[Federal Register Volume 75, Number 49 (Monday, March 15, 2010)]
[Proposed Rules]
[Pages 12334-12375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4859]



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Part II





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Proposed Rule

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

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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.

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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:
    <bullet> Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#f381969480dd909c9e9e969d8780b39596979681929f81968096818596dd949c85"><span class="__cf_email__" data-cfemail="d6a4b3b1a5f8b5b9bbbbb3b8a2a596b0b3b2b3a4b7baa4b3a5b3a4a0b3f8b1b9a0">[email protected]</span></a>. Include the 
docket number in the subject line of the message.
    <bullet> Facsimile: (202) 452-3819 or (202) 452-3102.
    <bullet> 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 open-end 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 
re-evaluation 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, over-the-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 
Sec.  101(c) (new TILA Sec.  148) and Sec.  102(b) (new TILA Sec.  
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:
    <bullet> 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).
    <bullet> 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).
    <bullet> 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).
    <bullet> 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 account-opening 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 Sec.  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 Sec. Sec.  
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 Sec. Sec.  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 Sec.  226.52(b). 
Accordingly, the Board is proposing to amend Sec.  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 Sec.  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 Sec.  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 Sec.  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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on which the annual percentage rate has been increased since January 1, 
2009.\1\
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    \1\ As discussed in the supplementary information to Sec.  
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 
Sec.  226.59).
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    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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  226.9(g). Proposed Sec.  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 Sec.  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

[[Page 12338]]

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\
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    \2\ The Board notes that some card issuers have recently 
announced that they will cease imposing fees for exceeding the 
credit limit. In addition, Sec.  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.
    \3\ U.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).
    \4\ See GAO Credit Card Report at 72-73.
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    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\
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    \5\ The 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.
    \6\ See 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.
---------------------------------------------------------------------------

    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 late-
payment and over-the-limit fees that average between $17 to $25. In 
addition, the Board understands that many credit unions charge late-
payment and over-the-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\
---------------------------------------------------------------------------

    \7\ See Pew Credit Card Report at 3, 31-33.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \8\ The Office of the Comptroller of the Currency (OCC), the 
Federal Deposit Insurance Corporation (FDIC), and the Office of 
Thrift Supervision (OTS).
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \9\ E.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)).
    \10\ See, 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.'').
    \11\ E.g., Merriam-Webster's Collegiate Dictionary at 936 (10th 
ed. 1995).
---------------------------------------------------------------------------

    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

[[Page 12339]]

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\
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    \12\ The 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).
---------------------------------------------------------------------------

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

[[Page 12340]]

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 Sec.  226.52(b)(3) should permit issuers 
to base penalty fees on consumer conduct by:
    <bullet> 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.
    <bullet> 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 Sec.  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 Sec.  226.52(b)(1). As 
discussed below, proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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--Sec.  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 Sec.  226.56(a), to the extent the imposition 
of such a fee or charge is permitted by Sec.  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\
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    \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 Sec.  226.56. 
See new TILA Sec.  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.
    \14\ As discussed below, Sec.  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.
---------------------------------------------------------------------------

    Proposed comment 52(b)-1 would also provide the following examples 
of fees to which Sec.  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 Sec.  226.5a(b)(2), except to the extent that such fees 
are based on account inactivity; (4) fees for insurance described in 
Sec.  226.4(b)(7) or debt cancellation or debt suspension coverage 
described in Sec.  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 Sec.  
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 Sec.  
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

[[Page 12341]]

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 Sec.  171(b)(4); see also Sec.  
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 
Sec.  171(b)(4)(B); Sec.  226.55(b)(4)(ii). With respect to new 
transactions, new TILA Sec.  172(a) generally prohibits card issuers 
from applying penalty rates during the first year after account 
opening. See also Sec.  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 Sec.  127(i); Sec.  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 Sec.  148; proposed Sec.  
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\
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    \15\ For example, revised TILA Section 171(a) and (b) and new 
TILA Section 172 explicitly distinguish between annual percentage 
rates, fees, and finance charges.
    \16\ The 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 Sec.  103 (introduced Feb. 11, 2009) (proposing to create 
a new TILA Sec.  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).
---------------------------------------------------------------------------

