Truth in Lending, 37526-37592 [2010-14717]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 75, Number 124 (Tuesday, June 29, 2010)]
[Rules and Regulations]
[Pages 37526-37592]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-14717]



[[Page 37525]]

-----------------------------------------------------------------------

Part II





Federal Reserve System





-----------------------------------------------------------------------



12 CFR Part 226



Truth in Lending; Final Rule

Federal Register / Vol. 75 , No. 124 / Tuesday, June 29, 2010 / Rules 
and Regulations

[[Page 37526]]


-----------------------------------------------------------------------

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: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is amending 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 final rule requires that penalty fees imposed by card 
issuers be reasonable and proportional to the violation of the account 
terms. The final rule also requires credit card issuers to reevaluate 
at least every six months annual percentage rates increased on or after 
January 1, 2009. The final rule also requires that notices of rate 
increases for credit card accounts disclose the principal reasons for 
the increase.

DATES: Effective Date. The rule is effective August 22, 2010.
    Mandatory compliance dates. The mandatory compliance date for the 
amendments to Sec. Sec.  226.9, 226.52, and 226.59, and the amendments 
to Model Forms G-20 and G-22 in Appendix G to Part 226, is August 22, 
2010. The amendments to the change-in-terms disclosures in Model Forms 
G-18(F) and G-18(G) also have a mandatory compliance date of August 22, 
2010. The mandatory compliance date for the amendments to the penalty 
fee disclosures in Sec. Sec.  226.5a, 226.6, 226.7, and 226.56, and in 
Model Forms G-10(B), G-10(C), G-10(E), G-17(B), G-17(C), G-18(B), G-
18(D), G-18(F), G-18(G), G-21, G-25(A), and G-25(B) in Appendix G to 
Part 226, is December 1, 2010.

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 final 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)) became 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 has implemented 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 February 22, 2010, the Board published 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 became effective on February 22, 2010. See 75 FR 7658 
(February 2010 Regulation Z Rule).
    On March 15, 2010, the Board published a proposed rule in the 
Federal Register to implement the provisions of the Credit Card Act 
that become effective on August 22, 2010. See 75 FR 12334 (March 2010 
Regulation Z Proposal). The comment period on the March 2010 Regulation 
Z Proposal closed on April 14, 2010.\1\ In response to the proposal, 
the Board received more than 22,000 comments from consumers, consumer 
groups, other government agencies, credit card issuers, industry trade 
associations, and others. As discussed in more detail elsewhere in this 
supplementary information, the Board has considered these comments in 
adopting this final rule.
---------------------------------------------------------------------------

    \1\ The comment period on the Paperwork Reduction Act analysis 
set forth in the March 2010 Regulation Z Proposal closed on May 14, 
2010.
---------------------------------------------------------------------------

II. Summary of Major 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 final rule permits a 
credit card issuer to charge a penalty fee for a particular type of 
violation (such as a

[[Page 37527]]

