# Credit Card Penalty Fees (Regulation Z)

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2023-02393

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** March 29, 2023
- **Citation:** 88 FR 18906

## Text

CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
[Docket No. CFPB-2023-0010]
RIN 3170-AB15
Credit Card Penalty Fees (Regulation Z)

AGENCY:

Consumer Financial Protection Bureau.

ACTION:

Proposed rule with request for public comment.

SUMMARY:

The Consumer Financial Protection Bureau (Bureau) proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under TILA. The proposal would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; provide that the current provision that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount; and provide that late fee amounts must not exceed 25 percent of the required payment.

DATES:

Comments should be received on or before May 3, 2023.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2023-0010 or RIN 3170-AB15, by any of the following methods:

•
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.

•
Email: 2023-NPRM-CreditCardLateFees@cfpb.gov.
Include Docket No. CFPB-2023-0010 or RIN 3170-AB15 in the subject line of the message.

•
Mail/Hand Delivery/Courier:
Comment Intake—2023 NPRM Credit Card Late Fees, c/o Legal Division Docket Manager, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically.

Instructions:
The Bureau encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. In general, comments received will be posted without change to
https://www.regulations.gov.
All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Comments will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Adrien Fernandez, Counsel, Krista Ayoub and Steve Wrone, Senior Counsels, Office of Regulations, at 202-435-7700. If you require this document in an alternative electronic format, please contact
CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

The Bureau proposes to amend provisions in § 1026.52(b) and its accompanying commentary as they relate to credit card late fees.
1

Currently, under § 1026.52(b)(1), a card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end consumer credit plan, such as a late payment, exceeding the credit limit, or returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in § 1026.52(b)(1)(i) or complies with the safe harbor provisions set forth in § 1026.52(b)(1)(ii). Section 1026.52(b)(1)(ii) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $41 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.
2

The Bureau is concerned that (1) the safe harbor dollar amounts for late fees currently set forth in § 1026.52(b)(1)(ii) are not reasonable and proportional to the omission or violation to which the fee relates; (2) the current higher safe harbor threshold for late fees for subsequent violations of the same type in the same billing cycle or in one of the next six billing cycles is higher than is justified based on consumer conduct and to deter future violations and, indeed, a late fee that is too high could interfere with the consumers' ability to make future payments on the account; and (3) additional restrictions on late fees may be needed to ensure that late fees are reasonable and proportional. Because late fees are by far the most prevalent penalty fees charged by card issuers and the Bureau's current data primarily relates to late fees, the Bureau's proposed changes to the restrictions in § 1026.52(b) are limited to late fees at this time, although the Bureau seeks comments on whether the proposed amendments should apply to other penalty fees.

1
When amending commentary, the Office of the Federal Register (OFR) requires reprinting of certain subsections being amended in their entirety rather than providing more targeted amendatory instructions. The sections of regulatory text and commentary included in this document show the language of those sections if the Bureau adopts its changes as proposed. In addition, the Bureau is releasing an unofficial, informal redline to assist industry and other stakeholders in reviewing the changes that it proposes to make to the regulatory text and commentary of Regulation Z. This redline can be found on the Bureau's website,
https://files.consumerfinance.gov/f/documents/cfpb_2023-credit-card-late-fees-proposed-rule_unofficial-redline_2023-01.pdf.
If any conflicts exist between the redline and the text of Regulation Z, its commentary, or this proposed rule, the documents published in the
Federal Register
are the controlling documents.

2
Although the safe harbors discussed above apply to charge card accounts, § 1026.52(b)(1)(ii) provides an additional safe harbor when a charge card account becomes seriously delinquent. Specifically, § 1026.52(b)(1)(ii)(C) provides that, when a card issuer has not received the required payment for two or more consecutive billing cycles on a charge card account that requires payment of outstanding balances in full at the end of each billing cycle, it may impose a late payment fee that does not exceed 3 percent of the delinquent balance.

The proposal would amend § 1026.52(b) and its accompanying commentary to help ensure that late fees are reasonable and proportional. First, the proposal would amend § 1026.52(b)(1)(ii) to lower the safe harbor dollar amount for late fees to $8 and to no longer apply to late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles.
3

Second, the proposal would provide that the current provision in § 1026.52(b)(1)(ii)(D) that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the safe harbor amount for late fees. Third, the proposal would amend § 1026.52(b)(2)(i)(A) to provide that late fee amounts must not exceed 25 percent of the required payment; currently, late fee amounts must not exceed 100 percent. The proposal also would amend comments 7(b)(11)-4, 52(a)(1)-1.i and iv, and 60(a)(2)-5.ii to revise current examples of late fee amounts to be consistent with the proposed $8 safe harbor late fee amount discussed above. The Bureau also solicits comment on whether card issuers should be prohibited from imposing late fees on consumers that make the required

payment within 15 calendar days following the due date. In addition, the Bureau seeks comment on whether, as a condition of using the safe harbor for late fees, it may be appropriate to require card issuers to offer automatic payment options (such as for the minimum payment amount), or to provide notification of the payment due date within a certain number of days prior to the due date, or both.

3
The proposal would not amend the safe harbor set forth in § 1026.52(b)(1)(ii)(C) applicable to charge card accounts.

The Bureau proposes one clarification that would apply to penalty fees generally. Specifically, the proposal would amend comment 52(b)(1)(i)-2.i to clarify that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. In addition, the Bureau solicits comment on several issues related to penalty fees generally. First, the Bureau solicits comment on whether the same or similar changes described above should be applied to other penalty fees, such as over-the-limit fees, returned-payment fees, and declined access check fees, or in the alternative, whether the Bureau should finalize the proposed safe harbor for late fees and eliminate the safe harbors for other penalty fees. Second, the Bureau solicits comment on whether instead of revising the safe harbor provisions set forth in § 1026.52(b)(1)(ii) as they apply to late fees as discussed above, the Bureau should instead eliminate the safe harbor provisions in § 1026.52(b)(1)(ii) for late fees or should instead eliminate the safe harbor for all penalty fees, including late fees, over-the-limit fees, returned-payment fees, and declined access check fees. If the safe harbor provisions were eliminated, card issuers would need to use the cost analysis provisions set forth in § 1026.52(b)(1)(i) to determine the amount of the penalty fees (subject to the limitations in § 1026.52(b)(2)). The Bureau also solicits comment on whether, in that event, the cost analysis provisions would need to be amended and, if so, how.

