitted no 

later than 30 days after publication of 

the proposal in the Federal Register. 

Because the proposal is limited to the 

implementation of two statutory 

provisions, the Board believes that 

interested parties will have sufficient 

time to review the proposed rule and 

prepare their comments. 

VI. Regulatory Flexibility Analysis 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) requires an 

agency to perform an initial and final 

regulatory flexibility analysis on the 

impact a rule is expected to have on 

small entities. 

Based on its analysis and for the 

reasons stated below, the Board believes 

that this proposed rule would have a 

significant economic impact on a 

substantial number of small entities. 

Accordingly, the Board has prepared the 

following initial regulatory flexibility 

analysis pursuant to section 604 of the 

RFA. A final regulatory flexibility 

analysis will be conducted after 

consideration of comments received 

during the public comment period. 

1. Statement of the need for, and 

objectives of, the proposed rule. The 

proposed rule would implement new 

substantive requirements and updates to 

disclosure provisions in the Credit Card 

Act, which establishes fair and 

transparent practices relating to the 

extension of open-end consumer credit 

plans. The supplementary information 

above describes in detail the reasons, 

objectives, and legal basis for each 

component of the proposed rule. 

2. Small entities affected by the 

proposed rule. All creditors that offer 

credit card accounts under open-end 

(not home-secured) consumer credit 

plans are subject to the proposed rule. 

The Board is relying on the analysis in 

the January 2009 FTC Act Rule, in 

which the Board, the OTS, and the 

NCUA estimated that approximately 

3,500 small entities offer credit card 

accounts. See 74 FR 5549–5550 (January 

29, 2009). The Board acknowledges, 

however, that the total number of small 

entities likely to be affected by the 

proposed rule is unknown, in part 

because the estimate in the January 2009 

FTC Act Rule does not include card 

issuers that are not banks, savings 

associations, or credit unions. The 

Board invites comment on the effect of 

the proposed rule on small entities. 

3. Recordkeeping, reporting, and 

compliance requirements. The proposed 

rule does not impose any new 

recordkeeping or reporting 

requirements. The proposed rule would, 

however, impose new compliance 

requirements. The compliance 

requirements of this proposed rule are 

described above in IV. Section-bySection Analysis. The Board notes that 

the precise costs to small entities to 

conform their open-end credit 

disclosures to the proposed rule and the 

costs of updating their systems to 

comply with the rule are difficult to 

predict. These costs would depend on a 

number of factors that are unknown to 

the Board, including, among other 

things, the specifications of the current 

systems used by such entities to prepare 

and provide disclosures and administer 

credit card accounts, the complexity of 

the terms of the credit card products 

that they offer, and the range of such 

product offerings. The Board seeks 

information and comment on any costs, 

compliance requirements, or changes in 

operating procedures arising from the 

application of the proposed rule to 

small entities. 

Proposed Amendments 

This subsection summarizes several of 

the proposed amendments to Regulation 

Z and their likely impact on small 

entities that offer open-end credit. More 

information regarding these and other 

proposed changes can be found in IV. 

Section-by-Section Analysis. 

Proposed §§ 226.5a(a)(2)(iv) and 

226.6(b)(1)(i) would generally require 

creditors that are small entities to use 

bold text when disclosing maximum 

limits on fees in the application and 

solicitation table and the accountopening table, respectively. Creditors 

that are small entities are already 

required to provide this information so 

the Board does not anticipate any 

significant additional burden on small 

entities by requiring the use of bold text. 

Proposed § 226.7(b)(11)(i)(B) would 

generally require card issuers that are 

small entities to disclose the amount of 

any late payment fee and any increased 

rate that may be imposed on the account 

as a result of a late payment. In 

addition, proposed § 226.7(b)(11)(i)(B) 

would permit the use of the term ‘‘up to’’ 

to disclose the highest fee if a range of 

late payment fees may be assessed. 

However, § 226.7(b)(11)(i)(B) already 

requires card issuers to disclose late 

payment fee information so the Board 

does not anticipate any significant 

additional burden on small entities. The 

Board also seeks to reduce the burden 


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39See GAO Credit Card Report at 72–73. 

40 In 2009, the information collection was retitled—Reporting, Recordkeeping and Disclosure 

Requirements associated with Regulation Z (Truth 

in Lending) and Regulation AA (Unfair or Deceptive 

Acts or Practices). 

on small entities by proposing model 

forms which can be used to ease 

compliance with the proposed rule. 

Proposed §§ 226.9(c)(2)(iv)(A)(8) and 

226.9(g)(3)(i)(A)(6) would generally 

require card issuers that are small 

entities to disclose no more than four 

reasons for an annual percentage rate 

increase in the notice required to be 

provided 45 days in advance of that 

increase. Although §§ 226.9(c) and (g) 

already require card issuers to provide 

45 days’ notice prior to an annual 

percentage rate increase, proposed 

§§ 226.9(c)(2)(iv)(A)(8) and 

226.9(g)(3)(i)(A)(6) may require some 

small entities to establish processes and 

alter their systems in order to comply 

with the provision. The cost of such 

change would depend on the size of the 

institution and the composition of its 

portfolio. 

Proposed § 226.52(b) would generally 

limit the dollar amount of penalty fees 

imposed by card issuers that are small 

entities. Specifically, credit card penalty 

fees must be based on certain permitted 

determinations or on a proposed safe 

harbor. In addition, proposed 

§ 226.52(b) prohibits penalty fees that 

exceed the dollar amount associated 

with the violation and certain types of 

penalty fees. As discussed in IV. 

Section-by-Section Analysis, in 2006 the 

GAO found that the percentage of issuer 

revenue derived from penalty fees had 

increased to approximately 10%.39

Compliance with this provision may 

reduce revenue that some entities derive 

from fees. Compliance with proposed 

§ 226.52(b) would also require card 

issuers that are small entities to conform 

certain penalty fee disclosures already 

required under §§ 226.5a, 226.6, 226.7, 

and 226.56. 

Proposed § 226.59 would generally 

require small entities that are card 

issuers to reevaluate an increased 

annual percentage rates no less than 

every six months. In addition, proposed 

§ 226.59 would require small entities 

that are card issuers to reduce the 

annual percentage rate, if appropriate, 

based on such reevaluation. Proposed 

§ 226.59 would require some small 

entities to establish processes and alter 

their systems in order to comply with 

the provision. The cost of such change 

would depend on the size of the 

institution and the composition of its 

portfolio. In addition, this provision 

may reduce revenue that some small 

entities derive from finance charges. 

Accordingly, the Board believes that, 

in the aggregate, the provisions of its 

proposed rule would have a significant 

economic impact on a substantial 

number of small entities. 

4. Other Federal rules. The Board has 

not identified any Federal rules that 

duplicate, overlap, or conflict with the 

proposed revisions to Regulation Z. 

5. Significant alternatives to the 

proposed revisions. The provisions of 

the proposed rule would implement the 

statutory requirements of the Credit 

Card Act that go into effect on August 

22, 2010. The Board has sought to avoid 

imposing additional burden, while 

effectuating the statute in a manner that 

is beneficial to consumers. The Board 

welcomes comment on any significant 

alternatives, consistent with the Credit 

Card Act, which would minimize 

impact of the proposed rule on small 

entities. 

VII. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act (PRA) of 1995 (44 U.S.C. 

3506; 5 CFR part 1320 Appendix A.1), 

the Board reviewed the proposed rule 

under the authority delegated to the 

Board by the Office of Management and 

Budget (OMB). The collection of 

information that is required by this 

proposed rule is found in 12 CFR part 

226. The Federal Reserve may not 

conduct or sponsor, and an organization 

is not required to respond to, this 

information collection unless the 

information collection displays a 

currently valid OMB control number. 

The OMB control number is 7100– 

0199.40

This information collection is 

required to provide benefits for 

consumers and is mandatory (15 U.S.C. 

1601 et seq.). The respondents/ 

recordkeepers are creditors and other 

entities subject to Regulation Z, 

including for-profit financial 

institutions, small businesses, and 

institutions of higher education. TILA 

and Regulation Z are intended to ensure 

effective disclosure of the costs and 

terms of credit to consumers. For openend credit, creditors are required to, 

among other things, disclose 

information about the initial costs and 

terms and to provide periodic 

statements of account activity, notices of 

changes in terms, and statements of 

rights concerning billing error 

procedures. Regulation Z requires 

specific types of disclosures for credit 

and charge card accounts and homeequity plans. For closed-end loans, such 

as mortgage and installment loans, cost 

disclosures are required to be provided 

prior to consummation. Special 

disclosures are required in connection 

with certain products, such as reverse 

mortgages, certain variable-rate loans, 

and certain mortgages with rates and 

fees above specified thresholds. TILA 

and Regulation Z also contain rules 

concerning credit advertising. Creditors 

are required to retain evidence of 

compliance for twenty-four months 

(§ 226.25), but Regulation Z does not 

specify the types of records that must be 

retained. 

Under the PRA, the Federal Reserve 

accounts for the paperwork burden 

associated with Regulation Z for the 

state member banks and other creditors 

supervised by the Federal Reserve that 

engage in lending covered by Regulation 

Z and, therefore, are respondents under 

the PRA. Appendix I of Regulation Z 

defines the Federal Reserve-regulated 

institutions as: State member banks, 

branches and agencies of foreign banks 

(other than Federal branches, Federal 

agencies, and insured state branches of 

foreign banks), commercial lending 

companies owned or controlled by 

foreign banks, and organizations 

operating under section 25 or 25A of the 

Federal Reserve Act. Other Federal 

agencies account for the paperwork 

burden on other entities subject to 

Regulation Z. To ease the burden and 

cost of complying with Regulation Z 

(particularly for small entities), the 

Federal Reserve provides model forms, 

which are appended to the regulation. 

Under proposed §§ 226.5a(a)(2)(iv) 

and 226.6(b)(1)(i), the use of bold text 

would be required when disclosing 

maximum limits on fees in the 

application and solicitation table and 

the account-opening table, respectively. 

The Board anticipates that creditors 

would incorporate, with little change, 

the proposed formatting change with the 

disclosure already required under 

§§ 226.5a(a)(2)(iv) and 226.6(b)(1)(i). 

Under proposed § 226.7(b)(11)(i)(B), a 

card issuer would be required to 

disclose the amount of any late payment 

fee and any increased rate that may be 

imposed on the account as a result of a 

late payment. In addition, proposed 

§ 226.7(b)(11)(i)(B) would permit the use 

of the term ‘‘up to’’ to disclose the 

highest fee if a range of late payment 

fees may be assessed. The Board 

anticipates that card issuers, with little 

additional burden, would incorporate 

the proposed disclosure requirement 

with the disclosures already required 

under § 226.7(b)(11)(i)(B). In an effort to 

reduce burden the Board is amending 

Appendix G–18 to provide guidance on 

an ‘‘up to’’ disclosure. 

Under proposed 

§§ 226.9(c)(2)(iv)(A)(8) and 


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41The burden estimate for this rulemaking does 

not include the burden addressing changes to 

implement provisions of Closed-End Mortgages 

(Docket No. R–1366), the Home-Equity Lines of 

Credit (Docket No. R–1367), or Notification of Sale 

or transfer of Mortgage Loans (Docket No. R–1378), 

as announced in separate proposed rulemakings. 

See 74 FR 43232, 74 FR 43428, and 74 FR 60143. 

226.9(g)(3)(i)(A)(6), a card issuer would 

be required to disclose no more than 

four reasons for an annual percentage 

rate increase in the notice required to be 

provided 45 days in advance of that 

increase. The Board anticipates that 

card issuers, with little additional 

burden, would incorporate the proposed 

disclosure requirement with the 

disclosure already required under 

§ 226.9(c) and § 226.9(g). 