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 final 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 final 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 final 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). Notably, the final rule also 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. In order to ensure 
that penalty fees are based on relatively current cost information, the 
final rule requires card issuers to re-evaluate their costs at least 
annually.
    Deterrence of violations. The Credit Card Act requires the Board to 
consider the deterrence of violations by the cardholder. As an 
alternative to basing penalty fees on costs, the Board's proposed rule 
would have permitted card issuers to base the amount of a penalty fee 
on a determination that the amount was reasonably necessary to deter 
that a particular type of violation. However, based on the comments and 
further analysis, the Board has determined that the proposed approach 
would not effectuate the purposes of the Credit Card Act. Instead, as 
discussed below, the Board has revised the safe harbors to better deter 
violations by generally allowing card issuers to impose higher fees for 
repeated violations during a particular period.
    Consumer conduct. The Credit Card Act requires the Board to 
consider the conduct of the cardholder. The final rule does not require 
that each penalty fee be based on an assessment of the individual 
consumer conduct associated with the violation. Instead, the final rule 
takes consumer conduct into account in three ways. First, as discussed 
below, the Board has adopted safe harbors that generally allow card 
issuers to impose higher penalty fees when a consumer repeatedly 
engages in the same type of conduct during a particular period.
    Second, the final rule prohibits issuers from imposing penalty fees 
that exceed the dollar amount associated with the violation. For 
example, under the final rule, a consumer who exceeds the credit limit 
by $5 cannot be charged an over-the-limit fee of more than $5. 
Similarly, a consumer who is late making a $20 minimum payment cannot 
be charged a late payment fee of more than $20.
    Third, the final rule prohibits issuers from imposing multiple 
penalty fees based on a single event or transaction. For example, the 
final rule prohibits issuers from charging a late payment fee and a 
returned payment fee based on a single payment.
    Safe harbors. Consistent with the safe harbor authority granted by 
the Credit Card Act, the final rule generally permits--as an 
alternative to the cost analysis discussed above--issuers to impose a 
$25 penalty fee for the first violation and a $35 fee for any 
additional violation of the same type during the next six billing 
cycles. For example, if a consumer paid late during the January billing 
cycle, a $25 late payment fee could be imposed. If one of the next six 
payments is late (i.e., the payments due during the February through 
July billing cycles), a $35 late payment fee could be imposed. As 
discussed in detail below, the Board believes that these amounts are 
generally consistent with the statutory factors of cost, deterrence, 
and consumer conduct. These amounts will be adjusted annually to the 
extent that changes in the Consumer Price Index would result in an 
increase or decrease of $1.\2\
---------------------------------------------------------------------------

    \2\ Notwithstanding these safe harbors, card issuers will be 
prohibited from imposing a fee that exceeds the dollar amount 
associated with the violation. For example, if a consumer does not 
make a $20 minimum payment by the due date, the late payment fee 
cannot exceed $20, even though the safe harbors would otherwise 
permit imposition of a higher fee.
---------------------------------------------------------------------------

    Although the safe harbors discussed above apply to charge card 
accounts, the final rule provides an additional safe harbor when a 
charge card account becomes seriously delinquent.\3\ Specifically, the 
final rule provides that, when a charge card issuer has not received 
the required payment for two or more consecutive billing cycles, it may 
impose a late payment fee that does not exceed 3% of the delinquent 
balance.
---------------------------------------------------------------------------

    \3\ 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 in full when the 
periodic statement is received or at the end of each billing cycle. 
See Sec. Sec.  226.5a(b)(7), 226.7(b)(12)(v)(A).
---------------------------------------------------------------------------

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. Card issuers 
are required to perform this review no less frequently than once every 
six months, and must maintain reasonable methodologies for this 
evaluation. The Credit Card Act 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 final 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, card issuers are required to 
review the account no less frequently than once each six months and, if 
appropriate based on that review, reduce the annual percentage rate. 
The requirement to reevaluate rate increases applies both to increases 
in annual percentage rates based on consumer-specific factors, such as 
changes in the consumer's creditworthiness, and to increases in annual 
percentage rates imposed based on factors that are not specific to the 
consumer, 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 final rule requires that the rate be 
reduced within 45 days after completion of the evaluation.
    Factors relevant to reevaluation of rate increases. The final rule 
generally permits 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 similar new 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

[[Page 37528]]

existing cardholders receiving the benefit of any reduced rate that 
they would receive if applying for a new credit card with the card 
issuer.
    The final rule contains a special provision for rate increases 
imposed between January 1, 2009 and February 21, 2010. For rates 
increased during this period, the final rule requires an issuer to 
conduct its first two reviews by using the factors that the issuer 
currently considers when determining the annual percentage rates 
applicable to similar new credit card accounts, unless the rate 
increase was based solely upon consumer-specific factors, such as a 
decline in the consumer's credit risk or the consumer's delinquency or 
default.
    Termination of obligation to reevaluate rate increases. The final 
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. Accordingly, in some circumstances, the 
final rule requires card issuers to reevaluate rate increases each six 
months for an indefinite period. The proposed rule solicited 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, 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.
    Based on the comments and further analysis, the Board declines to 
adopt a specific time limit on the obligation to reevaluate rate 
increases. The Credit Card Act does not expressly create such a time 
limit, and it may be beneficial to a consumer to have his or her rate 
reevaluated when market conditions change or the consumer's 
creditworthiness improves, even if a number of years have elapsed since 
the rate increase giving rise to the review requirement.