II. Background

A. The CARD Act

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was signed into law on May 22, 2009.
4

The CARD Act primarily amended TILA
5

and instituted new substantive and disclosure requirements to establish fair and transparent practices for open-end consumer credit plans. The CARD Act added TILA section 149, which provides, among other things, that the amount of any penalty fee 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 or any other penalty fee or charge, must be “reasonable and proportional” to such omission or violation.
6

4
Public Law 111-24, 123 Stat. 1734 (2009).

5
15 U.S.C. 1601
et seq.

6
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).

At the time of its passage, the CARD Act required the Board of Governors of the Federal Reserve System (Board) to issue rules establishing standards for assessing the reasonableness and proportionality of such penalty fees.
7

In issuing these rules, the CARD Act required 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 deemed necessary or appropriate by the Board.
8

The CARD Act authorized the Board to establish different standards for different types of fees and charges, as appropriate.
9

The CARD Act also granted the Board discretion 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.
10

As discussed in more detail below, the authority to implement TILA, including TILA section 149, transferred from the Board to the Bureau in 2011.

7
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).

8
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(c)).

9
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(d)).

10
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(e)).

B. The Board's Implementing Rule

On June 29, 2010, the Board issued a final rule implementing new TILA section 149 in its Regulation Z, 12 CFR 226.52(b) (2010 Final Rule).
11

The Board's Regulation Z, § 226.52(b) provided that a card issuer must not impose a fee for violating the terms or other requirements of a credit card account, such as a late payment, exceeding the credit limit, or returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in § 226.52(b)(1)(i) or complies with the safe harbor provisions set forth in § 226.52(b)(1)(ii).
12

The Board set the safe harbor amounts in § 226.52(b)(1)(ii) at $25 generally for penalty fees, except that it set forth a safe harbor of $35 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.
13

Although the safe harbors discussed above applied to charge card accounts, the Board's Regulation Z, § 226.52(b)(1)(ii) also provided an additional safe harbor when a charge card account becomes seriously delinquent. Specifically, § 226.52(b)(1)(ii)(C) provided that, when a card issuer has not received the required payment for two or more consecutive billing cycles on a charge card account that requires payment of outstanding balances in full at the end of each billing cycle, it may impose a late payment fee that does not exceed 3 percent of the delinquent balance.
14

The Board's Regulation Z, § 226.52(b)(1)(ii)(D) provided that the safe harbor dollar amounts would be adjusted annually to the extent that changes in the Consumer Price Index (CPI) would result in an increase or decrease of $1.
15

11
75 FR 37526 (June 29, 2010).

12
12 CFR 226.52(b)(1).

13
12 CFR 226.52(b)(1)(ii)(A) and (B).

14
12 CFR 226.52(b)(1)(ii)(C).

15
12 CFR 226.52(b)(1)(ii)(D).

The Board's Regulation Z, § 226.52(b)(2) also contained other restrictions on card issuers for imposing penalty fees. Specifically, § 226.52(b)(2)(i) prohibited issuers from imposing penalty fees that exceed the dollar amount associated with the violation.
16

In addition, § 226.52(b)(2)(ii) prohibited issuers from imposing multiple penalty fees based on a single event or transaction.
17

16
12 CFR 226.52(b)(2)(i).

17
12 CFR 226.52(b)(2)(ii).

C. Transfer of Authority for TILA to the Bureau and the Bureau's Rule

The Board's 2010 Final Rule implementing TILA section 149 took effect on August 22, 2010.
18

Nearly one year later, on July 21, 2011, the Board's rulemaking authority to implement the provisions of TILA, including TILA section 149, transferred to the Bureau pursuant to sections 1061 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
19

18
75 FR 37526, 37526 (June 29, 2010).

19
Public Law 111-203, 124 Stat. 1376 (2010).

On December 22, 2011, the Bureau issued an interim final rule issuing its Regulation Z, 12 CFR part 1026, to reflect its assumption of rulemaking

authority over TILA.
20

As set forth in the interim final rule, the Bureau's Regulation Z, § 1026.52(b) contained the same restrictions on penalty fees as set forth in the Board's Regulation Z, § 226.52(b).
21

20
76 FR 79768 (Dec. 22, 2011);
see also
81 FR 25323 (Apr. 28, 2016).

21
76 FR at 79822.

Since then, consistent with § 1026.52(b)(1)(ii)(D), the Bureau has adjusted the dollar amounts of the safe harbor threshold amounts to reflect changes in the CPI in effect as of June 1 of that year.
22

Section 1026.52(b)(1)(ii) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $41 for each subsequent violation of the same type that occur during the same billing cycle or in one of the next six billing cycles.
23

22
Comment 52(b)(1)(ii)-2.

23

See
supra note 2 for a description of an additional safe harbor that applies to charge card accounts.

D. A Decade of the Late Fee Safe Harbor

In the wake of the Board's and the Bureau's implementation of TILA section 149, late fees represent almost all penalty fee volume on credit cards, as overlimit fees are now practically nonexistent and fees for returned payments account for a negligible share based on Y-14+ data collected from a group of mass market and specialized issuers.
24

24
Bureau of Consumer Fin. Prot.,
Credit Card Late Fees,
at 13 (Mar. 2022) (Late Fee Report),
https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf. See
part III.C for a description of the Y-14+ data.

Prior to the passage of the CARD Act in 2009, the average late fee was $33 for issuers in the Bureau's Credit Card Database (CCDB) which includes information on the full consumer and small business credit card portfolios of large credit card lenders, covering approximately 85 percent of all credit card accounts in the U.S. between April 2008 and April 2016.
25

With the effective date of the safe harbor threshold amounts in 2010, the average late fee in the CCDB declined by over $10 to $23 in the fourth quarter of 2010.
26

25
Bureau of Consumer Fin. Prot.,
Card Act Report,
at 23 (Oct. 2013) (2013 Report),
http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf.
From 2008 to 2015, the Bureau used the CCDB to measure the amount of average late fees to include in the CARD Act reports that the Bureau releases every two years. In its 2017 report, the Bureau started using the Y-14 data to measure the amount of average late fees to include in its CARD Act reports and began using the Y-14+ data to calculate metrics including average late fee beginning with its 2019 report.
See
part III.C for a description of the Y-14 and Y-14+ data.