Proposed § 226.52(b) would generally 

limit the dollar amount of penalty fees 

imposed by card issuers. Specifically, 

credit card penalty fees must be based 

on certain permitted determinations or 

on a proposed safe harbor. In addition, 

proposed § 226.52(b) prohibits penalty 

fees that exceed the dollar amount 

associated with the violation and certain 

types of penalty fees. Compliance with 

proposed § 226.52(b) would require card 

issuers to conform certain penalty fee 

disclosures already required under 

§§ 226.5a, 226.6, 226.7, and 226.56. As 

mentioned in IV. Section-by-Section 

Analysis, in an effort to reduce burden 

the Board is proposing to amend 

guidance in Appendix G to provide 

model language for the disclosure of 

late-payment fees, over-the-limit fees, 

and returned-payment fees. 

The Board anticipates that creditors 

would incorporate the proposed 

disclosure requirement with the 

disclosures already required under 

§§ 226.5a(a)(2)(iv), 226.6(b)(1)(i), 

226.7(b)(11)(i)(B), 226.9(c)(2)(iv)(A)(8), 

226.9(g)(3)(i)(A)(6), and 226.52(b). The 

Board estimates that the proposed rule 

would impose a one-time increase in the 

total annual burden under Regulation Z. 

The 1,138 respondents would take, on 

average, 40 hours to update their 

systems to comply with the disclosure 

requirements addressed in this 

proposed rule. The total annual burden 

is estimated to increase by 45,520 hours, 

from 1,654,814 to 1,700,334 hours.41

The total one-time burden increase 

represents averages for all respondents 

regulated by the Federal Reserve. The 

Federal Reserve expects that the amount 

of time required to implement each of 

the proposed changes for a given 

financial institution or entity may vary 

based on the size and complexity of the 

respondent. 

The other Federal financial agencies: 

the Office of the Comptroller of the 

Currency (OCC), the Office of Thrift 

Supervision (OTS), the Federal Deposit 

Insurance Corporation (FDIC), and the 

National Credit Union Administration 

(NCUA) are responsible for estimating 

and reporting to OMB the total 

paperwork burden for the domestically 

chartered commercial banks, thrifts, and 

Federal credit unions and U.S. branches 

and agencies of foreign banks for which 

they have primary administrative 

enforcement jurisdiction under TILA 

Section 108(a), 15. U.S.C. 1607(a). These 

agencies are permitted, but are not 

required, to use the Board’s burden 

estimation methodology. Using the 

Board’s method, the total current 

estimated annual burden for the 

approximately 17,200 domestically 

chartered commercial banks, thrifts, and 

Federal credit unions and U.S. branches 

and agencies of foreign banks 

supervised by the Federal Reserve, OCC, 

OTS, FDIC, and NCUA under TILA 

would be approximately 13,706,325 

hours. The proposed rule would impose 

a one-time increase in the estimated 

annual burden for such institutions by 

688,000 hours to 14,394,325 hours. The 

above estimates represent an average 

across all respondents; the Board 

expects variations between institutions 

based on their size, complexity, and 

practices. 

Comments are invited on: (1) Whether 

the proposed collection of information 

is necessary for the proper performance 

of the Board’s functions; including 

whether the information has practical 

utility; (2) the accuracy of the Board’s 

estimate of the burden of the proposed 

information collection, including the 

cost of compliance; (3) ways to enhance 

the quality, utility, and clarity of the 

information to be collected; and (4) 

ways to minimize the burden of 

information collection on respondents, 

including through the use of automated 

collection techniques or other forms of 

information technology. Comments on 

the collection of information should be 

sent to Michelle Shore, Federal Reserve 

Board Clearance Officer, Division of 

Research and Statistics, Mail Stop 95–A, 

Board of Governors of the Federal 

Reserve System, Washington, DC 20551, 

with copies of such comments sent to 

the Office of Management and Budget, 

Paperwork Reduction Project (7100– 

0199), Washington, DC 20503. 

List of Subjects in 12 CFR Part 226 

Advertising, Consumer protection, 

Federal Reserve System, Reporting and 

recordkeeping requirements, Truth in 

Lending. 

Text of Interim Final Revisions 

For the reasons set forth in the 

preamble, the Board proposes to amend 

Regulation Z, 12 CFR part 226, as set 

forth below: 

PART 226—TRUTH IN LENDING 

(REGULATION Z) 

1. In § 226.5a, revise paragraph 

(a)(2)(iv) to read as follows: 

§ 226.5a Credit and charge card 

applications and solicitations. 

(a) * * * 

(2) * * * 

(iv) When a tabular format is required, 

any annual percentage rate required to 

be disclosed pursuant to paragraph 

(b)(1) of this section, any introductory 

rate required to be disclosed pursuant to 

paragraph (b)(1)(ii) of this section, any 

rate that will apply after a premium 

initial rate expires required to be 

disclosed under paragraph (b)(1)(iii) of 

this section, and any fee or percentage 

amounts or maximum limits on fee 

amounts disclosed pursuant to 

paragraphs (b)(2), (b)(4), (b)(8) through 

(b)(13) of this section must be disclosed 

in bold text. However, bold text shall 

not be used for: The amount of any 

periodic fee disclosed pursuant to 

paragraph (b)(2) of this section that is 

not an annualized amount; and other 

annual percentage rates or fee amounts 

disclosed in the table. 

* * * * * 

2. In § 226.6, revise paragraph (b)(1)(i) 

to read as follows: 

§ 226.6 Account-opening disclosures. 

* * * * * 

(b) * * * 

(1) * * * 

(i) Highlighting. In the table, any 

annual percentage rate required to be 

disclosed pursuant to paragraph (b)(2)(i) 

of this section; any introductory rate 

permitted to be disclosed pursuant to 

paragraph (b)(2)(i)(B) or required to be 

disclosed under paragraph (b)(2)(i)(F) of 

this section, any rate that will apply 

after a premium initial rate expires 

permitted to be disclosed pursuant to 

paragraph (b)(2)(i)(C) or required to be 

disclosed pursuant to paragraph 

(b)(2)(i)(F), and any fee or percentage 

amounts or maximum limits on fee 

amounts disclosed pursuant to 

paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) 

through (b)(2)(xii) of this section must 

be disclosed in bold text. However, bold 

text shall not be used for: The amount 

of any periodic fee disclosed pursuant 

to paragraph (b)(2) of this section that is 

not an annualized amount; and other 

annual percentage rates or fee amounts 

disclosed in the table. 

* * * * * 

3. Section 226.7(b)(11)(i)(B) is revised 

to read as follows: 


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§ 226.7 Periodic statement. 

(11) Due date; late payment costs. 

(i) * * * 

(B) The amount of any late payment 

fee and any increased periodic rate(s) 

(expressed as an annual percentage 

rate(s)) that may be imposed on the 

account as a result of a late payment. If 

a range of late payment fees may be 

assessed, the card issuer may state the 

range of fees, or the highest fee and an 

indication that the fee imposed could be 

lower. If the rate may be increased for 

more than one feature or balance, the 

card issuer may state the range of rates 

or the highest rate that could apply and 

at the issuer’s option an indication that 

the rate imposed could be lower. 

* * * * * 

4. Section 226.9(c)(2) and (g) are 

revised to read as follows: 

§ 226.9 Subsequent disclosure 

requirements. 

* * * * * 

(c) * * * 

(2) Rules affecting open-end (not 

home-secured) plans. (i) Changes where 

written advance notice is required. (A) 

General. For plans other than homeequity plans subject to the requirements 

of § 226.5b, except as provided in 

paragraphs (c)(2)(i)(B), (c)(2)(iii) and 

(c)(2)(v) of this section, when a 

significant change in account terms as 

described in paragraph (c)(2)(ii) of this 

section is made to a term required to be 

disclosed under § 226.6(b)(3), (b)(4) or 

(b)(5) or the required minimum periodic 

payment is increased, a creditor must 

provide a written notice of the change 

at least 45 days prior to the effective 

date of the change to each consumer 

who may be affected. The 45-day timing 

requirement does not apply if the 

consumer has agreed to a particular 

change; the notice shall be given, 

however, before the effective date of the 

change. Increases in the rate applicable 

to a consumer’s account due to 

delinquency, default or as a penalty 

described in paragraph (g) of this 

section that are not due to a change in 

the contractual terms of the consumer’s 

account must be disclosed pursuant to 

paragraph (g) of this section instead of 

paragraph (c)(2) of this section. 

(B) Changes agreed to by the 

consumer. A notice of change in terms 

is required, but it may be mailed or 

delivered as late as the effective date of 

the change if the consumer agrees to the 

particular change. This paragraph 

(c)(2)(i)(B) applies only when a 

consumer substitutes collateral or when 

the creditor can advance additional 

credit only if a change relatively unique 

to that consumer is made, such as the 

consumer’s providing additional 

security or paying an increased 

minimum payment amount. The 

following are not considered agreements 

between the consumer and the creditor 

for purposes of this paragraph 

(c)(2)(i)(B): the consumer’s general 

acceptance of the creditor’s contract 

reservation of the right to change terms; 

the consumer’s use of the account 

(which might imply acceptance of its 

terms under state law); the consumer’s 

acceptance of a unilateral term change 

that is not particular to that consumer, 

but rather is of general applicability to 

consumers with that type of account; 

and the consumer’s request to reopen a 

closed account or to upgrade an existing 

account to another account offered by 

the creditor with different credit or 

other features. 

(ii) Significant changes in account 

terms. For purposes of this section, a 

‘‘significant change in account terms’’ 

means a change to a term required to be 

disclosed under § 226.6(b)(1) and (b)(2), 

an increase in the required minimum 

periodic payment, or the acquisition of 

a security interest. 

(iii) Charges not covered by 

§ 226.6(b)(1) and (b)(2). Except as 

provided in paragraph (c)(2)(vi) of this 

section, if a creditor increases any 

component of a charge, or introduces a 

new charge, required to be disclosed 

under § 226.6(b)(3) that is not a 

significant change in account terms as 

described in paragraph (c)(2)(ii) of this 

section, a creditor may either, at its 

option: 

(A) Comply with the requirements of 

paragraph (c)(2)(i) of this section; or 

(B) Provide notice of the amount of 

the charge before the consumer agrees to 

or becomes obligated to pay the charge, 

at a time and in a manner that a 

consumer would be likely to notice the 

disclosure of the charge. The notice may 

be provided orally or in writing. 

(iv) Disclosure requirements. (A) 

Significant changes in account terms. If 

a creditor makes a significant change in 

account terms as described in paragraph 

(c)(2)(ii) of this section, the notice 

provided pursuant to paragraph (c)(2)(i) 

of this section must provide the 

following information: 

(1) A summary of the changes made 

to terms required by § 226.6(b)(1) and 

(b)(2), a description of any increase in 

the required minimum periodic 

payment, and a description of any 

security interest being acquired by the 

creditor; 

(2) A statement that changes are being 

made to the account; 

(3) For accounts other than credit card 

accounts under an open-end (not homesecured) consumer credit plan subject to 

§ 226.9(c)(2)(iv)(B), a statement 

indicating the consumer has the right to 

opt out of these changes, if applicable, 

and a reference to additional 

information describing the opt-out right 

provided in the notice, if applicable; 

(4) The date the changes will become 

effective; 

(5) If applicable, a statement that the 

consumer may find additional 

information about the summarized 

changes, and other changes to the 

account, in the notice; 

(6) If the creditor is changing a rate on 

the account, other than a penalty rate, 

a statement that if a penalty rate 

currently applies to the consumer’s 

account, the new rate described in the 

notice will not apply to the consumer’s 

account until the consumer’s account 

balances are no longer subject to the 

penalty rate; 

(7) If the change in terms being 

disclosed is an increase in an annual 

percentage rate, the balances to which 

the increased rate will be applied. If 

applicable, a statement identifying the 

balances to which the current rate will 

continue to apply as of the effective date 

of the change in terms; and 

(8) If the change in terms being 

disclosed is an increase in an annual 

percentage rate for a credit card account 

under an open-end (not home-secured) 

consumer credit plan, a statement of no 

more than four principal reasons for the 

rate increase, listed in their order of 

importance. 