III. Statutory Authority

General Rulemaking 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 rule direct 
the Board to issue implementing regulations. See Credit Card Act 
Section 101(c) (new TILA Section 148) and Section 102(b) (new TILA 
Section 149). Furthermore, these provisions of the Credit Card Act 
amend TILA, which mandates that the Board prescribe regulations to 
carry out its purposes and specifically authorizes the Board, among 
other things, to do the following:
     Issue regulations that contain such classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for any class of transactions, that in the 
Board's judgment are necessary or proper to effectuate the purposes of 
TILA, facilitate compliance with the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).
     Add or modify information required to be disclosed with 
credit and charge card applications or solicitations if the Board 
determines the action is necessary to carry out the purposes of, or 
prevent evasions of, the application and solicitation disclosure rules. 
15 U.S.C. 1637(c)(5).
     Require disclosures in advertisements of open-end plans. 
15 U.S.C. 1663.
    For the reasons discussed in this notice, the Board is using its 
specific authority under TILA and the Credit Card Act, in concurrence 
with other TILA provisions, to effectuate the purposes of TILA, to 
prevent the circumvention or evasion of TILA, and to facilitate 
compliance with TILA.

Authority To Issue Final Rule With an Effective Date of August 22, 2010

    Because the provisions of the Credit Card Act implemented by this 
final rule are effective on August 22, 2010,\4\ this final rule is also 
effective on August 22, 2010. In order to provide an adequate 
transition period, 12 U.S.C. 4802(b)(1) generally requires that new 
regulations and amendments take effect no earlier than the first day of 
the calendar quarter which begins on or after the date on which the 
regulations are published in final form. The date on which the Board's 
final rule is published in the Federal Register depends on a number of 
variables that are outside the Board's control, including the number 
and size of other notices submitted to the Federal Register prior to 
the Board's rule.\5\ If this final rule is not published in the Federal 
Register on or before July 1, 2010, the effective date for purposes of 
12 U.S.C. 4802(b)(1) would be October 1, 2010. However, the Board has 
determined that--under those circumstances--the statutory effective 
date of August 22, 2010 establishes good cause for making this final 
rule effective prior to October 1. See 12 U.S.C. 4802(b)(1)(A) 
(providing an exception to the general requirement when ``the agency 
determines, for good cause published with the regulation, that the 
regulation should become effective before such time''). Furthermore, 12 
U.S.C. 4802(b)(1)(C) provides an exception to the general requirement 
when ``the regulation is required to take effect on a date other than 
the date determined under [12 U.S.C. 4802(b)(1)] pursuant to any other 
Act of Congress.''
---------------------------------------------------------------------------

    \4\ See new TILA Sections 148(d) and 149(b).
    \5\ The Board notes that, although the Administrative Procedure 
Act (5 U.S.C. 551 et seq.) generally requires that rules be 
published not less than 30 days before their effective date, it also 
provides an exception when ``otherwise provided by the agency for 
good cause found and published with the rule.'' 15 U.S.C. 553(d)(3). 
Although the Board is issuing this final rule more than 30 days 
before August 22, 2010, it is possible that--for the reasons 
discussed above--the rule may not be published in the Federal 
Register more than 30 days before that date. Accordingly, to the 
extent applicable, the Board finds that good cause exists to publish 
the final rule less than 30 days before the effective date.
---------------------------------------------------------------------------

    Finally, TILA Section 105(d) provides that any regulation of the 
Board (or any amendment or interpretation thereof) requiring any 
disclosure which differs from the disclosures previously required by 
Chapters 1, 4, or 5 of TILA (or by any regulation of the Board 
promulgated thereunder) shall have an effective date no earlier than 
``that October 1 which follows by at least six months the date of 
promulgation.'' However, even assuming that TILA Section 105(d) applies 
to this final rule, the Board believes that the specific provisions in 
new TILA Sections 148 and 149 governing effective dates override the 
general provision in TILA Section 105(d).

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. Under the February 2010 Regulation Z Rule, 
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

[[Page 37529]]

fee amounts unless the fee varies by state.
    As discussed in detail below with respect to the amendments to the 
model forms in Appendix G-10 and G-17, disclosure of a maximum limit 
(or ``up to'' amount) may be necessary to accurately describe penalty 
fees that are consistent with the new substantive restrictions in 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 may be the only amount disclosed for penalty fees--it is 
important to highlight that amount.
    Accordingly, the Board is amending 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 is also 
making conforming amendments to comment 5a(a)(2)-5.ii.