26

Id.

However, from 2010 through the onset of the COVID-19 pandemic, issuers had steadily been charging consumers more in credit card late fees each year—peaking at over $14 billion in total late fee volume for issuers contained in the Y-14+ data in 2019.
27

At the end of 2012, the average late fee for major issuers in the CCDB reached about $27.
28

It remained at about that level until rising to $28 in 2018 for issuers in the Y-14+, consistent with the first safe harbor adjustment for inflation in 2014.
29

In 2019, the average late fee charged by credit card issuers in the Y-14+ rose to $31, approaching nominal pre-CARD Act levels.
30

The total volume of late fees assessed by issuers in the Y-14+ declined to about $12 billion in 2020 given record-high payment rates and public and private relief efforts.
31

27
Late Fee Report, at 4.

28
2013 Report, at 23.

29
Bureau of Consumer Fin. Prot.,
The Consumer Credit Card Market,
at 69 (Dec. 2019) (2019 Report),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf.

30
Late Fee Report, at 6.

31
Late Fee Report, at 5; Bureau of Consumer Fin. Prot.,
The Consumer Credit Card Market,
at 117 (Sept. 2021) (2021 Report),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf.

E. Credit Card Issuers' Use of the Late Fee Safe Harbor

Currently, § 1026.52(b)(1)(ii) sets forth a safe harbor of $30 generally for a late payment, except that it sets forth a safe harbor of $41 for each subsequent late payment within the next six billing cycles. A card issuer is not required to use the cost analysis provisions in § 1026.52(b)(1)(i) to determine the amount of late fees if it complies with these safe harbor amounts.
32

32

See
comment 52(b)(1)-1.i.A.

An analysis of credit card agreements found no evidence of any issuers using the cost analysis provisions to charge an amount higher than the safe harbor.
33

Most large issuers have taken advantage of the increased safe harbors as adjusted for inflation by increasing their fee amounts.
34

Eighteen of the top 20 issuers by outstanding balances contracted a maximum late fee at or near the higher safe harbor amount of $40 in 2020 based on analysis of the maximum late fee disclosed by an institution in agreements submitted to the Bureau's Credit Card Agreement Database in the fourth quarter of that year.
35

Yet, the most common maximum late fee disclosed in agreements submitted to the Bureau was $25, as driven by the practices of smaller banks and credit unions not in the top 20 issuers by asset size.
36

Finally, a small but growing number of issuers offer credit card products with no late fees.
37

33
Late Fee Report, at 14.

34

Id.

35

Id.
The Credit Card Agreement Database is available at
http://www.consumerfinance.gov/credit-cards/agreements.

36
Late Fee Report, at 14.

37

Id.
at 15.

Some card issuers, however, may be disincentivized to lower late fee amounts below the safe harbor, given that the industry as a whole continues to rely on late fees as a source of revenue and many consumers may not shop for credit cards based on the amount of the late fee. For banks in the Y-14+ data, late fees represented 10 percent of charges to consumers in 2020, but individual card issuers' revenue from late fees varied.
38

The share of late fees for individual issuers in the Y-14+ data ranged from a minimum of four percent to a maximum of 31 percent of total consumer charges in 2019. Among issuers there is a strong correlation between reliance on late fees and concentration of subprime accounts. Yet, the industry as a whole continues to rely on late fees as a source of revenue.
39

Given the amount of revenue that late fees generate, card issuers may not have an incentive to charge late fees lower than the safe harbor amount.

38

Id.
at 13.

39

Id.
at 14.

In addition, many consumers may not shop for credit cards based on the amount of late fees, which also may lessen card issuers incentive to charge late fees lower than the safe harbor amount. Survey data suggest that other factors, such as rewards, annual fees, and annual percentage rate(s) (APR), drive credit card usage.
40

In addition, recent academic work
41

directly observed that credit card offers highlight rewards, annual fees, and APRs more than late fees based on the position of the information and the size of the font. Only 6.06 percent of the 611,797 card offers in their data spanning from 1999 to 2007 mentioned late fees on the front page, with an average font size of 9.56. In contrast, (1) rewards were displayed on the front page 93.68 to 100 percent of the time (depending on the type of rewards) with an average font size of 12.12 to 16.56; (2) the annual fee was disclosed on the front page 78.02 percent of the time with an average font size of 13.39; and (3) APRs were displayed on the front page 27.95

percent of the time with an average font size of 13.02. The Bureau notes that the authors of the study explained that they excluded the post-2007 data “to abstract from the impact of the 2008 financial crisis and the [CARD Act] in 2009.”
42

However, the authors also stated that “the main results are qualitatively and quantitatively very similar if we include data until 2016.”
43

40
Karen Augustine,
U.S. Consumers and Credit: Rising Usage,
Mercator Advisory Group, at 40 (2018).

41
Hong Ru & Antoinette Schoar,
Do Credit Card Companies Screen for Behavioural Biases?
(Feb. 12, 2020), BIS Working Paper No. 842,
https://ssrn.com/abstract=3549532.

42

Id.
at 12.

43

Id.

F. Consumer Impact of Late Fees

Late fees represent over one-tenth of the $120 billion issuers charge to consumers in interest and fees, totaling over $14 billion in 2019.
44

A small share of accounts in low credit score tiers incur a high proportion of late fees.
45

Overall, the average deep subprime account in the Y-14 data (discussed in part III.C) was charged $138 in late fees in 2019, compared with $11 for the average superprime account.
46

The higher incidence of late fees for accounts in lower tiers, combined with higher average charges for repeat late fees within six billing cycles of the initial late fee, drives this disparity.
47

44
Late Fee Report, at 4.

45

Id.
at 7.

46

Id.
at 8.

47

Id.

Credit card accounts in the Y-14 data held by cardholders living in the U.S.' poorest neighborhoods paid twice as much on average in total late fees than those in the richest areas.
48

Cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019 than majority white areas.
49

And people in areas with the lowest rates of economic mobility paid nearly $10 more in late fee charges per account compared to people in areas with the highest rates of economic mobility.
50

48

Id.
at 9.