(B) Right to reject for credit card 

accounts under an open-end (not homesecured) consumer credit plan. In 

addition to the disclosures in paragraph 

(c)(2)(iv)(A) of this section, if a card 

issuer makes a significant change in 

account terms on a credit card account 

under an open-end (not home-secured) 

consumer credit plan, the creditor must 

generally provide the following 

information on the notice provided 

pursuant to paragraph (c)(2)(i) of this 

section. This information is not required 

to be provided in the case of an increase 

in the required minimum periodic 

payment, a change in an annual 

percentage rate applicable to a 

consumer’s account, a change in the 

balance computation method applicable 

to consumer’s account necessary to 

comply with § 226.54, or when the 

change results from the creditor not 

receiving the consumer’s required 

minimum periodic payment within 60 

days after the due date for that payment: 

(1) A statement that the consumer has 

the right to reject the change or changes 

prior to the effective date of the changes, 

unless the consumer fails to make a 

required minimum periodic payment 

within 60 days after the due date for 

that payment; 


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(2) Instructions for rejecting the 

change or changes, and a toll-free 

telephone number that the consumer 

may use to notify the creditor of the 

rejection; and 

(3) If applicable, a statement that if 

the consumer rejects the change or 

changes, the consumer’s ability to use 

the account for further advances will be 

terminated or suspended. 

(C) Changes resulting from failure to 

make minimum periodic payment 

within 60 days from due date for credit 

card accounts under an open-end (not 

home-secured) consumer credit plan. 

For a credit card account under an 

open-end (not home-secured) consumer 

credit plan, if the significant change 

required to be disclosed pursuant to 

paragraph (c)(2)(i) of this section is an 

increase in an annual percentage rate or 

a fee or charge required to be disclosed 

under § 226.6(b)(2)(ii), (b)(2)(iii), or 

(b)(2)(xii) based on the consumer’s 

failure to make a minimum periodic 

payment within 60 days from the due 

date for that payment, the notice 

provided pursuant to paragraph (c)(2)(i) 

of this section must also contain the 

following information: 

(1) A statement of the reason for the 

increase; and 

(2) That the increase will cease to 

apply to transactions that occurred prior 

to or within 14 days of provision of the 

notice, if the creditor receives six 

consecutive required minimum periodic 

payments on or before the payment due 

date, beginning with the first payment 

due following the effective date of the 

increase. 

(D) Format requirements. (1) Tabular 

format. The summary of changes 

described in paragraph (c)(2)(iv)(A)(1) of 

this section must be in a tabular format 

(except for a summary of any increase 

in the required minimum periodic 

payment), with headings and format 

substantially similar to any of the 

account-opening tables found in G–17 

in appendix G to this part. The table 

must disclose the changed term and 

information relevant to the change, if 

that relevant information is required by 

§ 226.6(b)(1) and (b)(2). The new terms 

shall be described in the same level of 

detail as required when disclosing the 

terms under § 226.6(b)(2). 

(2) Notice included with periodic 

statement. If a notice required by 

paragraph (c)(2)(i) of this section is 

included on or with a periodic 

statement, the information described in 

paragraph (c)(2)(iv)(A)(1) of this section 

must be disclosed on the front of any 

page of the statement. The summary of 

changes described in paragraph 

(c)(2)(iv)(A)(1) of this section must 

immediately follow the information 

described in paragraph (c)(2)(iv)(A)(2) 

through (c)(2)(iv)(A)(7) and, if 

applicable, paragraphs (c)(2)(iv)(A)(8), 

(c)(2)(iv)(B), and (c)(2)(iv)(C) of this 

section, and be substantially similar to 

the format shown in Sample G–20 or G– 

21 in appendix G to this part. 

(3) Notice provided separately from 

periodic statement. If a notice required 

by paragraph (c)(2)(i) of this section is 

not included on or with a periodic 

statement, the information described in 

paragraph (c)(2)(iv)(A)(1) of this section 

must, at the creditor’s option, be 

disclosed on the front of the first page 

of the notice or segregated on a separate 

page from other information given with 

the notice. The summary of changes 

required to be in a table pursuant to 

paragraph (c)(2)(iv)(A)(1) of this section 

may be on more than one page, and may 

use both the front and reverse sides, so 

long as the table begins on the front of 

the first page of the notice and there is 

a reference on the first page indicating 

that the table continues on the following 

page. The summary of changes 

described in paragraph (c)(2)(iv)(A)(1) of 

this section must immediately follow 

the information described in paragraph 

(c)(2)(iv)(A)(2) through (c)(2)(iv)(A)(7) 

and, if applicable, paragraphs 

(c)(2)(iv)(A)(8), (c)(2)(iv)(B), and 

(c)(2)(iv)(C), of this section, 

substantially similar to the format 

shown in Sample G–20 or G–21 in 

appendix G to this part. 

(v) Notice not required. For open-end 

plans (other than home equity plans 

subject to the requirements of § 226.5b) 

a creditor is not required to provide 

notice under this section: 

(A) When the change involves charges 

for documentary evidence; a reduction 

of any component of a finance or other 

charge; suspension of future credit 

privileges (except as provided in 

paragraph (c)(2)(vi) of this section) or 

termination of an account or plan; when 

the change results from an agreement 

involving a court proceeding; when the 

change is an extension of the grace 

period; or if the change is applicable 

only to checks that access a credit card 

account and the changed terms are 

disclosed on or with the checks in 

accordance with paragraph (b)(3) of this 

section; 

(B) When the change is an increase in 

an annual percentage rate upon the 

expiration of a specified period of time, 

provided that: 

(1) Prior to commencement of that 

period, the creditor disclosed in writing 

to the consumer, in a clear and 

conspicuous manner, the length of the 

period and the annual percentage rate 

that would apply after expiration of the 

period; 

(2) The disclosure of the length of the 

period and the annual percentage rate 

that would apply after expiration of the 

period are set forth in close proximity 

and in equal prominence to the first 

listing of the disclosure of the rate that 

applies during the specified period of 

time; and 

(3) The annual percentage rate that 

applies after that period does not exceed 

the rate disclosed pursuant to paragraph 

(c)(2)(v)(B)(1) of this paragraph or, if the 

rate disclosed pursuant to paragraph 

(c)(2)(v)(B)(1) of this section was a 

variable rate, the rate following any 

such increase is a variable rate 

determined by the same formula (index 

and margin) that was used to calculate 

the variable rate disclosed pursuant to 

paragraph (c)(2)(v)(B)(1); 

(C) When the change is an increase in 

a variable annual percentage rate in 

accordance with a credit card agreement 

that provides for changes in the rate 

according to operation of an index that 

is not under the control of the creditor 

and is available to the general public; or 

(D) When the change is an increase in 

an annual percentage rate, a fee or 

charge required to be disclosed under 

§ 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii), 

or the required minimum periodic 

payment due to the completion of a 

workout or temporary hardship 

arrangement by the consumer or the 

consumer’s failure to comply with the 

terms of such an arrangement, provided 

that: 

(1) The annual percentage rate or fee 

or charge applicable to a category of 

transactions or the required minimum 

periodic payment following any such 

increase does not exceed the rate or fee 

or charge or required minimum periodic 

payment that applied to that category of 

transactions prior to commencement of 

the arrangement or, if the rate that 

applied to a category of transactions 

prior to the commencement of the 

workout or temporary hardship 

arrangement was a variable rate, the rate 

following any such increase is a variable 

rate determined by the same formula 

(index and margin) that applied to the 

category of transactions prior to 

commencement of the workout or 

temporary hardship arrangement; and 

(2) The creditor has provided the 

consumer, prior to the commencement 

of such arrangement, with a clear and 

conspicuous disclosure of the terms of 

the arrangement (including any 

increases due to such completion or 

failure). This disclosure must generally 

be provided in writing. However, a 

creditor may provide the disclosure of 

the terms of the arrangement orally by 

telephone, provided that the creditor 

mails or delivers a written disclosure of 


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Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 12359 

the terms of the arrangement to the 

consumer as soon as reasonably 

practicable after the oral disclosure is 

provided. 

(vi) Reduction of the credit limit. For 

open-end plans that are not subject to 

the requirements of § 226.5b, if a 

creditor decreases the credit limit on an 

account, advance notice of the decrease 

must be provided before an over-thelimit fee or a penalty rate can be 

imposed solely as a result of the 

consumer exceeding the newly 

decreased credit limit. Notice shall be 

provided in writing or orally at least 45 

days prior to imposing the over-thelimit fee or penalty rate and shall state 

that the credit limit on the account has 

been or will be decreased. 

* * * * * 

(g) Increase in rates due to 

delinquency or default or as a penalty. 

(1) Increases subject to this section. For 

plans other than home-equity plans 

subject to the requirements of § 226.5b, 

except as provided in paragraph (g)(4) of 

this section, a creditor must provide a 

written notice to each consumer who 

may be affected when: 

(i) A rate is increased due to the 

consumer’s delinquency or default; or 

(ii) A rate is increased as a penalty for 

one or more events specified in the 

account agreement, such as making a 

late payment or obtaining an extension 

of credit that exceeds the credit limit. 

(2) Timing of written notice. 

Whenever any notice is required to be 

given pursuant to paragraph (g)(1) of 

this section, the creditor shall provide 

written notice of the increase in rates at 

least 45 days prior to the effective date 

of the increase. The notice must be 

provided after the occurrence of the 

events described in paragraphs (g)(1)(i) 

and (g)(1)(ii) of this section that trigger 

the imposition of the rate increase. 

(3)(i) Disclosure requirements for rate 

increases. (A) General. If a creditor is 

increasing the rate due to delinquency 

or default or as a penalty, the creditor 

must provide the following information 

on the notice sent pursuant to paragraph 

(g)(1) of this section: 

(1) A statement that the delinquency 

or default rate or penalty rate, as 

applicable, has been triggered; 

(2) The date on which the 

delinquency or default rate or penalty 

rate will apply; 

(3) The circumstances under which 

the delinquency or default rate or 

penalty rate, as applicable, will cease to 

apply to the consumer’s account, or that 

the delinquency or default rate or 

penalty rate will remain in effect for a 

potentially indefinite time period; 

(4) A statement indicating to which 

balances the delinquency or default rate 

or penalty rate will be applied; 

(5) If applicable, a description of any 

balances to which the current rate will 

continue to apply as of the effective date 

of the rate increase, unless a consumer 

fails to make a minimum periodic 

payment within 60 days from the due 

date for that payment; and 

(6) For a credit card account under an 

open-end (not home-secured) consumer 

credit plan, a statement of no more than 

four principal reasons for the rate 

increase, listed in their order of 

importance. 

(B) Rate increases resulting from 

failure to make minimum periodic 

payment within 60 days from due date. 

For a credit card account under an 

open-end (not home-secured) consumer 

credit plan, if the rate increase required 

to be disclosed pursuant to paragraph 

(g)(1) of this section is an increase 

pursuant to § 226.55(b)(4) based on the 

consumer’s failure to make a minimum 

periodic payment within 60 days from 

the due date for that payment, the notice 

provided pursuant to paragraph (g)(1) of 

this section must also contain the 

following information: 

(1) A statement of the reason for the 

increase; and 

(2) That the increase will cease to 

apply to transactions that occurred prior 

to or within 14 days of provision of the 

notice, if the creditor receives six 

consecutive required minimum periodic 

payments on or before the payment due 

date, beginning with the first payment 

due following the effective date of the 

increase. 

(ii) Format requirements. (A) If a 

notice required by paragraph (g)(1) of 

this section is included on or with a 

periodic statement, the information 

described in paragraph (g)(3)(i) of this 

section must be in the form of a table 

and provided on the front of any page 

of the periodic statement, above the 

notice described in paragraph (c)(2)(iv) 

of this section if that notice is provided 

on the same statement. 

(B) If a notice required by paragraph 

(g)(1) of this section is not included on 

or with a periodic statement, the 

information described in paragraph 

(g)(3)(i) of this section must be disclosed 

on the front of the first page of the 

notice. Only information related to the 

increase in the rate to a penalty rate may 

be included with the notice, except that 

this notice may be combined with a 

notice described in paragraph (c)(2)(iv) 

or (g)(4) of this section. 