Section 226.7 Periodic Statement

    Section 226.7(b)(11)(i)(B) currently 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 amendments 
to Appendix G, an ``up to'' disclosure may be necessary to accurately 
describe a late payment fee that is consistent with the substantive 
restrictions in Sec.  226.52(b). Accordingly, the Board is amending 
Sec.  226.7(b)(11)(i)(B) to clarify that, in these circumstances, 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 in certain 
circumstances. As discussed in detail below, Sec.  226.52(b)(2)(i) 
prohibits a card issuer from imposing a late payment fee that exceeds 
the amount of the delinquent required minimum periodic payment. 
However, while credit card minimum payments are generally a percentage 
of the outstanding balance (plus, in some cases, accrued interest and 
fees), many card issuers include a specific minimum amount in their 
minimum payment formulas. For example, a formula might state that the 
required minimum periodic payment will be the greater of 2% of the 
outstanding balance or $25. In these circumstances, the card issuer 
could disclose the late payment fee as a range from $25 to $35, which 
is the maximum fee amount under the safe harbors in Sec.  
226.52(b)(1)(ii)(A)-(B).

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

Notice of Reasons for Rate Increase
    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 on which the 
annual percentage rate has been increased since January 1, 2009.\6\
---------------------------------------------------------------------------

    \6\ As discussed in the supplementary information to Sec.  
226.59, the rule requires 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).
---------------------------------------------------------------------------

    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 implementing 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 is implementing 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 contractual terms or the exercise 
of a penalty pricing provision already in the contract; therefore for 
ease of reference the 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 
changes to Sec.  226.9(c)(2) and (g) 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 
are not 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. In 
the March 2010 Regulation Z Proposal, the Board proposed to add a new 
Sec.  226.9(c)(2)(iv)(A)(8) to require 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) consumer credit plan, 
listed in their order of importance, in order to implement the notice 
requirements of new TILA Section 148. Proposed comment 9(c)(2)(iv)-11 
set forth additional guidance on the disclosure. Specifically, proposed 
comment 9(c)(2)(iv)-11 stated 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

[[Page 37530]]