49

Id.
at 10.

50

Id.
at 11.

G. Other Consequences to Consumers of Late Payment

When a consumer does not make at least the minimum payment by the periodic statement due date, a late fee may not be the only consequence. However, the effect of a missed payment depends on cardholder conduct both prior to and after the due date.

For cardholders who typically pay their balance in full every month (so-called transactors), a late payment generally means both a late fee and new interest incurred for carrying or revolving a balance. For the cardholders who do not roll over a balance in the month before or after a late fee is assessed, the loss of a grace period
51

and coinciding interest charges may pose a similar or even greater burden than the late fee itself. For cardholders who regularly revolve a balance from one month to the next, a late fee is the main financial consequence of a missed payment if the payment is made prior to the next statement due date, as the additional interest charges on the unpaid minimum amount due for a limited number of days will likely be minimal.

51
A grace period is a period within which credit extended may be repaid without incurring a finance charge due to a periodic interest rate.
See, e.g.,
§ 1026.6(b)(2)(v) and comments 5(b)(2)(ii)-3.i and 54(a)(1)-2.

However, if a consumer does not make at least the minimum payment due for more than one billing cycle, non-payment may carry more severe consequences. After approximately 30 days, consumers' credit scores may decline after issuers report the delinquency to credit bureaus. A card issuer also may take actions to reprice new transactions on the account according to a penalty rate, if permitted under § 1026.55(b)(3).
52

After 60 days, issuers may take action to reprice the entire outstanding balance on the account according to a penalty rate, if permitted under § 1026.55(b)(4). At any point as an account becomes more delinquent, an issuer may take steps to reduce a cardholder's credit line or suspend use of the card, limit their earning or redemption of rewards, or increase outreach to collect the outstanding debt. After 180 days of delinquency, an issuer will typically close and charge off the credit card account which may carry a large and long-term financial penalty for a consumer.

52
If a consumer does not make the required payment by the due date, § 1026.55(b)(3) permits a card issuer to take actions to reprice new transactions on the account according to a penalty rate in certain circumstances. The Bureau understands, however, that most card issuers do not take actions to reprice new transactions to the penalty rate until the consumer is more than 60 days late. 2021 Report, at 51.

III. Summary of Rulemaking Process

A. Advance Notice of Proposed Rulemaking

On June 22, 2022, the Bureau issued an advance notice of proposed rulemaking (ANPR) seeking information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers' revenue and expenses.
53

Areas of inquiry included: (1) factors used by card issuers to set late fee amounts; (2) card issuers' costs and losses associated with late payments; (3) the deterrent effects of late fees; (4) cardholders' late payment behavior; (5) methods that card issuers use to facilitate or encourage timely payments, including automatic payment and notifications; (6) card issuers' use of the late fee safe harbor provisions in Regulation Z; and (7) card issuers' revenue and expenses related to their domestic consumer credit card operations. The Bureau received 43 comments in response to the ANPR.

53
87 FR 38679 (June 29, 2022).

Consumer group commenters generally recommended that the Bureau: (1) more closely tailor late fees to the amount of the debt owed by the cardholder, such as by establishing a sliding scale for the safe harbor amount so that late fees are proportional to the account balance and by capping the amount of late fees that can be imposed for an account during the year; (2) require a mandatory waiting period of several days before a late fee can be assessed; (3) decline to incorporate deterrence as a factor in setting late fee rules and safe harbor amounts; (4) consider the savings to issuers of providing online-only statements in determining the costs of collecting late payments, (5) require a postal mail notification before a late fee can be imposed for an online-only account; and (6) exclude the costs of being a furnisher of information to consumer reporting agencies from the costs of collecting late payments.

Card issuers and their trade groups that commented on the ANPR generally opposed revisions to Regulation Z's safe harbor provisions related to late fees, including lowering the safe harbor amounts. Several industry trade groups asserted that although the current safe harbor amounts do not cover all the costs associated with late payments and are not as effective a deterrent as higher fees would be, they cover a significant portion of issuer costs, deter late payments, and provide legal certainty to card issuers. Card issuers and trade group commenters, however, did not provide detailed information on the type of costs, and the dollar amount of the costs, they incur to collect late payments. Card issuers and their trade groups commenters also generally opposed eliminating the safe harbor provisions and requiring card issuers to use the cost analysis provisions in § 1026.52(b)(1)(i) to determine the amount of late fees a card issuer is permitted to charge. Several industry trade group commenters asserted that reducing or eliminating the safe harbor would reduce credit access and increase the cost of credit. One trade group commenter asserted that smaller

creditors and community banks, particularly those that extend credit to consumers who are trying to build or repair their credit, have proportionately higher compliance costs and would face the most risk if the safe harbor was reduced or eliminated, limiting their ability to continue to offer credit products at the same terms. Several industry trade group commenters also asserted that because lowering the safe harbor would have a significant impact on small financial institutions, the Bureau must comply with the Small Business Regulatory Enforcement Fairness Act (SBREFA) by convening a SBREFA panel in any late fee rulemaking. Several industry trade group commenters also indicated that if the safe harbor were eliminated, the Bureau would need to provide significantly more detail and clarity around the costs included in the late fee amount calculation under § 1026.52(b)(1)(i).

B. CARD Act Consultation With Certain Federal Agencies

Consistent with the CARD Act, the Bureau consulted with the following agencies regarding rules that implement TILA section 149: (1) the Comptroller of the Currency; (2) the Board of Directors of the Federal Deposit Insurance Corporation; and (3) the National Credit Union Administration Board.
54

The Bureau also consulted with the Board and several other federal agencies, as discussed in part VII.

54
15 U.S.C. 1665d(b) and 1665d(e).

C. Y-14 Data Considered for This Proposal

As discussed in more detail in the section-by-section analysis in part V, the Bureau has considered data in developing this proposal that the Board collects as part of its Y-14M (Y-14) data. Since June 2012, the Board has collected these data monthly from bank holding companies with total consolidated assets exceeding $50 billion. For this collection, surveyed financial institutions report comprehensive data on their assets on the last business day of each calendar month. These data are used to support the Board's supervisory stress test models and provide one source of data for the Bureau's biennial report to Congress on the consumer credit card market.
55

These data contain reported information on the following four metrics used in developing this proposal:

55

See
Bd. of Governors. of the Fed. Rsrv. Sys., Report Forms FR Y-14M,
https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV
(for more information on the Y-14M collection). The Bureau is one of several government agencies with whom the Board shares the data. Information in the Y-14 data do not include any personal identifiers. Additionally, accounts associated with the same consumer are not linked across or within issuers. The Y-14 data also does not include transaction-level data pertaining to consumer purchases.