    Proposed comment 52(b)-2 would clarify that a card issuer may round 
any fee that complies with Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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\
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    \17\ For 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.
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    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

[[Page 12342]]

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 Sec.  226.52(b)(1)(i) determination.
---------------------------------------------------------------------------

    \18\ The 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.
    \19\ See revised TILA Sec.  171; new TILA Sec.  172; see also 
Sec.  226.55.
    \20\ This 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.
    \21\ The 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.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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 Sec.  226.52(b)(1)(i) to late payment fees. In addition to 
providing illustrative examples, the comment would state that, for 
purposes of Sec.  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 Sec.  226.52(b)(1)(i) to returned-payment fees. The comment 
would state that, for purposes of Sec.  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 Sec.  226.52(b)(1)(i) to over-the-limit fees. In addition to 
providing illustrative examples, the comment would state that, for 
purposes of Sec.  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 Sec.  
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 Sec.  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, Sec.  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 Sec.  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 Sec.  
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 Sec.  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

[[Page 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 Sec.  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 Sec.  
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 Sec.  226.52(b)(1)(i) or to use the safe harbor in 
Sec.  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 Sec.  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 Sec.  
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 Sec.  226.52(b)(1)(iii) provides that a card issuer must 
reevaluate its determination under Sec.  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 Sec.  
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 Sec.  
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 Sec.  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 Sec.  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 Sec.  226.52(b)). See examples in 
proposed comment 52(b)(2)(i)-1 through -3.
    Finally, the Board recognizes that proposed Sec.  
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, 
Sec.  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 
Sec.  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 Sec.  
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 Sec.  
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, Sec.  226.52(b)(2)(i)(A) prohibits a

[[Page 12344]]

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 
Sec.  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, Sec.  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.
    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 returned-payment 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 Sec.  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, Sec.  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, Sec.  226.52(b)(2)(i)(B) prohibits a card issuer imposing an 
additional returned-payment 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\
---------------------------------------------------------------------------

    \22\ Although this concern could also be addressed under the 
prohibition on multiple fees based on a single event or transaction 
in Sec.  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 Sec.  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.
---------------------------------------------------------------------------

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 Sec.  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\
---------------------------------------------------------------------------

    \23\ The 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 Sec.  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.
---------------------------------------------------------------------------

    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 Sec.  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 over-the-limit fee on March 6, Sec.  
226.52(b)(2)(i)(A) would prohibit the card issuer from imposing an 
over-the-limit 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, Sec.  
226.52(b)(2)(i)(A) would prohibit the card issuer from imposing an 
over-the-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, Sec.  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

[[Page 12345]]

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 over-the-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 Sec.  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, Sec.  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 returned-payment fee. However, 
in these circumstances, Sec.  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 Sec.  226.52(b)(1) or the 
safe harbor in Sec.  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, Sec.  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, Sec.  226.52(b)(3) would provide a safe harbor that 
may be used to comply with the requirement in Sec.  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 Sec.  
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

[[Page 12346]]

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 home-equity lines of 
credit, the late payment fee, returned-payment fee, and over-the-limit 
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.
---------------------------------------------------------------------------

    \24\ See 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).
    \25\ See 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).
---------------------------------------------------------------------------

    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 open-end 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).
---------------------------------------------------------------------------

    \26\ See Cal. Fin. Code Sec.  4001(a)(1)-(2).
    \27\ See id. Sec.  4001(a)(3).
    \28\ See Mass. Ann. Laws ch. 140 Sec.  114B.
    \29\ See Me. Rev. Stat. Ann. tit. 9-A, Sec.  2-502(1); see also 
Minn. Stat. Sec. Sec.  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).
---------------------------------------------------------------------------

    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 [pound]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, [pound]12 has been equivalent to approximately $18 to 
$24 (based on annual averages) since the OFT announced its monetary 
threshold in April 2006.
---------------------------------------------------------------------------