reasons disclosed are required to relate to and accurately describe the 
principal factors actually considered by the credit card issuer.
    Proposed comment 9(c)(2)(iv)-11 would have permitted a card issuer 
to 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 noted 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.'' Finally, the 
proposed comment noted that in some circumstances, it may be 
appropriate for a card issuer to combine the disclosure of several 
reasons in one statement.
    Consumer groups and a federal agency urged the Board to require 
more specificity in the disclosure of reasons for a rate increase. 
These commenters indicated that more specificity would assist consumers 
in determining whether they could take action to improve the rates 
applicable to their credit card accounts. Several of these commenters 
stated that the Board should require the same level of specificity as 
is required in adverse action notices under the Equal Credit 
Opportunity Act, as implemented in Regulation B, and the Fair Credit 
Reporting Act (FCRA). 15 U.S.C. 1691 et seq., 12 CFR part 202, and 15 
U.S.C. 1681 et seq. In addition, one city consumer protection agency 
urged the Board to require more detailed information if the rate 
increase results from a decline in the consumer's credit score. In this 
case, the commenter stated that the Board should require issuers to 
disclose the consumer's current credit score as well as the previous 
score on record with the issuer.
    Industry commenters generally supported the Board's approach. 
Several commenters noted, however, that there would be significant 
burden associated with updating their systems in order to provide the 
disclosure of reasons for the increase and questioned whether the 
disclosure was necessary. Two credit union commenters asked the Board 
not to limit the disclosure to four reasons, while one other industry 
commenter stated that limiting the number of reasons in this manner was 
appropriate and should be retained.
    The Board is adopting new Sec.  226.9(c)(2)(iv)(A)(8) and new 
comment 9(c)(2)(iv)-11 generally as proposed. The Board continues to 
believe that this approach strikes the appropriate balance between 
providing consumers with useful information regarding the reasons for a 
rate increase while limiting ``information overload'' and unnecessary 
burden. Under the final rule, a consumer will be informed whether the 
rate increase is due to changes in his or her 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 more detailed information would not 
outweigh the operational burden associated with providing such 
additional information.
    The Board acknowledges that there may be a distinction between rate 
increases based on changes in a consumer's creditworthiness and 
portfolio-wide rate increases based on broader factors such as market 
conditions or the issuer's cost of funds. For individual rate 
increases, a consumer may be better able to take action to mitigate the 
change than for market-based rate increases. The Board has amended 
comment 9(c)(2)(iv)-11, as adopted, to clarify that the notice must 
specifically disclose any violation of the terms of the account on 
which the rate is being increased, such as a late payment or a returned 
payment, if such violation of the account terms is one of the four 
principal reasons for the rate increase. Accordingly, the notice 
required by Sec.  226.9(c)(2)(iv)(A)(8) will inform consumers of any 
specific on-account behavior in which they have engaged that gave rise 
to the rate increase. The notice required by Sec.  
226.9(c)(2)(iv)(A)(8) will also inform consumers if the rate increase 
resulted from a decline in their creditworthiness.
    The Board notes that, in many cases, consumers also will receive 
other notices under federal law that are more specifically intended to 
educate consumers about the relationship between their consumer reports 
and the terms of credit they receive. In particular, the Federal Trade 
Commission and Board's rules implementing section 615(h) of the FCRA 
require issuers to provide a risk-based pricing notice if a consumer's 
annual percentage rate on purchases is increased based in whole or in 
part on information in a consumer report. See 15 U.S.C. 1681m, 12 CFR 
part 222, and 16 CFR part 640. The risk-based pricing notice must 
inform the consumer that the rate is being increased based on 
information in a consumer report. In addition, a consumer who receives 
a risk-based pricing notice is entitled to obtain a free consumer 
report in order to check for errors. Accordingly, the Board believes 
that a more specific disclosure under Sec.  226.9(c)(2) is unnecessary.
    As discussed above, proposed comment 9(c)(2)(iv)-11 set forth 
several examples of how the reasons for a rate increase must be 
disclosed. The examples described a rate increase triggered by a 
decrease of 100 points in a consumer's credit score and a rate increase 
triggered by a 10% increase in an issuer's cost of funds. Two credit 
union commenters urged the Board to clarify that the examples in 
proposed comment 9(c)(2)(iv)-11 were not intended as guidance on 
acceptable reasons for rate increases. The Board notes that Sec.  
226.9(c)(2)(iv)(A)(8) and the associated commentary do not set forth, 
and are not intended to impose, any substantive limitations on when a 
rate increase may occur. The examples included in comment 9(c)(2)(iv)-
11 are included for illustrative purposes only and are being adopted as 
proposed.
    The Board proposed to add a new Sec.  226.9(g)(3)(i)(A)(6), which 
mirrored proposed Sec.  226.9(c)(2)(iv)(A)(8), for rate increases due 
to delinquency, default, or as a penalty not due to a change in 
contractual terms of the consumer's account. Proposed Sec.  
226.9(g)(3)(i)(A)(6) required 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) consumer credit plan. Proposed comment 9(g)-7 cross-referenced 
comment 9(c)(2)(iv)-11 for guidance on disclosure of the reasons for a 
rate increase. For the reasons discussed above, Sec.  
226.9(g)(3)(i)(A)(6) and comment 9(g)-7 are adopted as proposed.
    The Board also proposed 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 Sec.  226.9(c)(2)(iv)(A)(8) and 
(g)(3)(i)(A)(6). One issuer commented in support of the proposed 
amendments to these model forms, which are adopted as proposed. In 
addition, the Board has made one technical change to comment 
9(c)(2)(iv)-8, for consistency with changes to Sample G-21 that are 
discussed elsewhere in this Federal Register notice.
    Finally, the Board is amending Sec.  226.9(c)(2)(iv)(C) and 
(g)(3)(i)(B) for clarity and to eliminate redundancy with new Sec.  
226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6). As adopted in the February 
2010 Regulation Z Rule, Sec.  226.9(c)(2)(iv)(C) and (g)(3)(i)(B)