(4) Exception for decrease in credit 

limit. A creditor is not required to 

provide a notice pursuant to paragraph 

(g)(1) of this section prior to increasing 

the rate for obtaining an extension of 

credit that exceeds the credit limit, 

provided that: 

(i) The creditor provides at least 45 

days in advance of imposing the penalty 

rate a notice, in writing, that includes: 

(A) A statement that the credit limit 

on the account has been or will be 

decreased. 

(B) A statement indicating the date on 

which the penalty rate will apply, if the 

outstanding balance exceeds the credit 

limit as of that date; 

(C) A statement that the penalty rate 

will not be imposed on the date 

specified in paragraph (g)(4)(i)(B) of this 

section, if the outstanding balance does 

not exceed the credit limit as of that 

date; 

(D) The circumstances under which 

the penalty rate, if applied, will cease to 

apply to the account, or that the penalty 

rate, if applied, will remain in effect for 

a potentially indefinite time period; 

(E) A statement indicating to which 

balances the penalty rate may be 

applied; and 

(F) If applicable, a description of any 

balances to which the current rate will 

continue to apply as of the effective date 

of the rate increase, unless the consumer 

fails to make a minimum periodic 

payment within 60 days from the due 

date for that payment; and 

(ii) The creditor does not increase the 

rate applicable to the consumer’s 

account to the penalty rate if the 

outstanding balance does not exceed the 

credit limit on the date set forth in the 

notice and described in paragraph 

(g)(4)(i)(B) of this section. 

(iii) (A) If a notice provided pursuant 

to paragraph (g)(4)(i) of this section is 

included on or with a periodic 

statement, the information described in 

paragraph (g)(4)(i) of this section must 

be in the form of a table and provided 

on the front of any page of the periodic 

statement; or 

(B) If a notice required by paragraph 

(g)(4)(i) of this section is not included 

on or with a periodic statement, the 

information described in paragraph 

(g)(4)(i) of this section must be disclosed 

on the front of the first page of the 

notice. Only information related to the 

reduction in credit limit may be 

included with the notice, except that 

this notice may be combined with a 

notice described in paragraph (c)(2)(iv) 

or (g)(1) of this section. 

* * * * * 

5. Section 226.52(b) is added to read 

as follows: 

§ 226.52 Limitations on fees. 

* * * * * 

(b) Limitations on penalty fees. (1) 

General rule. A card issuer must not 


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12360 Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 

impose a fee for violating the terms or 

other requirements of a credit card 

account under an open-end (not homesecured) consumer credit plan unless 

the dollar amount of the fee is based on 

one of the determinations set forth in 

this paragraph. 

(i) Fees based on costs. A card issuer 

may impose a fee for violating the terms 

or other requirements of an account if 

the card issuer has determined that the 

dollar amount of the fee represents a 

reasonable proportion of the total costs 

incurred by the card issuer as a result 

of that type of violation. 

(ii) Fees based on deterrence. A card 

issuer may impose a fee for violating the 

terms or other requirements of an 

account if the card issuer has 

determined that the dollar amount of 

the fee is reasonably necessary to deter 

that type of violation using an 

empirically derived, demonstrably and 

statistically sound model that 

reasonably estimates the effect of the 

amount of the fee on the frequency of 

violations. 

(iii) Reevaluation of determinations. 

A card issuer must reevaluate a 

determination made under paragraph 

(b)(1)(i) or (b)(1)(ii) of this section at 

least once every twelve months. If as a 

result of the reevaluation the card issuer 

determines that a lower fee is consistent 

with paragraph (b)(1)(i) or (b)(1)(ii) of 

this section, the card issuer must begin 

imposing the lower fee within 30 days 

after completing the reevaluation. If as 

a result of the reevaluation the card 

issuer determines that a higher fee is 

consistent with paragraph (b)(1)(i) or 

(b)(1)(ii) of this section, the card issuer 

may begin imposing the higher fee after 

complying with the notice requirements 

in § 226.9. 

(2) Prohibited fees. (i) Fees that 

exceed dollar amount associated with 

violation. (A) Generally. A card issuer 

must not impose a fee for violating the 

terms or other requirements of a credit 

card account under an open-end (not 

home-secured) consumer credit plan 

that exceeds the dollar amount 

associated with the violation at the time 

the fee is imposed. 

(B) No dollar amount associated with 

violation. A card issuer must not impose 

a fee for violating the terms or other 

requirements of a credit card account 

under an open-end (not home-secured) 

consumer credit plan when there is no 

dollar amount associated with the 

violation. For purposes of paragraph 

(b)(2)(i) of this section, there is no dollar 

amount associated with the following 

violations: 

(1) Transactions that the card issuer 

declines to authorize; 

(2) Account inactivity; and 

(3) The closure or termination of an 

account. 

(ii) Multiple fees based on a single 

event or transaction. A card issuer must 

not impose more than one fee for 

violating the terms or other 

requirements of a credit card account 

under an open-end (not home-secured) 

consumer credit plan based on a single 

event or transaction. A card issuer may 

at its option comply with this 

prohibition by imposing no more than 

one fee for violating the account terms 

or other requirements during a billing 

cycle. 

(3) Safe harbor. Except as provided in 

paragraph (b)(2) of this section, a card 

issuer complies with paragraph (b)(1) of 

this section if the dollar amount of a fee 

for violating the terms or other 

requirements of a credit card account 

under an open-end (not home-secured) 

consumer credit plan does not exceed 

the greater of: 

(i) $[XX.XX], adjusted annually by the 

Board to reflect changes in the 

Consumer Price Index; or 

(ii) Five percent of the dollar amount 

associated with the violation, provided 

that the dollar amount of the fee does 

not exceed $[XX.XX], adjusted annually 

by the Board to reflect changes in the 

Consumer Price Index. 

6. Section 226.59 is added to read as 

follows: 

§ 226.59 Reevaluation of rate increases. 

(a) General rule. (1) Reevaluation of 

rate increases. If a card issuer increases 

an annual percentage rate that applies to 

a credit card account under an open-end 

(not home-secured) consumer credit 

plan, based on the credit risk of the 

consumer, market conditions, or other 

factors, or increased such a rate on or 

after January 1, 2009, and 45 days’ 

advance notice of the rate increase is 

required pursuant to § 226.9(c)(2) or (g), 

the card issuer must: 

(i) Evaluate whether such factors have 

changed; and 

(ii) Based on its review of such 

factors, reduce the annual percentage 

rate applicable to the consumer’s 

account, as appropriate. 

(2) Rate reductions—timing. If a card 

issuer is required to reduce the rate 

applicable to an account pursuant to 

paragraph (a)(1) of this section, the card 

issuer must reduce the rate not later 

than 30 days after completion of the 

evaluation described in paragraph (a)(1). 

(b) Policies and procedures. A card 

issuer must have reasonable written 

policies and procedures in place to 

review the factors described in 

paragraphs (a) and (d) of this section. 

(c) Timing. A card issuer that is 

subject to paragraph (a) of this section 

must review changes in factors in 

accordance with paragraphs (a) and (d) 

of this section not less frequently than 

once every six months after the initial 

rate increase. 

(d) Factors. A card issuer is not 

required to base its review under 

paragraph (a) of this section on the same 

factors on which an increase in an 

annual percentage rate was based. The 

card issuer may, at its option, review the 

factors on which the rate increase was 

originally based, or may review the 

factors that it currently considers when 

determining the annual percentage rates 

applicable to its credit card accounts 

under an open-end (not home-secured) 

consumer credit plan. 

(e) Rate increases subject to 

§ 226.55(b)(4). If an issuer increases a 

rate applicable to a consumer’s account 

pursuant to § 226.55(b)(4) based on the 

card issuer not receiving the consumer’s 

required minimum periodic payment 

within 60 days after the due date, the 

issuer is not required to review factors 

pursuant to paragraph (a) of this section 

prior to the sixth payment due date after 

the effective date of the increase. 

However, if the annual percentage rate 

applicable to the consumer’s account is 

not reduced pursuant to 

§ 226.55(b)(4)(ii), the card issuer must 

review factors in accordance with 

paragraph (a) of this section no later 

than six months after the sixth payment 

due following the effective date of the 

rate increase. 

(f) Termination of obligation to review 

factors. The obligation to review factors 

described in paragraph (a) and (d) of 

this section ceases to apply if: 

(1) The issuer reduces the annual 

percentage rate applicable to a credit 

card account under an open-end (not 

home-secured) consumer credit plan to 

the rate applicable immediately prior to 

the increase, or, if the rate applicable 

immediately prior to the increase was a 

variable rate, to a variable rate 

determined by the same formula (index 

and margin) that was used to calculate 

the rate applicable prior to the increase; 

or 

(2) The issuer reduces the annual 

percentage rate to a rate that is lower 

than the rate described in paragraph 

(f)(1) of this section. 

(g) Acquired accounts. (1) General. 

Except as provided in paragraph (g)(2) 

of this section, the obligation to review 

changes in factors in paragraph (a) of 

this section applies to credit card 

accounts that have been acquired by the 

card issuer from another card issuer. A 

card issuer may review either the factors 

that the card issuer from which it 

acquired the accounts considered in 

connection with the rate increase, or 


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may review the factors that it currently 

considers in determining the annual 

percentage rates applicable to its credit 

card accounts. 

(2) Review of acquired portfolio. If a 

card issuer reviews all of the credit card 

accounts it acquires, as soon as 

reasonably practicable after the 

acquisition of such accounts, in 

accordance with the factors that it 

currently uses in determining the rates 

applicable to its credit card accounts: 

(i) Except as provided in paragraph 

(g)(2)(iii), the card issuer is required to 

review changes in factors in accordance 

with paragraph (a) of this section only 

for rate increases that are imposed as a 

result of that review. See §§ 226.9 and 

226.55 for additional requirements 

regarding rate increases on acquired 

accounts. 

(ii) Except as provided in paragraph 

(g)(2)(iii) of this section, the card issuer 

is not required to review changes in 

factors in accordance with paragraph (a) 

of this section for any rate increases 

made prior to the card issuer’s 

acquisition of such accounts. 

(iii) If as a result of the card issuer’s 

review, an account is subject to, or 

continues to be subject to, an increased 

rate as a penalty, or due to the 

consumer’s delinquency or default, the 

requirements of this section apply. 

(h) Exceptions. (1) Servicemembers 

Civil Relief Act exception. The 

requirements of this section do not 

apply to increases in an annual 

percentage rate that was previously 

decreased pursuant to 50 U.S.C. app. 

527, provided that such a rate increase 

is made in accordance with 

§ 226.55(b)(6). 

(2) Charged off accounts. The 

requirements of this section do not 

apply to accounts that the card issuer 

has charged off in accordance with loanloss provisions. 

7. Appendix G to part 226 is amended 

by revising Forms G–10(B), G–10(C), G– 

17(B), G–17(C), G–18(B), G–18(D), G– 

18(F), G–18(G), G–20, G–21, G–22, G– 

25(A), and G–25(B). 

Appendix G to Part 226—Open-End 

Model Forms and Clauses 

* * * * * 

BILLING CODE 6210–01–P 


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* * * * * G–18(B)—Late Payment Fee Sample 

Late Payment Warning: If we do not 

receive your minimum payment by the 

date listed above, you may have to pay 

a late fee of up to $XX and your APRs 

may be increased up to the Penalty APR 

of 28.99%. 

* * * * * 


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* * * * * 

BILLING CODE 6210–01–C 


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* * * * * 

G–25(A)—Consent Form for Over-the-Credit 

Limit Transactions 

Your Choice Regarding Over-the-Credit Limit 

Coverage 

Unless you tell us otherwise, we will 

decline any transaction that causes you to go 

over your credit limit. If you want us to 

authorize these transactions, you can request 

over-the-credit limit coverage. 

If you have over-the-credit limit coverage 

and you go over your credit limit, we will 

charge you a fee of up to $XX. We may also 

increase your APRs to the Penalty APR of 

XX.XX%. You will only pay one fee per 

billing cycle, even if you go over your limit 

multiple times in the same cycle. 