Late Fee Income:
Reported net fee income assessed for late or nonpayment accounts in a given domestic credit card portfolio by card type (
e.g.,
general purpose or private label). This is late fee income for the Bureau's purposes, as discussed in the section-by-section analysis of § 1026.52(b)(1)(ii).

Collection Costs:
Reported costs incurred to collect problem credits that include the total collection cost of delinquent, recovery, and bankrupt accounts. Issuers report these aggregate costs monthly for their domestic credit card portfolios and separately by credit card type.
56

These reported costs do not include losses and associated costs.
57

56
Types include General Purpose, Private Label, Business, and Corporate cards.

57
Issuers report projected losses, the dollar amount of charge-offs and any associated recoveries, interest expense, and loan loss provisions separately.

Late Fee Amount:
Reported amount of the late fee charged on a particular account in a particular month.

Total Required Payments:
Reported total payment amount on a particular account in a particular month, including any missed payments or fees that were required to be paid in a particular billing cycle. This typically includes the minimum payment due, past due payments, and any amount reported as over the credit limit.

The Y-14 data received by the Bureau cover the period from the middle of 2012 through September 2022 and are provided by issuers that accounted for just under 70 percent of outstanding balances on U.S. consumer credit cards as of year-end 2020. For the purposes of the analysis using these data as described in part V, the Bureau only considered account- and portfolio-level data for issuers in a given month for consumer general purpose and private label credit cards for which there existed data on late fee income, collection costs, late fee amounts, and total required payments in the Y-14 data. With respect to credit card data, the Bureau receives the complete portfolio data (including late fee income and collection costs) for all the card issuers included in the data collection. The Bureau receives only a random 40 percent subsample of account information (including late fee amounts and total required payments) reported by card issuers included in the data collection.

Collection costs in the Y-14 data include both pre-charge-off and post-charge-off collection costs. As discussed in the section-by-section analysis of § 1026.52(b)(1)(i), the Bureau proposes to amend comment 52(b)(1)(i)-2.i to clarify that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions.

Consistent with that proposed clarification, the Bureau estimated the percentage of collection costs that may occur after charge-off so that they could be excluded from the collection costs in the Y-14 data. The Bureau notes that the most significant post-charge-off collection costs are likely to be commissions paid to third-party debt collectors for charged-off accounts. The Bureau understands that such commission payments, made to third-party debt collection companies, would be made almost exclusively in connection with accounts that have been charged off, and represent a conservative estimate of post-charge-off collection costs, as there may be other costs associated with collections post-charge-off beyond such commission payments.

The Bureau estimated from debt collection reports the commission expenses that six major card issuers paid in 2019 and 2020, representing 91 percent of balances and 93 percent of collection costs among portfolios with positive collection expenses reported in the Y-14 data in the twelve months leading up to August 2022.
58

The methodology for estimating post-charge-off commissions considered the amount of charged-off balances and then estimated the commission on the volume of recovered balances by using the recovery and commission rates.

59

Based on these commission expenses that these six major card issuers paid in 2019 and 2020 to third-party debt collectors for charged-off accounts, the Bureau estimated that these post-charge-off costs are around 25 percent of total collection costs for these issuers; the average ratio was 27 percent in 2019 and 21 percent in 2020. In 2019, the median ratio of estimated post-charge-off commission costs to annual collection costs in the Y-14 for individual issuers was 28 percent; in 2020, it was 23 percent. Based on this data, the Bureau estimated that pre-charge-off collection costs were equal to 75 percent of the collection costs included in the Y-14 data for purposes of its analysis related to the proposed changes to the safe harbor thresholds for late fees in § 1026.52(b)(1)(ii).

58
As part of its review of the practices of credit card issuers for its biennial review of the consumer credit card market, the Bureau surveys several large issuers to better understand practices and trends in credit card debt collection. These data provided in response to data filing orders served as the basis of this calculation. For more information on these data,
see
2021 Report, at 17.

59
For example, if an issuer had a total of $1 million in newly charged-off balances in a given year, a cumulative recovery rate for that year of five percent, and a post-charge-off commission rate of 20 percent, the Bureau would estimate the post-charge-off commission costs to be $10,000. To calculate the post-charge-off collection costs as a share of total cost of collections, the Bureau then divided the estimated post-charge-off commission costs by the total collection costs the bank reported in the Y-14 data. For issuers who sell debt, the cost of collections calculation uses charge-off balances net of asset sales. The commission rate for each issuer is an average weighted by the share of post-charge-off balances in each tier placement (
e.g.,
primary, secondary, and tertiary placements).

As discussed in more detail in the section-by-section analysis in part V, the Bureau also considered Y-14+ data in developing this proposal. The Y-14+ data includes information from the Board's Y-14 data and a diverse group of specialized issuers.

IV. Legal Authority

A. Section 1022 of the Dodd-Frank Act

Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”
60

Among other statutes, title X of the Dodd-Frank Act and TILA are Federal consumer financial laws.
61

Accordingly, in issuing this proposed rule, the Bureau proposes to exercise its authority under Dodd-Frank Act section 1022(b)(1) to prescribe rules under TILA and title X that carry out the purposes and objectives and prevent evasion of those laws.

60
12 U.S.C. 5512(b)(1).

61
Dodd-Frank Act section 1002(14); codified at 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12); codified at 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA).

B. The Truth in Lending Act

As amended by the Dodd-Frank Act, TILA section 105(a)
62

directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that, in the judgment of the Bureau, are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. Pursuant to TILA section 102(a), a purpose of TILA is to assure a meaningful disclosure of credit terms to enable the consumer to avoid the uninformed use of credit and compare more readily the various credit terms available to the consumer. This stated purpose is tied to Congress's finding that economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.
63

Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA's purposes.

62
15 U.S.C. 1604(a).