[[Page 37531]]

required a creditor to include a statement of the reasons for the rate 
increase in any notice disclosing a rate increase based on a 
delinquency of more than 60 days. New Sec.  226.9(c)(2)(iv)(A)(8) and 
(g)(3)(i)(A)(6) require all Sec.  226.9(c) and (g) notices disclosing 
rate increases applicable to credit card accounts under an open-end 
(not home-secured) consumer credit plan to state the principal reasons 
for rate increases. Accordingly, the requirement to state the reasons 
for rate increases under Sec.  226.9(c)(2)(iv)(C) and (g)(3)(i)(B) has 
been deleted as unnecessary, because such notice is now required under 
Sec.  226.9(c)(2)(iv)(A)(8) and (g)(3)(i)(A)(6).
Other Amendments to Sec.  226.9(c)(2)
    For the reasons discussed in the supplementary information to Sec.  
226.52(b), the Board is amending Sec.  226.9(c)(2)(iv)(B) to clarify 
that the right to reject does not apply to an increase in a fee as a 
result of a reevaluation of a determination made under Sec.  
226.52(b)(1)(i) or an adjustment to the safe harbors in Sec.  
226.52(b)(1)(ii) to reflect changes in the Consumer Price Index.
    For the reasons discussed in the supplementary information to Sec.  
226.59(f), the Board also is adopting a new comment 9(c)(2)(v)-12 that 
clarifies the relationship between Sec.  226.9(c)(2)(v)(B) and Sec.  
226.59 in the circumstances where a rate is increased due to loss of a 
temporary rate but is subsequently decreased pursuant to the review 
required by Sec.  226.59.

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 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, some agreements 
provide that a fee will be assessed if amounts are charged to the 
account that exceed the account's credit limit.\7\ 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.\8\ The GAO also found 
that, over the same period, the percentage of issuer revenue derived 
from penalty fees increased to approximately 10%.\9\
---------------------------------------------------------------------------

    \7\ 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.
    \8\ U.S. Government 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 https://www.gao.gov/new.items/d06929.pdf).
    \9\ See GAO Credit Card Report at 72-73.
---------------------------------------------------------------------------

    According to data obtained by the Board from Mintel Comperemedia, 
the average late payment fee has increased to approximately $38 as of 
March 2010, while the average over-the-limit fee has increased to 
approximately $36.\10\ 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.\11\
---------------------------------------------------------------------------

    \10\ 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 increased to 
approximately $38 by March 2010. 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 $37.
    \11\ 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 https://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 smaller credit card issuers generally 
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 and $25. 
In addition, the Board understands that many credit unions charge late 
payment and over-the-limit fees of $20 on average.\12\ 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.\13\
---------------------------------------------------------------------------

    \12\ Data submitted during the comment period by a trade 
association representing federal and state credit unions supported 
the Board's understanding with respect to credit union penalty fees.
    \13\ 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\14\ 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.''
---------------------------------------------------------------------------

    \14\ 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 is implementing new TILA Section 149 
in Sec.  226.52(b). In developing Sec.  226.52(b), 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

[[Page 37532]]

with one another. As a separate legal term, ``reasonable'' has been 
defined as ``fair, proper, or moderate.'' \15\ Congress often uses a 
reasonableness standard to provide agencies or courts with broad 
discretion in implementing or interpreting a statutory requirement.\16\ 
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.'' \17\ 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, while 
providing the Board with substantial discretion in implementing that 
requirement.
---------------------------------------------------------------------------

    \15\ 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)).
    \16\ 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.'').
    \17\ 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 factors, 
the Board believes that they are indicative of 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.\18\
---------------------------------------------------------------------------

    \18\ Several commenters asserted that Section 149 requires the 
Board to base the standards for penalty fees on one or more of the 
factors listed in Section 149(c). In particular, several industry 
commenters argued that proposed Sec.  226.52(b)(1) was inconsistent 
with Section 149 insofar as it required issuers to choose between 
basing penalty fees on costs or deterrence, noting that Section 
149(c) uses the conjunctive ``and'' rather than the disjunctive 
``or'' when listing the factors. Such arguments misread Section 
149(c), which--as noted above--only requires the Board to consider 
the listed factors. Thus, while these factors provide valuable 
guidance, the Board does not believe that Congress intended to limit 
the Board's discretion in the manner suggested by these commenters. 
Furthermore, as discussed below, there are circumstances where--in 
the Board's view--the statutory factors point to conflicting 
results, leaving it to the Board to resolve those conflicts.
---------------------------------------------------------------------------