Even if you request over-the-credit limit 

coverage, in some cases we may still decline 

a transaction that would cause you to go over 

your limit, such as if you are past due or 

significantly over your credit limit. 

If you want over-the-limit coverage and to 

allow us to authorize transactions that go 

over your credit limit, please: 

—Call us at [telephone number]; 

—Visit [Web site]; or 

—Check or initial the box below, and return 

the form to us at [address]. 

lI want over-the-limit coverage. I 

understand that if I go over my credit limit, 

my APRs may be increased and I will be 

charged a fee of up to $XX. [I have the right 

to cancel this coverage at any time.] 

[lI do not want over-the-limit coverage. I 

understand that transactions that exceed my 

credit limit will not be authorized.] 

Printed Name: llllllllllllll

Date: llllllllllllllllll

[Account Number]: lllllllllll

G–25(B)—Revocation Notice for Periodic 

Statement Regarding Over-the-Credit Limit 

Transactions 

You currently have over-the-credit limit 

coverage on your account, which means that 

we pay transactions that cause you go to over 

your credit limit. If you do go over your 

credit limit, we will charge you a fee of up 

to $XX. We may also increase your APRs. To 

remove over-the-credit-limit coverage from 

your account, call us at 1–800–xxxxxxx or 

visit [insert web site]. [You may also write us 

at: [insert address]. ] 

[You may also check or initial the box 

below and return this form to us at: [insert 

address]. 

lI want to cancel over-the-limit coverage 

for my account. 

Printed Name: llllllllllllll

Date: llllllllllllllllll

[Account Number]: lllllllllll

8. In Supplement I to Part 226: 

A. Under Section 226.5a—Credit and 

Charge Card Applications and 

Solicitations, under 5a(a) General rules, 

under 5a(a)(2) Form of disclosures; 

tabular format, paragraph 5.ii. is 

revised. 

B. Under Section 226.9—Subsequent 

Disclosure Requirements: 

(i) Under 9(c) Change in terms, under 

9(c)(2)(iv) Disclosure requirements, 

paragraphs 1. through 11. are revised; 

and 

(ii) Under 9(g) Increase in rates due to 

delinquency or default or as a penalty, 

paragraphs 1. through 7. are revised. 

C. Under Section 226.52—Limitations 

on Fees, 52(b) Limitations on penalty 

fees is added. 

D. Under Section 226.56— 

Requirements for over-the-limit 

transactions: 

(i) Under 56(e) Content, paragraph 1. 

is revised; and 

(ii) Under 56(j) Prohibited practices, 

paragraph 6. is added. 

E. Section 226.59—Reevaluation of 

Rate Increases is added. 

Supplement I to Part 226—Official Staff 

Interpretations 

* * * * * 

Section 226.5a—Credit and Charge Card 

Applications and Solicitations 

* * * * * 

5a(a) General rules. 

* * * * * 

5a(a)(2) Form of disclosures; tabular 

format. 

* * * * * 

5. * * * 

ii. Maximum limits on fees. Section 

226.5a(a)(2)(iv) provides that any maximum 

limits on fee amounts must be disclosed in 

bold text. For example, assume that, 

consistent with § 226.52(b)(3), a card issuer’s 

late payment fee will not exceed $XX.XX. 

The maximum limit of $XX.XX for the late 

payment fee must be highlighted in bold. 

Similarly, assume an issuer will charge a 

cash advance fee of $5 or 3 percent of the 

cash advance transaction amount, whichever 

is greater, but the fee will not exceed $100. 

The maximum limit of $100 for the cash 

advance fee must be highlighted in bold. 

* * * * * 

Section 226.9—Subsequent Disclosure 

Requirements 

* * * * * 

9(c) Change in terms. 

* * * * * 

9(c)(2)(iv) Disclosure requirements. 

1. Changing margin for calculating a 

variable rate. If a creditor is changing a 

margin used to calculate a variable rate, the 

creditor must disclose the amount of the new 

rate (as calculated using the new margin) in 

the table described in § 226.9(c)(2)(iv), and 

include a reminder that the rate is a variable 

rate. For example, if a creditor is changing 

the margin for a variable rate that uses the 

prime rate as an index, the creditor must 

disclose in the table the new rate (as 

calculated using the new margin) and 

indicate that the rate varies with the market 

based on the prime rate. 

2. Changing index for calculating a 

variable rate. If a creditor is changing the 

index used to calculate a variable rate, the 

creditor must disclose the amount of the new 

rate (as calculated using the new index) and 

indicate that the rate varies and how the rate 

is determined, as explained in 

§ 226.6(b)(2)(i)(A). For example, if a creditor 

is changing from using a prime rate to using 

the LIBOR in calculating a variable rate, the 

creditor would disclose in the table the new 

rate (using the new index) and indicate that 

the rate varies with the market based on the 

LIBOR. 

3. Changing from a variable rate to a nonvariable rate. If a creditor is changing a rate 

applicable to a consumer’s account from a 

variable rate to a non-variable rate, the 

creditor must provide a notice as otherwise 

required under § 226.9(c) even if the variable 

rate at the time of the change is higher than 

the non-variable rate. 

4. Changing from a non-variable rate to a 

variable rate. If a creditor is changing a rate 

applicable to a consumer’s account from a 

non-variable rate to a variable rate, the 

creditor must provide a notice as otherwise 

required under § 226.9(c) even if the nonvariable rate is higher than the variable rate 

at the time of the change. 

5. Changes in the penalty rate, the triggers 

for the penalty rate, or how long the penalty 

rate applies. If a creditor is changing the 

amount of the penalty rate, the creditor must 

also redisclose the triggers for the penalty 

rate and the information about how long the 

penalty rate applies even if those terms are 

not changing. Likewise, if a creditor is 

changing the triggers for the penalty rate, the 

creditor must redisclose the amount of the 

penalty rate and information about how long 

the penalty rate applies. If a creditor is 

changing how long the penalty rate applies, 

the creditor must redisclose the amount of 

the penalty rate and the triggers for the 

penalty rate, even if they are not changing. 

6. Changes in fees. If a creditor is changing 

part of how a fee that is disclosed in a tabular 

format under § 226.6(b)(1) and (b)(2) is 

determined, the creditor must redisclose all 

relevant information related to that fee 

regardless of whether this other information 

is changing. For example, if a creditor 

currently charges a cash advance fee of 

‘‘Either $5 or 3% of the transaction amount, 

whichever is greater. (Max: $100),’’ and the 

creditor is only changing the minimum dollar 

amount from $5 to $10, the issuer must 

redisclose the other information related to 

how the fee is determined. For example, the 

creditor in this example would disclose the 

following: ‘‘Either $10 or 3% of the 

transaction amount, whichever is greater. 

(Max: $100).’’ 

7. Combining a notice described in 

§ 226.9(c)(2)(iv) with a notice described in 

§ 226.9(g)(3). If a creditor is required to 

provide a notice described in § 226.9(c)(2)(iv) 

and a notice described in § 226.9(g)(3) to a 

consumer, the creditor may combine the two 

notices. This would occur if penalty pricing 

has been triggered, and other terms are 

changing on the consumer’s account at the 

same time. 

8. Content. Sample G–20 contains an 

example of how to comply with the 

requirements in § 226.9(c)(2)(iv) when a 

variable rate is being changed to a nonvariable rate on a credit card account. The 

sample explains when the new rate will 

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balances the current rate will continue to 

apply. Sample G–21 contains an example of 

how to comply with the requirements in 

§ 226.9(c)(2)(iv) when (i) the late payment fee 

on a credit card account is being increased 

in accordance with a formula that depends 

on the outstanding balance on the account, 

and (ii) the returned payment fee is also 

being increased. The sample discloses the 

consumer’s right to reject the changes in 

accordance with § 226.9(h). 

9. Clear and conspicuous standard. See 

comment 5(a)(1)–1 for the clear and 

conspicuous standard applicable to 

disclosures required under 

§ 226.9(c)(2)(iv)(A)(1). 

10. Terminology. See § 226.5(a)(2) for 

terminology requirements applicable to 

disclosures required under 

§ 226.9(c)(2)(iv)(A)(1). 

11. Reasons for increase. Section 

226.9(c)(2)(iv)(A)(8) requires card issuers to 

disclose the principal reason(s) for increasing 

an annual percentage rate applicable to a 

credit card account under an open-end (not 

home-secured) consumer credit plan. The 

regulation does not mandate a minimum 

number of reasons that must be disclosed. 

However, the specific reasons disclosed 

under § 226.9(c)(2)(iv)(A)(8) are required to 

relate to and accurately describe the 

principal factors actually considered by the 

card issuer in increasing the rate. A card 

issuer may describe the reasons for the 

increase in general terms. For example, the 

notice of a rate increase triggered by a 

decrease of 100 points in a consumer’s credit 

score may state that the increase is due to ‘‘a 

decline in your creditworthiness’’ or ‘‘a 

decline in your credit score.’’ Similarly, a 

notice of a rate increase triggered by a 10% 

increase in the card issuer’s cost of funds 

may be disclosed as ‘‘a change in market 

conditions.’’ In some circumstances, it may 

be appropriate for a card issuer to combine 

the disclosure of several reasons in one 

statement. For example, assume that a 

consumer made a late payment on the credit 

card account on which the rate increase is 

being imposed, made a late payment on a 

credit card account with another card issuer, 

and the consumer’s credit score decreased, in 

part due to such late payments. The card 

issuer may disclose the reasons for the rate 

increase as a decline in the consumer’s credit 

score and the consumer’s late payment on the 

account subject to the increase. Because the 

late payment on the credit card account with 

the other issuer also likely contributed to the 

decline in the consumer’s credit score, it is 

not required to be separately disclosed. 

* * * * * 

9(g) Increase in rates due to delinquency or 

default or as a penalty. 

1. Relationship between § 226.9(c) and (g) 

and § 226.55—examples. Card issuers subject 

to § 226.55 are prohibited from increasing the 

annual percentage rate for a category of 

transactions on any consumer credit card 

account unless specifically permitted by one 

of the exceptions in § 226.55(b). See 

comments 55(a)–1 and 55(b)–3 and the 

commentary to § 226.55(b)(4) for examples 

that illustrate the relationship between the 

notice requirements of § 226.9(c) and (g) and 

§ 226.55. 

2. Affected consumers. If a single credit 

account involves multiple consumers that 

may be affected by the change, the creditor 

should refer to § 226.5(d) to determine the 

number of notices that must be given. 

3. Combining a notice described in 

§ 226.9(g)(3) with a notice described in 

§ 226.9(c)(2)(iv). If a creditor is required to 

provide notices pursuant to both 

§ 226.9(c)(2)(iv) and (g)(3) to a consumer, the 

creditor may combine the two notices. This 

would occur when penalty pricing has been 

triggered, and other terms are changing on 

the consumer’s account at the same time. 

4. Content. Sample G–22 contains an 

example of how to comply with the 

requirements in § 226.9(g)(3)(i) when the rate 

on a consumer’s credit card account is being 

increased to a penalty rate as described in 

§ 226.9(g)(1)(ii), based on a late payment that 

is not more than 60 days late. Sample G–23 

contains an example of how to comply with 

the requirements in § 226.9(g)(3)(i) when the 

rate increase is triggered by a delinquency of 

more than 60 days. 

5. Clear and conspicuous standard. See 

comment 5(a)(1)–1 for the clear and 

conspicuous standard applicable to 

disclosures required under § 226.9(g). 

6. Terminology. See § 226.5(a)(2) for 

terminology requirements applicable to 

disclosures required under § 226.9(g). 

7. Reasons for increase. See comment 

9(c)(2)(iv)–11 for guidance on disclosure of 

the reasons for a rate increase for a credit 

card account under an open-end (not homesecured) consumer credit plan. 

* * * * * 

Section 226.52—Limitations on Fees 

52(a) Limitations during first year after 

account opening. 

* * * * * 

52(b) Limitations on penalty fees. 

1. Fees for violating the account terms or 

other requirements. For purposes of 

§ 226.52(b), a fee is 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. 