    \30\ OFT Credit Card Statement at 1.
    \31\ OFT Credit Card Statement at 27-28.
    \32\ OFT Credit Card Statement at 29.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  226.52(b)(3) is intended to provide a single penalty 
fee amount that is generally consistent with the requirements of Sec.  
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

[[Page 12347]]

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\
---------------------------------------------------------------------------

    \33\ Proposed comments 52(b)(2)-1 and 52(b)(3)-1 would clarify 
that the safe harbor in Sec.  226.52(b)(3) would not permit a card 
issuer to impose a fee that is prohibited by Sec.  226.52(b)(2). For 
example, if Sec.  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 Sec.  226.52(b)(3) to impose a higher 
fee.
---------------------------------------------------------------------------

    Section 226.52(b)(3)(i) would provide that a card issuer generally 
complies with the requirements of Sec.  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\
---------------------------------------------------------------------------

    \34\ The approach set forth in this proposed comment is similar 
to Sec.  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.
---------------------------------------------------------------------------

    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, Sec.  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 
Sec.  226.52(b)(3)(i), so long as that fee does not exceed 5% of the 
dollar amount associated with the violation.
---------------------------------------------------------------------------

    \35\ Consistent with proposed Sec.  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.
---------------------------------------------------------------------------

    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 Sec.  226.52(b)(3)(ii) 
could not exceed a specific dollar amount. The Board requests comment 
on the appropriate upper limit.\36\
---------------------------------------------------------------------------

    \36\ As discussed in proposed comment 52(b)(3)-2, this upper 
limit would also be adjusted annually based on changes in the 
Consumer Price Index.
---------------------------------------------------------------------------

    The Board solicits comment on the general safe harbor approach in 
proposed Sec.  226.52(b)(3). The Board also solicits comment on the 
appropriate dollar amounts for proposed Sec.  226.52(b)(3)(i) and the 
upper limit in proposed Sec.  226.52(b)(3)(ii). Finally, the Board 
solicits comment on whether 5% is the appropriate percentage for 
proposed Sec.  226.52(b)(3)(ii). As noted above, the Board encourages 
commenters to provide data supporting their submissions.
Application of Proposed Sec.  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 Sec.  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 
Sec.  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 Sec.  226.52(b) are 
necessary to permit charge card issuers to manage risk.

Section 226.56 Requirements for Over-the-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 over-the-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-the-limit fee 
consistent with the substantive restrictions in proposed Sec.  
226.52(b).
    In addition, because proposed Sec.  226.52(b) would impose 
additional substantive limitations on over-the-limit fees, the Board 
proposes to add a cross-reference to Sec.  226.52(b) in new comment 
56(j)-6.

Section 226.59 Reevaluation of Rate Increases

    As discussed in the supplementary information to Sec.  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

[[Page 12348]]

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 Sec.  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 Sec.  226.9(c)(2) and (g), 
which are discussed in the supplementary information to Sec.  226.9.
    Proposed Sec.  226.59 would apply to ``credit card accounts under 
an open-end (not home-secured) consumer credit plan'' as defined in 
Sec.  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 Sec.  226.59(a) sets forth the general rule regarding the 
reevaluation of rate increases. Proposed Sec.  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 Sec.  
226.59(a)(1) would limit this obligation to rate increases for which 45 
days' advance notice is required under Sec.  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 properly-disclosed 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 Sec.  226.59 would be inconsistent with the purposes of 
new TILA Section 148. Accordingly, the Board is proposing this 
limitation to the scope of Sec.  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 Sec.  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 Sec.  226.59(d), a card issuer is not 
required under Sec.  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 Sec.  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 Sec.  226.9(c)(2) of the change in terms, but the 
requirements of Sec.  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 Sec.  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 Sec.  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 Sec.  226.55 and the 45-day advance 
notice requirements in Sec.  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 Sec.  226.59.
    Proposed Sec.  226.59(a)(2) states that if a card issuer is 
required to reduce the rate applicable to an account pursuant to Sec.  
226.59(a)(1), the card issuer must reduce the rate not later than 30 
days after completion of the evaluation described in Sec.  
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 Sec.  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