63
TILA section 102(a), codified at 15 U.S.C. 1601(a).

As described above, the CARD Act was signed into law on May 22, 2009,
64

and the Act amended TILA
65

by adding section 149, which provides, among other things, that the amount of any penalty fee 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 or any other penalty fee or charge, must be “reasonable and proportional” to such omission or violation.
66

64
Public Law 111-24, 123 Stat. 1734 (2009).

65
15 U.S.C. 1601
et seq.

66
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).

At the time of its passage, the CARD Act required the Board to issue rules establishing standards for assessing the reasonableness and proportionality of such penalty fees, with a statutory deadline of February 22, 2010 for issuing this required rule.
67

The Act also authorized the Board to establish different standards for different types of fees and charges, as appropriate.
68

The CARD Act also allowed, but did not require, the Board to issue rules to provide for a safe harbor amount for any such penalty fee that is presumed to be reasonable and proportional to such omissions or violations.
69

This grant of discretionary authority did not include a deadline. The Board issued a rule on June 29, 2010, completing the required rulemaking (now contained in the Bureau's Regulation Z, 12 CFR 1026.52(b)(1)(i)) and adding a discretionary portion (now contained in the Bureau's Regulation Z, 12 CFR 1026.52(b)(1)(ii)) with safe harbors.

67
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).

68
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(d)).

69
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(e)).

On July 21, 2011, the Board's rulemaking authority to implement the provisions of TILA, including TILA section 149, transferred to the Bureau pursuant to sections 1061 and 1100A of the Dodd-Frank Act.
70

70
Public Law 111-203, 124 Stat. 1376 (2010).

For the reasons discussed in this proposal, the Bureau proposes to amend certain provisions in Regulation Z that impact the amount of late fees that card issuers can charge to carry out TILA's purposes and proposes such additional requirements, adjustments, and exceptions as, in the Bureau's judgment, may be necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance. In developing these aspects of this proposal pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, facilitating consumers' ability to compare credit terms, and helping consumers avoid the uninformed use of credit, and the findings of TILA, including strengthening competition among financial institutions and promoting economic stabilization.

The Bureau also has analyzed whether the current safe harbor threshold amounts for late fees are reasonable and proportional to a cardholder's omission or violation. In considering the appropriate amount, the Bureau is guided by factors including (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 deemed necessary or appropriate.

V. Section-by-Section Analysis

Section 1026.7 Periodic Statement

7(b) Rules Affecting Open-End (Not Home-Secured) Plans

7(b)(11) Due Date; Late Payment Costs

Section 1026.7(b) sets forth the disclosure requirements for periodic statements that apply to open-end (not home-secured) plans. Section 1026.7(b)(11) generally requires that for a credit card account under an open-end (not home-secured) consumer credit plan, a card issuer must provide on each periodic statement: (1) the due date for a payment and the due date must be the same day of the month for each billing cycle; and (2) the amount of any late

payment fee and any increased periodic rate(s) (expressed as APRs) that may be imposed on the account as a result of a late payment.

Currently, comment 7(b)(11)-4 provides that for purposes of disclosing the amount of any late payment fee and any increased APR that may be imposed on the account as a result of a late payment under § 1026.7(b)(11), a card issuer that imposes a range of late payment fees or rates on a credit card account under an open-end (not home-secured) consumer credit plan may state the highest fee or rate along with an indication lower fees or rates could be imposed. Comment 7(b)(11)-4 also provides an example to illustrate how a card issuer may meet the standard set forth above, stating that a phrase indicating the late payment fee could be “up to $29” complies with this standard. The proposed rule would amend comment 7(b)(11)-4 to read “up to $8” so that the late fee amount in the example would be consistent with the proposed $8 late fee safe harbor amount set forth in proposed § 1026.52(b)(1)(ii).

Section 1026.52 Limitations on Fees

52(a) Limitations During First Year After Account Opening

52(a)(1) General Rule

Section 1026.52(a)(1) generally provides that the total amount of fees a consumer is required to pay with respect to a credit card account under an open-end (not home-secured) consumer credit plan during the first year after account opening must not exceed 25 percent of the credit limit in effect when the account is opened. Section 1026.52(a)(2) provides that late payment fees, over-the-limit fees, and returned-payment fees; or other fees that the consumer is not required to pay with respect to the account are excluded from the fee limitation set forth in § 1026.52(a)(1).

Comment 52(a)(1)-1 provides that the 25 percent limit in § 1026.52(a)(1) applies to fees that the card issuer charges to the account as well as to fees that the card issuer requires the consumer to pay with respect to the account through other means (such as through a payment from the consumer's asset account to the card issuer or from another credit account provided by the card issuer). Comment 52(a)(1)-1 also provides four examples to illustrate the provision set forth above. The two examples in comment 52(a)(1)-1.i and iv contain late fee amounts of $15. The proposed rule would amend the two examples in comment 52(a)(1)-1.i and iv to use a late fee amount of $8, so that the late fee amounts in the examples are consistent with the proposed $8 late fee safe harbor amount set forth in proposed § 1026.52(b)(1)(ii).

52(b) Limitations on Penalty Fees

52(b)(1) General Rule

Section 1026.52(b) provides 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 issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in § 1026.52(b)(1)(i) (referred to herein as the cost analysis provisions) or complies with the safe harbor provisions set forth in § 1026.52(b)(1)(ii). It further provides that a card issuer must not impose such a fee unless the fee is consistent with certain prohibitions set forth in § 1026.52(b)(2), including a prohibition in § 1026.52(b)(2)(i)(A) on imposing a penalty fee that exceeds the dollar amount associated with the violation, which currently prohibits late fees that exceed 100 percent of the required minimum payment.
71

The commentary to § 1026.52(b) explains that penalty fees subject to its provisions include late fees, returned-payment fees, and fees for over-the-limit transactions, among others.
72

71

See
comment 52(b)(2)(i)-1.

72

See
comment 52(b)(1)-1.

As discussed in the section-by-section analysis of § 1026.52(b)(1)(ii) below, the Bureau proposes to amend § 1026.52(b)(1)(ii) to lower the safe harbor dollar amount for late fees to $8 (currently set at $30) and to provide that the higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles (currently set at $41) does not apply to late fees.
73

73
As discussed in the section-by-section analysis of § 1026.52(b)(1)(ii)(C) below, the Bureau is not proposing to lower or otherwise change the safe harbor amount of a late fee that card issuers may impose when a charge card account becomes seriously delinquent.