Accordingly, § 226.52(b) does not apply to 

charges attributable to an increase in an 

annual percentage rate based on an act or 

omission that violates the account terms. 

i. The following are examples of fees that 

are subject to the limitations in § 226.52(b) or 

are prohibited by § 226.52(b): 

A. Late 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. 

B. Returned-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. 

C. Any fee or charge for an over-the-limit 

transaction as defined in § 226.56(a), to the 

extent the imposition of such a fee or charge 

is permitted by § 226.56. 

D. Any fee or charge for a transaction that 

the card issuer declines to authorize. See 

§ 226.52(b)(2)(i)(B). 

E. Any 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) or the closure or termination of 

an account. See § 226.52(b)(2)(i)(B). 

ii. The following are examples of fees to 

which § 226.52(b) does not apply: 

A. Balance transfer fees. 

B. Cash advance fees. 

C. Foreign transaction fees. 

D. Annual fees and other fees for the 

issuance or availability of credit described in 

§ 226.5a(b)(2), except to the extent that such 

fees are based on account inactivity. 

E. Fees for insurance described in 

§ 226.4(b)(7) or debt cancellation or debt 

suspension coverage described in 

§ 226.4(b)(10) written in connection with a 

credit transaction, provided that such fees are 

not imposed as a result of a violation of the 

account terms or other requirements. 

F. Fees for making an expedited payment 

(to the extent permitted by § 226.10(e)). 

G. Fees for optional services (such as travel 

insurance). 

H. Fees for reissuing a lost or stolen card. 

2. Rounding to nearest whole dollar. A card 

issuer may round any fee that complies with 

§ 226.52(b) to the nearest whole dollar. For 

example, if § 226.52(b) permits a card issuer 

to impose a late payment fee of $21.50, the 

card issuer may round that amount up to the 

nearest whole dollar and impose a late 

payment fee of $22. However, if the late 

payment fee permitted by § 226.52(b) were 

$21.49, the card issuer would not be 

permitted to round that amount up to $22, 

although the card issuer could round that 

amount down and impose a late payment fee 

of $21. 

52(b)(1) General rule 

1. Amounts charged by other card issuers. 

The fact that a card issuer’s fees for violating 

the account terms or other requirements are 

comparable to fees assessed by other card 

issuers does not satisfy the requirements of 

§ 226.52(b)(1). 

52(b)(1)(i) Fees based on costs. 

1. Costs incurred as a result of violations 

of the account terms. Section 226.52(b)(1)(i) 

does not require a card issuer to base a fee 

on the costs incurred as a result of a specific 

violation of the account terms or other 

requirements. Instead, for purposes of 

§ 226.52(b)(1)(i), a card issuer must have 

determined that a fee for violating the 

account terms or other requirements 

represents a reasonable proportion of the 

costs incurred by the card issuer as a result 

of that type of violation. The factors relevant 

to this determination include: 

A. The number of violations of a particular 

type experienced by the card issuer during a 

prior period; 

B. The costs incurred by the card issuer 

during that period as a result of those 

violations; and 

C. At the card issuer’s option, reasonable 

estimates of changes in the number of 

violations of that type and the resulting costs 

during an upcoming period. See illustrative 

examples in comments 52(b)(1)(i)–4 through– 

6. 


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2. Losses and associated costs. Losses and 

associated costs (including the cost of 

holding reserves against potential losses) are 

not costs incurred by a card issuer as a result 

of violations of the account terms or other 

requirements for purposes of § 226.52(b)(1)(i). 

3. Third party charges. As a general matter, 

amounts charged to the card issuer by a third 

party as a result of a violation of the account 

terms or other requirements are costs 

incurred by the card issuer for purposes of 

§ 226.52(b)(1)(i). For example, if a card issuer 

is charged a specific amount by a third party 

for each returned payment, that amount is a 

cost incurred by the card issuer as a result 

of returned payments. However, if the 

amount is charged to the card issuer by an 

affiliate or subsidiary of the card issuer, the 

card issuer must have determined that the 

charge represents a reasonable proportion of 

the costs incurred by the affiliate or 

subsidiary as a result of the type of violation. 

For example, if an affiliate of a card issuer 

provides collection services to the card issuer 

on delinquent accounts, the card issuer must 

have determined that the amounts charged to 

the card issuer by the affiliate for such 

services represent a reasonable proportion of 

the costs incurred by the affiliate as a result 

of late payments. 

4. Late payment fees. 

i. Costs incurred as a result of late 

payments. For purposes of § 226.52(b)(1)(i), 

the costs incurred by a card issuer as a result 

of late payments include the costs associated 

with the collection of late payments, such as 

the costs associated with notifying 

consumers of delinquencies and resolving 

delinquencies (including the establishment 

of workout and temporary hardship 

arrangements). 

ii. Examples. 

A. Late payment fee based on past 

delinquencies and costs. Assume that, during 

year one, a card issuer experienced 1 million 

delinquencies and incurred $23 million in 

costs as a result of those delinquencies. For 

purposes of § 226.52(b)(1)(i), a $23 late 

payment fee would represent a reasonable 

proportion of the total costs incurred by the 

card issuer as a result of late payments 

during year two. 

B. Adjustment based on reasonable 

estimate of future changes. Same facts as 

above except the card issuer reasonably 

estimates that—based on past delinquency 

rates and other factors relevant to potential 

delinquency rates for year two—it will 

experience a 1% decrease in delinquencies 

during year two (in other words, 10,000 

fewer delinquencies for a total of 990,000). 

The card issuer also reasonably estimates 

that—based on past changes in costs incurred 

as a result of delinquencies and other factors 

relevant to potential costs for year two—it 

will experience a 3% increase in costs during 

year two (in other words, $690,000 in 

additional costs for a total of $23.69 million). 

For purposes of § 226.52(b)(1)(i), a $24 late 

payment fee would represent a reasonable 

proportion of the total costs incurred by the 

card issuer as a result of late payments 

during year two. 

5. Returned-payment fees. 

i. Costs incurred as a result of returned 

payments. For purposes of § 226.52(b)(1)(i), 

the costs incurred by a card issuer as a result 

of returned payments include: 

A. Costs associated with processing 

returned payments and reconciling the card 

issuer’s systems and accounts to reflect 

returned payments; and 

B. Costs associated with notifying the 

consumer of the returned payment and 

arranging for a new payment. 

ii. Examples. 

A. Returned-payment fee based on past 

returns and costs. Assume that, during year 

one, a card issuer experienced 150,000 

returned payments and incurred $3.1 million 

in costs as a result of those returned 

payments. For purposes of § 226.52(b)(1)(i), a 

$21 returned-payment fee would represent a 

reasonable proportion of the total costs 

incurred by the card issuer as a result of 

returned payments during year two. 

B. Adjustment based on reasonable 

estimate of future changes. Same facts as 

above except the card issuer reasonably 

estimates that—based on past returned 

payment rates and other factors relevant to 

potential returned payment rates for year 

two—it will experience a 2% increase in 

returned payments during year two (in other 

words, 3,000 additional returned payments 

for a total of 153,000). The card issuer also 

reasonably estimates that—based on past 

changes in costs incurred as a result of 

returned payments and other factors relevant 

to potential costs for year two—it will 

experience a 3% decrease in costs during 

year two (in other words, a $93,000 reduction 

in costs for a total of $3.007 million). For 

purposes of § 226.52(b)(1)(i), a $20 returnedpayment fee would represent a reasonable 

proportion of the total costs incurred by the 

card issuer as a result of returned payments 

during year two. 

6. Over-the-limit fees. 

i. Costs incurred as a result of over-thelimit transactions. For purposes of 

§ 226.52(b)(1)(i), the costs incurred by a card 

issuer as a result of over-the-limit 

transactions include: 

A. Costs associated with determining 

whether to authorize over-the-limit 

transactions; and 

B. Costs associated with notifying the 

consumer that the credit limit has been 

exceeded and arranging for payments to 

reduce the balance below the credit limit. 

ii. Examples. 

A. Over-the-limit fee based on past fees 

and costs. Assume that, during year one, a 

card issuer authorized 600,000 over-the-limit 

transactions and incurred $4.5 million in 

costs as a result of those over-the-limit 

transactions. However, because of the 

affirmative consent requirements in § 226.56, 

the card issuer was only permitted to impose 

200,000 over-the-limit fees during year one. 

For purposes of § 226.52(b)(1)(i), a $23 overthe-limit fee would represent a reasonable 

proportion of the total costs incurred by the 

card issuer as a result of over-the-limit 

transactions during year two. 

B. Adjustment based on reasonable 

estimate of future changes. Same facts as 

above except the card issuer reasonably 

estimates that—based on past over-the-limit 

transaction rates, the percentages of over-thelimit transactions that resulted in an overthe-limit fee in the past (consistent with 

§ 226.56), and factors relevant to potential 

changes in those rates and percentages for 

year two—it will authorize approximately the 

same number of over-the-limit transactions 

during year two (600,000) and impose 

approximately the same number of over-thelimit fees (200,000). The card issuer also 

reasonably estimates that—based on past 

changes in costs incurred as a result of overthe-limit transactions and other factors 

relevant to potential costs for year two—it 

will experience a 6% decrease in costs 

during year two (in other words, a $270,000 

reduction in costs for a total of $4.23 

million). For purposes of § 226.52(b)(1)(i), a 

$21 over-the-limit fee would represent a 

reasonable proportion of the total costs 

incurred by the card issuer as a result of overthe-limit transactions during year two. 

52(b)(1)(ii) Fees based on deterrence. 

1. Deterrence of violations. Section 

226.52(b)(1)(ii) does not require a card issuer 

to determine that a fee for violating the 

account terms or other requirements is 

reasonably necessary to deter violations by a 

specific consumer or with respect to a 

specific account. Instead, for purposes of 

§ 226.52(b)(1)(ii), a card issuer must have 

determined that the dollar amount of a fee for 

violating the account terms or other 

requirements is reasonably necessary to deter 

the type of violation for which the fee is 

imposed. 

2. Use of models. Section 226.52(b)(2)(ii) 

provides that, in order to determine that the 

dollar amount of a fee for violating the 

account terms or other requirements is 

reasonably necessary to deter that type of 

violation, the card issuer must use an 

empirically derived, demonstrably and 

statistically sound model that reasonably 

estimates the effect of the dollar amount of 

the fee on the frequency of the type of 

violation. A model that reasonably estimates 

a statistical correlation between the 

imposition of a fee and the frequency of a 

type of violation is not sufficient to satisfy 

the requirements of § 226.52(b)(1)(ii). Instead, 

in order to support a determination that the 

dollar amount of a fee is reasonably 

necessary to deter a particular type of 

violation, a model must reasonably estimate 

that, independent of other variables, the 

imposition of a lower fee amount would 

result in a substantial increase in the 

frequency of that type of violation. The 

parameterization of the model used for this 

purpose must be sufficiently flexible to allow 

for the identification of a lower fee level 

above which additional fee increases have no 

marginal effect on the frequency of 

violations. 

52(b)(2) Prohibited fees 

1. Relationship to § 226.52(b)(1) and (b)(3). 

A card issuer does not comply with 

§ 226.52(b)(1) if it imposes a fee that is 

inconsistent with the prohibitions in 

§ 226.52(b)(2). Similarly, the prohibitions in 

§ 226.52(b)(2) apply even if a fee is consistent 

with the safe harbor in § 226.52(b)(3). For 

example, even if a card issuer has determined 

for purposes of § 226.52(b)(1) that a $25 fee 

represents a reasonable proportion of the 

total costs incurred by the card as a result of 

a particular type of violation or that a $25 fee 


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Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 12373 

is reasonably necessary to deter that type of 

violation, § 226.52(b)(2)(i) prohibits the card 

issuer from imposing that fee if the dollar 

amount associated with the violation is less 

than $25. 

52(b)(2)(i) Fees that exceed dollar amount 

associated with violation. 