[[Page 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, Sec.  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 Sec.  
226.9(c)(2) or (g). The requirements of Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
226.9(c)(2)(v)(C) or if the increase occurs upon expiration of a 
specified period of time and disclosures complying with Sec.  
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 Sec.  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 Sec.  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, Sec.  
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 Sec.  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 Sec.  226.59 are 
different from, and operate in addition to, the requirements of Sec.  
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 Sec.  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 Sec.  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 Sec.  226.59(c) clarifies the timing requirements for the 
reevaluation of rate increases pursuant to Sec.  226.59(a). Consistent 
with new TILA Section 148(b)(2), a card issuer that is subject to Sec.  
226.59(a) must review changes in factors in accordance with Sec.  
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

[[Page 12350]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  226.59(d) would provide that a card issuer is 
not required to base its review under Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  226.59(a) on 
January 25, 2011. The creditor complies with Sec.  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 Sec.  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 Sec.  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

[[Page 12351]]

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 Sec.  226.55(b)(4)
    Proposed Sec.  226.59(e) sets forth a special timing rule for card 
issuers that increase a rate pursuant to Sec.  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, Sec.  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 Sec.  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 Sec.  226.55(b)(4)(ii), the 
requirement to review an account under Sec.  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 Sec.  226.55(b)(4)(ii) is a stronger right 
than the requirement that card issuers review consumers' accounts 
pursuant to Sec.  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 Sec.  
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, Sec.  226.59(e) would provide that a card issuer is 
not required to review factors in accordance with Sec.  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 six-month periods. The Board believes 
that it is appropriate that a creditor review a consumer's account 
after the cure right expires under Sec.  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 Sec.  226.59(f) would state that 
the obligation to review factors under Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 12352]]

Sec.  226.59 even after an extended period of time.
59(g) Acquired Accounts
    Proposed Sec.  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 Sec.  226.59(g)(2), the obligation to 
review changes in factors in Sec.  226.59(a) applies even to such 
acquired accounts. Consistent with the rule in Sec.  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 Sec.  226.59(g)(1) 
may choose to review factors in accordance with Sec.  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 Sec.  226.59(g)(2) sets forth an alternate means for 
compliance with Sec.  226.59 for accounts acquired by a card issuer. 
The Board is proposing Sec.  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 Sec.  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 Sec.  
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 Sec.  226.59(a) only for rate increases that are imposed as a 
result of that review. Similarly, Sec.  226.59(g)(2)(ii) provides that 
the card issuer generally is not required to review changes in factors 
in accordance with Sec.  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 Sec.  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 Sec.  
226.59(a) would apply with regard to that rate increase. The Board 
solicits comment on whether Sec.  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 Sec.  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 Sec.  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 Sec.  
226.59, unless and until the card issuer makes a subsequent rate 
increase applicable to those accounts.
    In addition to the general rule in Sec.  226.59(g)(2)(i) and 
(g)(2)(ii), the Board is proposing Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  226.59(a), unless and until the card issuer makes a 
subsequent rate increase applicable to those accounts.

[[Page 12353]]

    The Board notes that any rate increases the acquiring card issuer 
makes as a result of its review pursuant to Sec.  226.59(g)(2) are 
subject to the substantive and notice requirements regarding rate 
increases in Sec. Sec.  226.9 and 226.55. Proposed Sec.  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 Sec.  
226.59, using its authority under TILA Section 105(a), which are set 
forth in Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  
226.59(h)(1) provides that the requirements of Sec.  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 Sec.  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 Sec.  226.59(h)(2) provides that the requirements of Sec.  
226.59 do not apply to accounts that the card issuer has charged off in 
accordance with loan-loss 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 Sec.  
226.52(b), the Board is proposing to amend the model language in 
Appendix G for the disclosure of late payment fees, over-the-limit 
fees, and returned-payment fees.