In addition, as discussed in more detail below, the Bureau proposes to provide that the current provision in § 1026.52(b)(1)(ii)(D) that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the safe harbor amount for late fees. Also, as discussed in the section-by-section analysis of § 1026.52(b)(2)(i) below, the Bureau proposes to amend § 1026.52(b)(2)(i)(A) to provide that late fee amounts may not exceed 25 percent of the required minimum payment.

The Bureau also proposes one clarification that would apply to penalty fees generally. Specifically, the Bureau proposes to amend comment 52(b)(1)(i)-2.i to clarify that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions.

The Bureau is not proposing to amend the lead-in text of § 1026.52(b)(1). However, for consistency with the proposed amendments to other provisions in § 1026.52(b) and for clarity, the Bureau proposes certain amendments to the commentary to § 1026.52(b) and (b)(1). Specifically, the Bureau proposes to amend comment 52(b)-1.i.A to clarify that a late payment fee or late fee is any fee imposed for a late payment and to include a cross-reference to § 1026.60(b)(9) and accompanying commentary for further guidance. The Bureau also proposes to amend comment 52(b)-2, which provides an illustrative example of how to round a penalty fee to the nearest whole dollar in compliance with the rule. The proposed amendments would reduce the dollar amounts of late fees in the example to reflect amounts that would be permissible under the Bureau's proposals to lower the late fee safe harbor amount to $8 and to cap late fees at 25 percent of the required minimum payment. In addition, the Bureau proposes to add new comment 52(b)-5 to clarify that any dollar amount examples in the commentary to § 1026.52(b) relating to the safe harbors in § 1026.52(b)(1) are based on the original historical safe-harbor thresholds of $25 and $35 for penalty fees other than late fees, and on the proposed threshold of $8 for late fees. This proposed clarification would help explain why the dollar amounts for penalty fees other than late fees are different from the ones set forth in the regulatory text in § 1026.52(b)(1)(ii)(A) and (B).

The Bureau also proposes to amend comments 52(b)(1)-1.i.B and C, which illustrate the relationship between the cost analysis provisions in § 1026.52(b)(1)(i) and the safe harbor provisions in § 1026.52(b)(1)(ii). The Bureau proposes to amend the illustrative example in comment 52(b)(1)-1.i.B to reflect a late fee amount consistent with the proposal. In addition, because the Bureau proposes to substantially amend the safe harbor provisions for late fees, the Bureau proposes to remove references to late fees from the illustrative examples in comment 52(b)(1)-1.i.C and replace

them with references to over-the-limit fees.

In addition, the Bureau proposes to amend comment 52(b)(1)-1.ii, which illustrates the relationship between the penalty fee limitations in § 1026.52(b)(1) and the prohibitions in § 1026.52(b)(2). The proposed amendments would reduce the dollar amount of a late fee in the example to reflect an amount that would be consistent with the Bureau's proposal to lower the late fee safe harbor amount.

The Bureau solicits comment on all aspects of these proposed amendments to the commentary to § 1026.52(b) and (b)(1), including comment on what additional amendments may be needed to help ensure clarity and compliance certainty.

52(b)(1)(i) Fees Based on Costs

As noted above, under the cost analysis provisions in § 1026.52(b)(1)(i), a card issuer may impose a fee for violating the terms or other requirements of an account consistent with the general rule in § 1026.52(b)(1) 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. Section 1026.52(b)(1)(i) further provides that a card issuer must reevaluate that determination at least once every 12 months and sets forth certain other requirements and conditions that apply if, as a result of the reevaluation, the card issuer determines that either a lower or higher fee represents a reasonable proportion of the total costs incurred by the card issuer as a result of that type of violation.

The Bureau is not proposing to amend the text of § 1026.52(b)(1)(i). However, for purposes of clarity and compliance certainty, the Bureau proposes to revise comment 52(b)(1)(i)-2.i to clarify that the costs that card issuers can consider for purposes of determining the amount of a penalty fee under the cost analysis provisions in § 1026.52(b)(1)(i) do not include collection costs that are incurred after an account is charged off in accordance with loan-loss provisions.

Comment 52(b)(1)(i)-1 currently provides that card issuers may include in the costs for determining the amount of a penalty fee “the costs incurred . . . as a result of [the] violation.” Comment 52(b)(1)(i)-2 addresses amounts not considered costs incurred by a card issuer as a result of violations of the terms or other requirements of an account for purposes of § 1026.52(b)(1)(i). Comment 52(b)(1)(i)-2.i provides that one such amount that cannot be considered as costs incurred for purposes of § 1026.52(b)(1)(i) are losses and associated costs (including the cost of holding reserves against potential losses and the cost of funding delinquent accounts).

The Bureau proposes to amend comment 52(b)(1)(i)-2.i to clarify the “losses and associated costs” that card issuers may not consider as costs incurred for purposes of § 1026.52(b)(1)(i) include any collection costs that are incurred after an account is charged off in accordance with loan-loss provisions. The Bureau's proposal, therefore, would make it explicit that for any collection costs that a card issuer incurs after an account has been charged off are not considered costs incurred for purposes of § 1026.52(b)(1)(i). The Bureau understands that when an account has been charged off, the card issuer has written the account off as a loss; therefore, any cost in collecting amounts owed to a card issuer that are incurred post-charge-off is related to mitigating a loss as opposed to the cost of a violation of the account terms. As the Board noted in its 2010 Final Rule “it would be inconsistent with the purpose of the [CARD Act] to permit card issuers to begin recovering losses and associated costs through penalty fees rather than through upfront rates.”
74

74
75 FR 37526, 37538 (June 29, 2010).

The Bureau received two comments to the ANPR that indicated there may be a need to clarify that costs of collecting amounts owed to a card issuer incurred after an account is charged off are costs related to a loss and, therefore, cannot be considered as costs incurred for a violation of account terms for purposes of § 1026.52(b)(1)(i). For instance, one industry trade group commenter noted that, for example, late fees are meant to cover, among other things, the charge-off costs associated with late payments. Another industry credit union commenter similarly explained that late fees help offset the charge-off on accounts not paid by consumers. Given the two comments suggesting potential confusion, the Bureau proposes to clarify that such costs cannot be considered for purposes of § 1026.52(b)(1)(i).