1. Late payment fees. For purposes of 

§ 226.52(b)(2)(i), the dollar amount associated 

with a late payment is the amount of the 

required minimum periodic payment that 

was not received on or before the payment 

due date. Thus, § 226.52(b)(2)(i)(A) prohibits 

a card issuer from imposing a late payment 

fee that exceeds the amount of the required 

minimum periodic payment on which that 

fee is based. For example, assume that an 

account has a balance of $1,000. If the card 

issuer does not receive the $20 required 

minimum periodic payment on or before the 

payment due date, § 226.52(b)(2)(i)(A) 

prohibits the card issuer from imposing a late 

payment fee that exceeds $20 (even if a 

higher fee would be permitted under 

§ 226.52(b)(1) or (b)(3)). 

2. Returned-payment fees. For purposes of 

§ 226.52(b)(2)(i), the dollar amount associated 

with a returned payment is the amount of the 

required minimum periodic payment due 

during the billing cycle in which the 

payment is returned to the card issuer. Thus, 

§ 226.52(b)(2)(i)(A) prohibits a card issuer 

from imposing a returned-payment fee that 

exceeds the amount of that required 

minimum periodic payment. However, if a 

payment has been returned and is submitted 

again for payment by the card issuer, there 

is no additional dollar amount associated 

with a subsequent return of that payment and 

§ 226.52(b)(2)(i)(B) prohibits the card issuer 

from imposing an additional returnedpayment fee. The following examples 

illustrate the application of § 226.52(b)(2)(i) 

to returned-payment fees: 

i. Assume that the billing cycles for an 

account begin on the first day of the month 

and end on the last day of the month and that 

the payment due date is the twenty-fifth day 

of the month. A minimum payment of $20 is 

due on March 25. The card issuer receives a 

check for $100 on March 23, which is 

returned to the card issuer for insufficient 

funds on March 26. Section 226.52(b)(2)(i)(A) 

prohibits the card issuer from imposing a 

returned-payment fee that exceeds $20 (even 

if a higher fee would be permitted under 

§ 226.52(b)(1) or (b)(3)). Furthermore, 

§ 226.52(b)(2)(ii) prohibits the card issuer 

from assessing both a late payment fee and 

a returned-payment fee in these 

circumstances. See comment 52(b)(2)(ii)–1. 

ii. Same facts as above except that the card 

issuer receives the $100 check on March 31 

and the check is returned for insufficient 

funds on April 2. The minimum payment 

due on April 25 is $30. Section 

226.52(b)(2)(i)(A) prohibits the card issuer 

from imposing a returned-payment fee that 

exceeds $30 (even if a higher fee would be 

permitted under § 226.52(b)(1) or (b)(3)). 

iii. Same facts as paragraph i. above except 

that, on March 28, the card issuer presents 

the $100 check for payment a second time. 

On April 1, the check is again returned for 

insufficient funds. Section 226.52(b)(2)(i)(B) 

prohibits the card issuer from imposing a 

returned-payment fee based on the return of 

the payment on April 1. 

3. Over-the-limit fees. For purposes of 

§ 226.52(b)(2)(i), the dollar amount associated 

with extensions of credit in excess of the 

credit limit for an account is the total amount 

of credit extended by the card issuer in 

excess of the credit limit as of the date on 

which the over-the-limit fee is imposed. 

Thus, § 226.52(b)(2)(i)(A) prohibits a card 

issuer from imposing an over-the-limit fee 

that exceeds that amount. Although 

§ 226.56(j)(1)(i) prohibits a card issuer from 

imposing more than one over-the-limit fee 

per billing cycle, the card issuer may choose 

the date during the billing cycle on which to 

impose an over-the-limit fee so long as the 

dollar amount of the fee does not exceed the 

total amount of credit extended in excess of 

the limit as of that date. The following 

examples illustrate the application of 

§ 226.52(b)(2)(i)(A) to over-the-limit fees: 

i. Assume that the billing cycles for a credit 

card account with a credit limit of $5,000 

begin on the first day of the month and end 

on the last day of the month. Assume also 

that, consistent with § 226.56, the consumer 

has affirmatively consented to the payment of 

transactions that exceed the credit limit. On 

March 1, the account has a $4,950 balance. 

On March 6, a $60 transaction is charged to 

the account, increasing the balance to $5,010. 

If the card issuer chooses to impose an overthe-limit fee on March 6, § 226.52(b)(2)(i)(A) 

prohibits the card issuer from imposing an 

over-the-limit fee that exceeds $10 (even if a 

higher fee would be permitted under 

§ 226.52(b)(1) or (b)(3)). 

ii. Same facts as above, except that the card 

issuer chooses not to impose an over-thelimit fee on March 6. On March 25, a $5 

transaction is charged to the account, 

increasing the balance to $5,015. If the card 

issuer chooses to impose an over-the-limit fee 

on March 25, § 226.52(b)(2)(i)(A) prohibits 

the card issuer from imposing an over-thelimit fee that exceeds $15 (even if a higher 

fee would be permitted under § 226.52(b)(1) 

or (b)(3)). 

iii. Same facts as in paragraph ii. above, 

except that the card issuer chooses not to 

impose an over-the-limit fee on March 25. On 

March 26, the card issuer receives a payment 

of $20, reducing the balance below the credit 

limit to $4,995. In these circumstances, 

§ 226.52(b)(2)(i)(A) prohibits the card issuer 

from imposing an over-the-limit fee (even if 

a fee would be permitted under § 226.52(b)(1) 

or (b)(3)). Furthermore, § 226.52(b)(2)(i)(A) 

does not permit the card issuer to impose a 

fee at the end of the billing cycle (March 31) 

based on the total amount of credit extended 

in excess of the credit limit on an earlier date 

(such as March 6 or 25). 

52(b)(2)(ii) Multiple fees based on single 

event or transaction. 

1. Single event or transaction. Section 

226.52(b)(2)(ii) prohibits a card issuer from 

imposing more than one fee for violating the 

account terms or other requirements based on 

a single event or transaction. The following 

examples illustrate the application of 

§ 226.52(b)(2)(ii). Assume for purposes of 

these examples that the billing cycles for a 

credit card account begin on the first day of 

the month and end on the last day of the 

month and that the payment due date for the 

account is the twenty-fifth day of the month. 

i. Assume that the required minimum 

periodic payment due on March 25 is $20. 

On March 26, the card issuer has not 

received any payment and imposes a late 

payment fee. Section 226.52(b)(2)(ii) 

prohibits the card issuer from imposing an 

additional late payment fee if the $20 

minimum payment has not been received by 

a subsequent date (such as March 31). 

However, § 226.52(b)(2)(ii) does not prohibit 

the card issuer from imposing an additional 

late payment fee if the required minimum 

periodic payment due on April 25 (which 

may include the $20 due on March 25) is not 

received on or before that date. 

ii. Assume that the required minimum 

periodic payment due on March 25 is $20. 

A. On March 25, the card issuer receives 

a check for $50, but the check is returned for 

insufficient funds on March 27. Consistent 

with § 226.52(b)(2)(i)(A), the card issuer may 

impose a late payment fee of $20 or a 

returned-payment fee of $20 (assuming that 

these amounts comply with § 226.52(b)(1) or 

(b)(3)). However, § 226.52(b)(2)(ii) prohibits 

the card issuer from imposing both fees 

because those fees would be based on a 

single event or transaction. 

B. Same facts as paragraph ii.A. above 

except that that card issuer receives the $50 

check on March 27 and the check is returned 

for insufficient funds on March 29. 

Consistent with § 226.52(b)(2)(i)(A), the card 

issuer may impose a late payment fee of $20 

or a returned-payment fee of $20 (assuming 

that these amounts comply with 

§ 226.52(b)(1) or (b)(3)). However, 

§ 226.52(b)(2)(ii) prohibits the card issuer 

from imposing both fees because those fees 

would be based on a single event or 

transaction. 

iii. Assume that the credit limit for an 

account is $1,000. On March 31, the balance 

on the account is $975 and the card issuer 

has not received the $20 required minimum 

periodic payment due on March 25. On that 

same date (March 31), a $50 transaction is 

charged to the account, which increases the 

balance to $1,025. Consistent with 

§ 226.52(b)(2)(i)(A), the card issuer may 

impose a late payment fee of $20 and an 

over-the-limit fee of $25 (assuming that these 

amounts comply with § 226.52(b)(1) or 

(b)(3)). Section 226.52(b)(2)(ii) does not 

prohibit the imposition of both fees because 

those fees are based on different events or 

transactions. 

52(b)(3) Safe harbor. 

1. Relationship to § 226.52(b)(1) and (b)(2). 

A fee that complies with the safe harbor in 

§ 226.52(b)(3) complies with the 

requirements of § 226.52(b)(1). However, the 

safe harbor in § 226.52(b)(3) does not permit 

a card issuer to impose a fee that is 

inconsistent with the prohibitions in 

§ 226.52(b)(2). For example, if 

§ 226.52(b)(2)(i) prohibits the card issuer 

from imposing a late payment fee that 

exceeds $15, § 226.52(b)(3) does not permit 

the card issuer to impose a higher late 

payment fee. 

2. Adjustments based on Consumer Price 

Index. For purposes of § 226.52(b)(3)(i) and 

(b)(3)(ii), the Board shall calculate each year 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
12374 Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 

price level adjusted amounts using the 

Consumer Price Index in effect on June 1 of 

that year. When the cumulative change in the 

adjusted minimum value derived from 

applying the annual Consumer Price level to 

the current amounts in § 226.52(b)(3)(i) and 

(b)(3)(ii) has risen by a whole dollar, those 

amounts will be increased by $1.00. In 

contrast, when the cumulative change in the 

adjusted minimum value derived from 

applying the annual Consumer Price level to 

the current amounts in § 226.52(b)(3)(i) and 

(b)(3)(ii) has decreased by a whole dollar, 

those amounts will be decreased by $1.00. 

The Board will publish adjustments to the 

amounts in § 226.52(b)(3)(i) and (b)(3)(ii). 

3. Fees as percentages of dollar amount 

associated with transaction. 

i. Late payment fee. For purposes of 

§ 226.52(b)(3)(ii), the dollar amount 

associated with a late payment is the amount 

of the required minimum periodic payment 

that was not received on or before the 

payment due date. Thus, § 226.52(b)(3)(ii) 

generally permits a card issuer to impose a 

late payment fee that does not exceed 5% of 

the required minimum periodic payment on 

which that fee is based. For example, assume 

that, under the terms of a credit card account, 

the card issuer must receive a minimum 

payment of $450 on or before June 15. If the 

card issuer does not receive the $450 

payment on or before June 15, 

§ 226.52(b)(3)(ii) permits the card issuer to 

impose a late payment fee of $23 (which 

equals 5% of the $450 required minimum 

periodic payment, rounded to the nearest 

whole dollar). 

ii. Returned-payment fee. For purposes of 

§ 226.52(b)(3)(ii), the dollar amount 

associated with a returned payment is the 

amount of the required minimum periodic 

payment due during the billing cycle in 

which the payment is returned to the card 

issuer. See comment 52(b)(2)(i)–2. Thus, 

§ 226.52(b)(3)(ii) generally permits a card 

issuer to impose a returned-payment fee that 

does not exceed 5% of the amount of that 

required minimum periodic payment. For 

example: 

A. Assume that a $500 required minimum 

periodic payment is due on March 25. On 

that date, the card issuer receives a check for 

$700, but the check is returned to the card 

issuer for insufficient funds on March 27. 

Section 226.52(b)(3)(ii) permits the card 

issuer to impose a returned-payment fee of 

$25 (which equals 5% of $500 required 

minimum periodic payment), provided this 

amount does exceed the limitation in 

§ 226.52(b)(3)(ii). 

B. Same facts as above except that the card 

issuer receives the $700 check on March 31 

and the check is returned for insufficient 

funds on April 2. The minimum payment 

due on April 25 is $800. Section 

226.52(b)(3)(ii) permits the card issuer to 

impose a returned-payment fee of $40 (which 

equals 5% of $800 required minimum 

periodic payment), provided this amount 

does exceed the limitation in 

§ 226.52(b)(3)(ii). 

iii. Over-the-limit fee. For purposes of 

§ 226.52(b)(3)(ii), the dollar amount 

associated with extensions of credit in excess 

of the credit limit for an account is the total 

amount of credit extended by the card issuer 

in excess of the credit limit as of the date on 

which the over-the-limit fee is imposed. 