Samples G-10(B) & G-10(C)--Applications and Solicitations Samples 
(Credit Cards) (Sec.  226.5a(b))

Samples G-17(B) & G-17(C)--Account-Opening Samples (Sec.  226.6(b)(2))

    Sections 226.5a and 226.6 require creditors to disclose late 
payment fees, over-the-limit fees, and returned-payment fees in, 
respectively, the application and solicitation disclosures and the 
account-opening disclosures. See Sec. Sec.  226.5a(b)(9), (b)(10), 
(b)(12); Sec. Sec.  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-the-limit 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 Sec.  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 Sec.  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-
the-limit fees, and returned-payment fees as ``up to $XX.'' In this 
model language, $XX represents the maximum fee under the safe harbor in 
proposed Sec.  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, 
Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \38\ The 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.

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[[Page 12354]]

Samples G-18(B), G-18(D), G-18(F), and G-18(G)--Periodic Statement 
Forms (Sec.  226.7(b))

    As noted above, Sec.  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) (Sec.  
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 (Sec.  
226.56)

Model Form G-25(B)--Revocation Notice for Periodic Statement Regarding 
Over-the-Limit Transactions (Sec.  226.56)

    As noted above, Sec.  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 Sec.  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 over-the-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-by-Section 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 Sec. Sec.  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 account-opening 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 Sec.  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 Sec.  
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, Sec.  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

[[Page 12355]]

on small entities by proposing model forms which can be used to ease 
compliance with the proposed rule.
    Proposed Sec. Sec.  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 Sec. Sec.  226.9(c) and (g) already require 
card issuers to provide 45 days' notice prior to an annual percentage 
rate increase, proposed Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  226.52(b) would also require card issuers that are small 
entities to conform certain penalty fee disclosures already required 
under Sec. Sec.  226.5a, 226.6, 226.7, and 226.56.
---------------------------------------------------------------------------

    \39\ See GAO Credit Card Report at 72-73.
---------------------------------------------------------------------------

    Proposed Sec.  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 Sec.  226.59 would 
require small entities that are card issuers to reduce the annual 
percentage rate, if appropriate, based on such reevaluation. Proposed 
Sec.  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\
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    \40\ In 2009, the information collection was re-titled--
Reporting, Recordkeeping and Disclosure Requirements associated with 
Regulation Z (Truth in Lending) and Regulation AA (Unfair or 
Deceptive Acts or Practices).
---------------------------------------------------------------------------

    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 open-end 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 home-equity 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 (Sec.  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 Sec. Sec.  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 Sec. Sec.  226.5a(a)(2)(iv) and 
226.6(b)(1)(i).
    Under proposed Sec.  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 Sec.  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 
Sec.  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 Sec. Sec.  226.9(c)(2)(iv)(A)(8) and

[[Page 12356]]

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 Sec.  226.9(c) and Sec.  226.9(g).
    Proposed Sec.  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 Sec.  226.52(b) prohibits penalty 
fees that exceed the dollar amount associated with the violation and 
certain types of penalty fees. Compliance with proposed Sec.  226.52(b) 
would require card issuers to conform certain penalty fee disclosures 
already required under Sec. Sec.  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 
Sec. Sec.  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\
---------------------------------------------------------------------------

    \41\ The 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.
---------------------------------------------------------------------------

    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 Sec.  226.5a, revise paragraph (a)(2)(iv) to read as follows:


Sec.  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 Sec.  226.6, revise paragraph (b)(1)(i) to read as follows:


Sec.  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:

[[Page 12357]]

Sec.  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:


Sec.  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 home-equity plans subject to the requirements of Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 home-secured) consumer credit plan subject to Sec.  
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 
home-secured) 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 Sec.  
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;

[[Page 12358]]

    (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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 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 Sec.  226.5b, if a creditor decreases 
the credit limit on an account, advance notice of the decrease must be 
provided before an over-the-limit 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-the-limit 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 Sec.  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 Sec.  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:


Sec.  226.52  Limitations on fees.