    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. 
Finally, the Board has considered other relevant factors, as discussed 
below.
    Section 226.52(b) reflects the Board's careful consideration of the 
statutory factors. However, when those factors were in conflict, the 
Board found it necessary to give more weight to a particular factor or 
factors. For example, as discussed below with respect to Sec.  
226.52(b)(2)(i), the Board has determined that--if a fee based on the 
card issuer's costs would be disproportionate to the consumer conduct 
that caused the violation--it is consistent with the intent of Section 
149 to give greater weight to the consumer conduct factor. The Board 
has made these determinations pursuant to the authority granted by new 
TILA Section 149 and existing TILA Section 105(a).
Cost Incurred as a Result of Violations
    New TILA Section 149(c)(1) requires the Board to consider the costs 
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 generally reasonable and proportional to a violation if it 
represents a reasonable proportion of the total costs incurred by the 
issuer as a result of all violations of the same type. Accordingly, the 
Board has adopted this standard in Sec.  226.52(b)(1)(i). This 
application of Section 149 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 also ensuring 
that those costs are spread evenly among consumers and that no 
individual consumer bears an unreasonable or disproportionate 
share.\19\ As discussed below, the Board has also adopted safe harbor 
amounts in Sec.  226.52(b)(1)(ii) that the Board believes will be 
generally sufficient to cover issuers' costs.
---------------------------------------------------------------------------

    \19\ One commenter argued that the Board's ``reasonable 
proportion'' standard does not satisfy the requirement in Section 
149(a) that penalty fees be ``reasonable and proportional.'' 
(Emphasis added.) Specifically, the commenter argued that, while a 
fee that represents a reasonable proportion of an issuer's costs 
might be proportional, it was not necessarily reasonable. The Board 
disagrees. By listing costs incurred from a violation as one of the 
factors in Section 149(c), Congress indicated that a penalty fee 
based on such costs will generally be reasonable for purposes of 
Section 149(a). Furthermore, the limitations in Sec.  226.52(b)(2) 
impose additional reasonableness requirements on penalty fees that 
are based on costs.
---------------------------------------------------------------------------

    The Board notes that Sec.  226.52(b)(1)(i) does 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 been resolved 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, Sec.  226.52(b)(1)(i) requires 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. Under proposed Sec.  
226.52(b)(1)(ii), a penalty fee would have been deemed reasonable and 
proportional to a violation if the card issuer had determined that the 
dollar amount of the fee was reasonably necessary to deter that type of 
violation using an empirically derived, demonstrably and statistically 
sound model that reasonably estimated the effect of the amount of the 
fee on the frequency of violations. This proposed standard was intended 
to encourage issuers to develop an empirical basis for the relationship 
between penalty fee amounts and deterrence and to prevent consumers 
from being charged fees that unreasonably exceeded--or were out of 
proportion to--their deterrent effect.\20\
---------------------------------------------------------------------------

    \20\ Like Sec.  226.52(b)(1)(i), proposed Sec.  226.52(b)(1)(ii) 
would not have required that penalty fees be calibrated to deter 
individual consumers from engaging in specific violations. The Board 
noted 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.

---------------------------------------------------------------------------

[[Page 37533]]

    However, commenters generally expressed strong reservations 
regarding the deterrence standard in proposed Sec.  226.52(b)(1)(ii). 
Some industry commenters argued that, in order to develop the data 
necessary to comply with the proposed standard, the Board would have to 
permit card issuers to test--after the statutory effective date of 
August 22, 2010--the deterrent effect of fee amounts that would 
otherwise be inconsistent with Sec.  226.52(b).\21\ Other industry 
commenters urged the Board to adopt a less stringent standard, stating 
that it would be impossible for card issuers--particularly smaller 
institutions with limited resources--to develop the data and models 
necessary to satisfy proposed Sec.  226.52(b)(1)(i). In contrast, 
consumer groups and a municipal consumer protection agency expressed 
concern that the proposed standard was not sufficiently stringent and 
would allow card issuers to use marginal changes in the frequency of 
violations to justify unreasonably high fee amounts.\22\
---------------------------------------------------------------------------