Thus, § 226.52(b)(3)(ii) generally permits a 

card issuer to impose an over-the-limit fee 

that does not exceed 5% of that amount. 

Although § 226.56(j)(1)(i) prohibits a card 

issuer from imposing more than one over-thelimit fee per billing cycle, a card issuer may 

choose the date during the billing cycle on 

which to impose an over-the-limit fee. For 

example, assume that the billing cycles for a 

credit card account with a credit limit of 

$5,000 begin on the first day of the month 

and end on the last day of the month. 

Assume also that, consistent with § 226.56, 

the consumer has affirmatively consented to 

the payment of transactions that exceed the 

credit limit. On September 1, the account has 

a balance of $4,900. On September 15, a $500 

transaction is charged to the account, 

increasing the balance to $5,400. The card 

issuer chooses not to impose an over-thelimit fee at this time. On September 20, a 

$200 transaction is charged to the account, 

increasing the balance to $5,600. If the card 

issuer chooses to impose an over-the-limit fee 

on September 20, § 226.52(b)(3)(ii) permits 

the issuer to impose a fee of $30 (which 

equals 5% of the $600 extensions of credit in 

excess of the $5,000 credit limit), provided 

this amount does exceed the limitation in 

§ 226.52(b)(3)(ii). 

* * * * * 

Section 226.56—Requirements for Over-theLimit Transactions 

* * * * * 

56(e) Content 

1. Amount of over-the-limit fee. See Model 

Forms G–25(A) and G–25(B) for guidance on 

how to disclose the amount of the over-thelimit fee. 

* * * * * 

56(j) Prohibited Practices 

* * * * * 

6. Additional restrictions on over-the-limit 

fees. See § 226.52(b). 

* * * * * 

* * * * * 

Section 226.59–Reevaluation of Rate 

Increases 

59(a) General Rule 

1. Types of rate increases covered. Section 

226.59(a) applies both to increases in annual 

percentage rates imposed on a consumer’s 

account based on that consumer’s credit risk 

or other circumstances specific to that 

consumer and to increases in annual 

percentage rates applied to the account due 

to factors such as changes in market 

conditions or the issuer’s cost of funds. 

2. Rate increases actually imposed. Under 

§ 226.59(a), a card issuer must review 

changes in factors only if the increased rate 

is actually imposed on the consumer’s 

account. For example, if a card issuer 

increases the penalty rate for a credit card 

account under an open-end (not homesecured) credit plan and the consumer’s 

account has no balances that are currently 

subject to the penalty rate, the card issuer is 

required to provide a notice pursuant to 

§ 226.9(c) of the change in terms, but the 

requirements of § 226.59 do not apply. 

However, if the consumer’s account later 

becomes subject to the penalty rate, the card 

issuer is required to provide a notice 

pursuant to § 226.9(g) and the requirements 

of § 226.59 begin to apply upon imposition 

of the penalty rate. Similarly, if a card issuer 

raises the cash advance rate applicable to a 

consumer’s account but the consumer 

engages in no cash advance transactions to 

which that increased rate is applied, the card 

issuer is required to provide a notice 

pursuant to § 226.9(c) of the change in terms, 

but the requirements of § 226.59 do not 

apply. If the consumer subsequently engages 

in a cash advance transaction, the 

requirements of § 226.59 begin to apply at 

that time. 

3. Rate increases prior to effective date of 

rule. For increases in annual percentage rates 

applicable to a credit card account under an 

open-end (not home-secured) consumer 

credit plan on or after January 1, 2009 and 

prior to August 22, 2010, § 226.59(a) requires 

the card issuer to review changes in factors 

and reduce the rate, as appropriate, if the rate 

increase is of a type for which 45 days’ 

advance notice would currently be required 

under § 226.9(c)(2) or (g). For example, 45 

days’ notice is not required under 

§ 226.9(c)(2) if the rate increase results from 

the increase in the index by which a 

properly-disclosed variable rate is 

determined in accordance with 

§ 226.9(c)(2)(v)(C) or if the increase occurs 

upon expiration of a specified period of time 

and disclosures complying with 

§ 226.9(c)(2)(v)(B) have been provided. The 

requirements of § 226.59 do not apply to such 

rate increases. 

59(b) Consideration of Factors 

1. Amount of rate decrease. Even in 

circumstances where a rate reduction is 

required, § 226.59 does not require that a 

card issuer decrease the rate that applies to 

a credit card account to the rate that was in 

effect prior to the rate increase subject to 

§ 226.59(a). The amount of the rate decrease 

that is required must be determined based 

upon the card issuer’s reasonable policies 

and procedures for consideration of factors 

described in § 226.59(a) and (d). For example, 

a consumer’s rate on new purchases is 

increased from a variable rate of 15.99% to 

a variable rate of 23.99% based on the 

consumer’s making a required minimum 

periodic payment five days late. The 

consumer makes all of the payments required 

on the account on time for the six months 

following the rate increase. The card issuer 

is not required to decrease the consumer’s 

rate to the 15.99% that applied prior to the 

rate increase. However, the card issuer’s 

policies and procedures for performing the 

review required by § 226.59(a) must be 

reasonable and should take into account any 

reduction in the consumer’s credit risk based 

upon the consumer’s timely payments. 

59(c) Timing 

1. In general. The issuer may review all of 

its accounts subject to paragraph (a) of this 


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Federal Register / Vol. 75, No. 49 / Monday, March 15, 2010 / Proposed Rules 12375 

section at the same time once every six 

months, may review each account once each 

six months on a rolling basis based on the 

date on which the rate was increased for that 

account, or may otherwise review each 

account not less frequently than once every 

six months. 

2. Example. A card issuer increases the 

rates applicable to one half of its credit card 

accounts on June 1, 2010. The card issuer 

increases the rates applicable to the other 

half of its credit card accounts on September 

1, 2010. The card issuer may review the rate 

increases for all of its credit card accounts on 

or before December 1, 2010, and at least 

every six months thereafter. In the 

alternative, the card issuer may first review 

the rate increases for the accounts that were 

repriced on June 1, 2010 on or before 

December 1, 2010, and may first review the 

rate increases for the accounts that were 

repriced on September 1, 2010 on or before 

March 1, 2011. 

3. Rate increases prior to effective date of 

rule. For increases in annual percentage rates 

applicable to a credit card account under an 

open-end (not home-secured) consumer 

credit plan on or after January 1, 2009 and 

prior to August 22, 2010, § 226.59(c) requires 

that the first review for such rate increases 

be conducted prior to February 22, 2011. 

59(d) Factors 

1. Change in factors. A creditor that 

complies with § 226.59(a) by reviewing the 

factors it currently considers in determining 

the annual percentage rates applicable to its 

credit card accounts may change those 

factors from time to time. When a creditor 

changes the factors it considers in 

determining the annual percentage rates 

applicable to its credit card accounts from 

time to time, it may comply with § 226.59(a) 

by reviewing the set of factors it considered 

immediately prior to the change in factors for 

a brief transition period, or may consider the 

new factors. For example, a creditor changes 

the factors it uses to determine the rates 

applicable to new credit card accounts on 

January 1, 2011. The creditor reviews the 

rates applicable to its existing accounts that 

have been subject to a rate increase pursuant 

to § 226.59(a) on January 25, 2011. The 

creditor complies with § 226.59(a) by 

reviewing, at its option, either the factors that 

it considered on December 31, 2010 when 

determining the rates applicable to its new 

credit card accounts, or may consider the 

factors that it considers as of January 25, 

2011. 

2. Comparison of existing account to 

factors used for new accounts. Under 

§ 226.59(a), if a creditor evaluates its existing 

accounts using the same factors that it uses 

in determining the rates applicable to new 

accounts, the review of factors need not 

result in existing accounts being subject to 

the same rates and rate structure as a creditor 

imposes on new accounts. For example, a 

creditor may offer variable rates on new 

accounts that are computed by adding a 

margin that depends on various factors to the 

value of the LIBOR index. The account that 

the creditor is required to review pursuant to 

§ 226.59(a) may have variable rates that were 

determined by adding a different margin, 

depending on different factors, to the prime 

rate. In performing the review required by 

§ 226.59(a), the creditor may review the 

factors it uses to determine the rates 

applicable to its new accounts. If a rate 

reduction is required, however, the creditor 

need not base the variable rate for the 

existing account on the LIBOR index but may 

continue to use the prime rate. Section 

226.59(a) requires, however, that the rate on 

the existing account after the reduction, as 

determined by adding the prime rate and 

margin, be comparable to the rate, as 

determined by adding the margin and LIBOR, 

charged on a new account (except for any 

promotional rate) for which the factors are 

comparable. 

3. Multiple product lines. If a card issuer 

uses different factors in determining the 

applicable annual percentage rates for 

different types of credit card plans, 

§ 226.59(d) requires the card issuer to review 

those factors that it uses in determining the 

annual percentage rates for the consumer’s 

specific type of credit card plan. For 

example, a card issuer may review different 

factors in determining the annual percentage 

rate that applies to credit card plans for 

which the consumer pays an annual fee and 

receives rewards points than it reviews in 

determining the rates for credit card plans 

with no annual fee and no rewards points. 

Similarly, a card issuer may review different 

factors in determining the annual percentage 

rate that applies to private label credit cards 

than it reviews in determining the rates 

applicable to credit cards that can be used at 

a wider variety of merchants. However, a 

card issuer must review the same factors for 

credit card accounts with similar features 

that are offered for similar purposes and may 

not consider different factors for each of its 

individual credit card accounts. 

59(g) Acquired Accounts 

59(g)(2) Review of Acquired Portfolio 

1. Example—general. A card issuer 

acquires a portfolio of accounts that currently 

are subject to annual percentage rates of 12%, 

15%, and 18%. As soon as reasonably 

practicable after the acquisition of such 

accounts, the card issuer reviews all of these 

accounts in accordance with the factors that 

it currently uses in determining the rates 

applicable to its credit card accounts. As a 

result of that review, the card issuer 

decreases the rate on the accounts that are 

currently subject to a 12% annual percentage 

rate to 10%, leaves the rate applicable to the 

accounts currently subject to a 15% annual 

percentage rate at 15%, and increases the rate 

applicable to the accounts currently subject 

to a rate of 18% to 20%. Section 226.59(g)(2) 

requires the card issuer to review, no less 

frequently than once every six months, the 

accounts for which the rate has been 

increased to 20%. The card issuer is not 

required to review the accounts subject to 

10% and 15% rates pursuant to § 226.59(a), 

unless and until the card issuer makes a 

subsequent rate increase applicable to those 

accounts. 

2. Example—penalty rates. A card issuer 

acquires a portfolio of accounts that currently 

are subject to standard annual percentage 

rates of 12% and 15%. In addition, several 

acquired accounts are subject to a penalty 

rate of 24%. As soon as reasonably 

practicable after the acquisition of such 

accounts, the card issuer reviews all of these 

accounts in accordance with the factors that 

it currently uses in determining the rates 

applicable to its credit card accounts. As a 

result of that review, the card issuer leaves 

the standard rates applicable to the accounts 

at 12% and 15%, respectively. The card 

issuer decreases the rate applicable to the 

accounts currently at 24% to its penalty rate 

of 23%. Section 226.59(g)(2) requires the card 

issuer to review, no less frequently than once 

every six months, the accounts that are 

subject to a penalty rate of 23%. The card 

issuer is not required to review the accounts 

subject to 12% and 15% rates pursuant to 

§ 226.59(a), unless and until the card issuer 

makes a subsequent rate increase applicable 

to those accounts. 

By Order of the Board of Governors of the 

Federal Reserve System, March 3, 2010. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2010–4859 Filed 3–12–10; 8:45 am] 

BILLING CODE 6210–01–P 


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