* * * * *
    (b) Limitations on penalty fees. (1) General rule. A card issuer 
must not

[[Page 12360]]

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 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 Sec.  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:


Sec.  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 Sec.  
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 Sec.  226.55(b)(4). If an issuer 
increases a rate applicable to a consumer's account pursuant to Sec.  
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 Sec.  
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

[[Page 12361]]

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 Sec. Sec.  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 
Sec.  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 loan-loss 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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* * * * *
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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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* * * * *

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* * * * *
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BILLING CODE 6210-01-C

[[Page 12370]]

* * * * *

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].
    --I 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.]
    [--I do not want over-the-limit coverage. I understand that 
transactions that exceed my credit limit will not be authorized.]
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------

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].
    -- I want to cancel over-the-limit coverage for my account.
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------

    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 Sec.  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 Sec.  
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 Sec.  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 non-variable 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 Sec.  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 Sec.  226.9(c) even if the non-
variable 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 Sec.  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 Sec.  226.9(c)(2)(iv) with a 
notice described in Sec.  226.9(g)(3). If a creditor is required to 
provide a notice described in Sec.  226.9(c)(2)(iv) and a notice 
described in Sec.  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 Sec.  226.9(c)(2)(iv) when a variable rate 
is being changed to a non-variable rate on a credit card account. 
The sample explains when the new rate will apply to new transactions 
and to which

[[Page 12371]]

balances the current rate will continue to apply. Sample G-21 
contains an example of how to comply with the requirements in Sec.  
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 Sec.  
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 Sec.  226.9(c)(2)(iv)(A)(1).
    10. Terminology. See Sec.  226.5(a)(2) for terminology 
requirements applicable to disclosures required under Sec.  
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 Sec.  
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 Sec.  226.9(c) and (g) and Sec.  
226.55--examples. Card issuers subject to Sec.  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 Sec.  226.55(b). 
See comments 55(a)-1 and 55(b)-3 and the commentary to Sec.  
226.55(b)(4) for examples that illustrate the relationship between 
the notice requirements of Sec.  226.9(c) and (g) and Sec.  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 Sec.  226.5(d) to determine the number of notices 
that must be given.
    3. Combining a notice described in Sec.  226.9(g)(3) with a 
notice described in Sec.  226.9(c)(2)(iv). If a creditor is required 
to provide notices pursuant to both Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  226.9(g).
    6. Terminology. See Sec.  226.5(a)(2) for terminology 
requirements applicable to disclosures required under Sec.  
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 home-secured) 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 Sec.  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, Sec.  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 Sec.  226.52(b) or are prohibited by Sec.  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 Sec.  226.56(a), to the extent the imposition of such a 
fee or charge is permitted by Sec.  226.56.
    D. Any fee or charge for a transaction that the card issuer 
declines to authorize. See Sec.  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 Sec.  226.52(b)(2)(i)(B).
    ii. The following are examples of fees to which Sec.  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 Sec.  226.5a(b)(2), except to the extent that 
such fees are based on account inactivity.
    E. Fees for insurance described in Sec.  226.4(b)(7) or debt 
cancellation or debt suspension coverage described in Sec.  
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 Sec.  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 Sec.  226.52(b) to the nearest whole dollar. 
For example, if Sec.  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 Sec.  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 Sec.  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 
Sec.  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.

[[Page 12372]]

    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 Sec.  
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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  226.52(b)(1)(i), a $20 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.
    6. Over-the-limit fees.
    i. Costs incurred as a result of over-the-limit transactions. 
For purposes of Sec.  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 Sec.  226.56, the card issuer was only 
permitted to impose 200,000 over-the-limit fees during year one. For 
purposes of Sec.  226.52(b)(1)(i), a $23 over-the-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-the-limit transactions that resulted in an over-
the-limit fee in the past (consistent with Sec.  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-the-limit fees (200,000). The 
card issuer also reasonably estimates that--based on past changes in 
costs incurred as a result of over-the-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 
Sec.  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 over-the-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 Sec.  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 Sec.  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 Sec.  226.52(b)(1) and (b)(3). A card issuer 
does not comply with Sec.  226.52(b)(1) if it imposes a fee that is 
inconsistent with the prohibitions in Sec.  226.52(b)(2). Similarly, 
the prohibitions in Sec.  226.52(b)(2) apply even if a fee is 
consistent with the safe harbor in Sec.  226.52(b)(3). For example, 
even if a card issuer has determined for purposes of Sec.  
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