    \21\ Notably, some of these commenters stated that, even if such 
testing were permitted, they would not test high fee amounts on 
their consumers because of the risks involved. One industry 
commenter submitted the results of models based on issuer data 
estimating the deterrent effect of different penalty fee amounts. 
However, because the Board does not have access to the data and 
assumptions used to produce these results, the Board is unable to 
determine whether these models satisfy the proposed standard.
    \22\ Some consumer groups argued that deterrence was not an 
appropriate consideration because, for example, a penalty fee is 
unlikely to have a deterrent effect in circumstances where consumers 
cannot avoid the violation of the account terms. The Board 
acknowledged this possibility in the proposal. However, the Board 
also noted that deterrence is a required factor for the Board to 
consider under new TILA Section 149(c) and that 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) (available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1091623&download=yes).
---------------------------------------------------------------------------

    Based on its review of the comments and its own reevaluation of the 
proposed deterrence standard, the Board has determined that the 
standard in proposed Sec.  226.52(b)(1)(ii) would not provide card 
issuers with a meaningful ability to base penalty fees on deterrence. 
Furthermore, the Board is concerned that adopting a less stringent 
standard could lead to penalty fees that are substantially higher than 
current levels, which would undermine the purpose of new TILA Section 
149. Accordingly, the Board has not adopted proposed Sec.  
226.52(b)(1)(ii).
    Instead, the Board has revised the safe harbors in proposed Sec.  
226.52(b)(3) to better address concerns regarding deterrence and 
adopted those safe harbors in Sec.  226.52(b)(1)(ii). Specifically, 
Sec.  226.52(b)(1)(ii) would permit card issuers to impose a $25 fee 
for the first violation of a particular type and a $35 fee for each 
additional violation of the same type during the next six billing 
cycles. For example, if a consumer pays late for the first time in 
January, Sec.  226.52(b)(1)(ii) would limit the late payment fee to 
$25. If the consumer pays late again during February, March, April, 
May, June, or July, the card issuer would be permitted to impose a $35 
late payment fee. However, if after paying late in January the consumer 
makes the next six payments on time, the fee for the next late payment 
would be limited to $25. The Board believes that Sec.  226.52(b)(1)(ii) 
is consistent with new TILA 149(c)(2) insofar as--after a violation has 
occurred--the amount of the fee increases to deter additional 
violations of the same type during the next six billing cycles.
    Although the application and solicitation disclosures in Sec.  
226.5a and the account opening disclosures in Sec.  226.6 provide 
consumers with advance notice of the amount of credit card penalty 
fees,\23\ the Board is concerned that some consumers may discount these 
disclosures because they overestimate their ability to avoid paying 
late and engaging in other conduct that violates the terms or other 
requirements of the account. However, as noted in the proposal, there 
is some evidence that the experience of incurring a late payment fee 
makes consumers less likely to pay late for a period of time.\24\ 
Accordingly, although upfront disclosure of a penalty fee may be 
sufficient to deter some consumers from engaging in certain conduct, 
other consumers may be deterred by the imposition of the fee itself. 
For these consumers, the Board believes that imposition of a higher fee 
when multiple violations occur will have a significant deterrent effect 
on future violations. In addition, as discussed below, the Board 
believes that multiple violations during a relatively short period can 
be associated with increased costs and credit risk and reflect a more 
serious form of consumer conduct than a single violation.
---------------------------------------------------------------------------

    \23\ In addition, Sec.  226.7(b)(11) requires card issuers to 
disclose on each periodic statement the amount of the late payment 
fee that will be imposed if payment is not received by the due date.
    \24\ For example, one study of four million credit card 
statements found that 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. See 
Agarwal, Learning in the Credit Card Market. Although this study 
indicates that the imposition of a penalty fee may cease to have a 
deterrent effect on future violations after four months, the Board 
has concluded--as discussed in greater detail below--that imposing 
an increased fee for additional violations of the same type during 
the next six billing cycles is consistent with the intent of the 
Credit Card Act.
---------------------------------------------------------------------------

    In the proposal, the Board solicited comment on this tiered