[[Page 12373]]

is reasonably necessary to deter that type of violation, Sec.  
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 Sec.  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, Sec.  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, Sec.  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 Sec.  
226.52(b)(1) or (b)(3)).
    2. Returned-payment fees. For purposes of Sec.  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, 
Sec.  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 Sec.  226.52(b)(2)(i)(B) prohibits the card issuer from 
imposing an additional returned-payment fee. The following examples 
illustrate the application of Sec.  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 Sec.  
226.52(b)(1) or (b)(3)). Furthermore, Sec.  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 Sec.  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 Sec.  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, Sec.  
226.52(b)(2)(i)(A) prohibits a card issuer from imposing an over-
the-limit fee that exceeds that amount. Although Sec.  
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 Sec.  
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 
Sec.  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 over-the-limit fee on March 6, 
Sec.  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 Sec.  226.52(b)(1) or (b)(3)).
    ii. Same facts as above, except 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, Sec.  226.52(b)(2)(i)(A) prohibits the card issuer from 
imposing an over-the-limit fee that exceeds $15 (even if a higher 
fee would be permitted under Sec.  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, 
Sec.  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 Sec.  
226.52(b)(1) or (b)(3)). Furthermore, Sec.  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 Sec.  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, Sec.  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 Sec.  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 Sec.  226.52(b)(1) or (b)(3)). However, 
Sec.  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 Sec.  
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 Sec.  226.52(b)(1) or (b)(3)). However, Sec.  
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 
Sec.  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 Sec.  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 Sec.  226.52(b)(1) and (b)(2). A fee that 
complies with the safe harbor in Sec.  226.52(b)(3) complies with 
the requirements of Sec.  226.52(b)(1). However, the safe harbor in 
Sec.  226.52(b)(3) does not permit a card issuer to impose a fee 
that is inconsistent with the prohibitions in Sec.  226.52(b)(2). 
For example, if Sec.  226.52(b)(2)(i) prohibits the card issuer from 
imposing a late payment fee that exceeds $15, Sec.  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 
Sec.  226.52(b)(3)(i) and (b)(3)(ii), the Board shall calculate each 
year

[[Page 12374]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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, Sec.  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, Sec.  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 Sec.  
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, Sec.  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 Sec.  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 Sec.  226.52(b)(3)(ii).
    iii. Over-the-limit fee. For purposes of Sec.  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, Sec.  
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 Sec.  
226.56(j)(1)(i) prohibits a card issuer from imposing more than one 
over-the-limit 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 Sec.  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-the-limit 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, Sec.  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 Sec.  226.52(b)(3)(ii).
* * * * *

Section 226.56--Requirements for Over-the-Limit 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-the-
limit fee.
* * * * *

56(j) Prohibited Practices

* * * * *
    6. Additional restrictions on over-the-limit fees. See Sec.  
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 Sec.  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 home-secured) 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 
Sec.  226.9(c) of the change in terms, but the requirements of Sec.  
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 Sec.  226.9(g) and the requirements of 
Sec.  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 Sec.  226.9(c) of 
the change in terms, but the requirements of Sec.  226.59 do not 
apply. If the consumer subsequently engages in a cash advance 
transaction, the requirements of Sec.  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, Sec.  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 Sec.  
226.9(c)(2) or (g). For example, 45 days' notice is not required 
under Sec.  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 Sec.  226.9(c)(2)(v)(C) or if the 
increase occurs upon expiration of a specified period of time and 
disclosures complying with Sec.  226.9(c)(2)(v)(B) have been 
provided. The requirements of Sec.  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, Sec.  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 
Sec.  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 Sec.  
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 Sec.  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

[[Page 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, Sec.  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 Sec.  
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 Sec.  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 Sec.  226.59(a) on 
January 25, 2011. The creditor complies with Sec.  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 Sec.  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 Sec.  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 
Sec.  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, Sec.  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 
Sec.  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 Sec.  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]
BILL CODE 6210-01-P


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