The Bureau solicits comment on this proposed clarification of the commentary to § 1026.52(b)(1)(i), including comment on whether any additional clarification may be needed. The Bureau also solicits comment on whether there are other specific clarifications that should be made to the provisions of the commentary providing guidance on how to perform a cost analysis under the rule.

52(b)(1)(ii) Safe Harbors

Overview of Proposed Amendments to Late Fee Safe Harbor Provisions

As noted in part I, the Bureau is concerned that (1) the safe harbor dollar amounts for late fees currently set forth in § 1026.52(b)(1)(ii) are not reasonable and proportional to the omission or violation to which the fee relates; (2) the current higher safe harbor threshold for late fees for subsequent violations of the same type in the same billing cycle or in one of the next six billing cycles is higher than is justified based on consumer conduct and to deter future violations and, indeed, a late fee that is too high could interfere with the consumers' ability to make future payments on the account; and (3) additional restrictions on late fees may be needed to ensure that late fees are reasonable and proportional. To address these concerns, the Bureau proposes to amend § 1026.52(b)(1)(ii) to lower the safe harbor amounts for late fees—currently set at $30 and $41 for a first and subsequent violation, respectively—to a late fee amount of $8 for the first and subsequent violations.
75

The Bureau's proposal would eliminate the higher safe harbor amount for subsequent late payment violations. As discussed below, based on analysis of available evidence and consideration of the relevant factors, the Bureau preliminarily determines that a late fee amount of $8 for the first and subsequent violations is presumed to be reasonable and proportional to the late payment violation to which the fee relates. In addition, for the reasons discussed in the section-by-section analysis of § 1026.52(b)(1)(ii)(D), the Bureau proposes to no longer apply to the late fee safe harbor amount current § 1026.52(b)(1)(ii)(D) that provides for annual inflation adjustments for the safe harbor dollar amounts.

75
As discussed in the section-by-section analysis of § 1026.52(b)(1)(ii)(C) below, the Bureau is not proposing to lower or otherwise change the safe harbor amount of a late fee that card issuers may impose when a charge card account becomes seriously delinquent.

The Bureau is not proposing at this time to similarly amend the safe harbor provisions in § 1026.52(b)(1)(ii) as they apply to other types of penalty fees, including returned-payment fees, fees for over-the-limit transactions, and declined access check fees. The Bureau is limiting the proposed amendments to late fees because the $14 billion in late fees charged in 2019 account for nearly 99 percent of all penalty fees imposed by major card issuers in the Y-14+

data
76

and, as such, pose far greater consumer protection concerns than do other penalty fees totaling less than $0.2 billion that year. Moreover, as a result of their prevalence, late fees have produced a substantial amount of data and other evidence that prompts and forms the basis of this proposal. Further, the Bureau has determined that proposing to lower the safe harbor amounts only for late fees is consistent with its authority under TILA section 149(d), which authorizes the Bureau, in issuing rules to implement the CARD Act's penalty fee provisions, to establish “different standards for different types of fees and charges, as appropriate.”
77

Nonetheless, as discussed below, the Bureau solicits comment on several issues related to penalty fees generally, including whether the safe harbor dollar amount in § 1026.52(b)(1)(ii)(A) should be similarly lowered for all penalty fees, and the higher safe harbor amount provision in § 1026.52(b)(1)(ii)(B) should be similarly eliminated for all penalty fees.

76
Late Fee Report, at 13.

77
15 U.S.C. 1665d(c).

The Board's Implementing Rule and Findings

In the 2010 Final Rule implementing TILA section 149, the Board established penalty fee safe harbor amounts of $25 for the first violation and $35 for any additional violations of the same type that occur during the same billing cycle or in one of the next six billing cycles. In doing so, the Board indicated that it “believes that these amounts are generally consistent with the statutory factors of cost, deterrence, and consumer conduct.”
78

In interpreting TILA section 149(a), the Board found that “it appears that Congress intended the words `reasonable and proportional' . . . 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.”
79

78
75 FR 37526, 37527 (June 29, 2010).

79

Id.
at 37532.

The Board's Consideration of Costs.
The cost-related data on which the Board relied was limited. Although the Board received more than 22,000 comments on its proposed rule, the Board noted that “relatively few provided any data” supporting a particular safe harbor amount.
80

While one commenter suggested the average cost of collecting late payments for credit card accounts issued by the largest issuers was $28, the Board noted the comment “significantly overstates the fee amounts necessary to cover the costs incurred by large issuers as a result of violations,” as it included costs not incurred as a result of violations, such as the cost of funding balances that would have been charged off regardless of fees.
81

80

Id.
at 37541.

81

Id.

Given these limitations, instead of relying on data related to the costs of collecting late payments in setting the safe harbor dollar amounts in its Regulation Z, § 226.52(b)(1)(ii)(A) and (B), the Board primarily considered the following information in setting the safe harbor dollar amounts: (1) the dollar amounts of late fees currently charged by credit card issuers; (2) the dollar amounts of late fees charged with respect to deposit accounts and consumer credit accounts other than credit cards; (3) State and local laws regulating late fees; (4) the safe harbor threshold for credit card default charges established by the United Kingdom's Office of Fair Trading (OFT) in 2006; (5) data related to deterrence that provides evidence on whether the experience of incurring a late payment fee makes consumers less likely to pay late for a period of time; and (6) data submitted by a large credit card issuer that indicated that consumers who pay late multiple times over a six-month period generally present a significantly greater credit risk to issuers than consumers who pay late a single time.

In establishing the safe harbor amounts, the Board concluded that “it is not possible based on the available information to set safe harbor amounts that precisely reflect the costs incurred by a widely diverse group of card issuers and that deter the optimal number of consumers from future violations,”
82

and stated its belief that the safe harbor amounts established in the rule were “generally sufficient to cover issuers' costs and to deter future violations.”
83

The Board further concluded that, based on the comments received in response to its proposal, the $25 safe harbor in § 226.52(b)(1)(ii)(A) for the first violation was sufficient to cover the costs incurred by most small issuers as a result of violations.
84

82

Id.
at 37544.

83

Id.

84

Id.
at 37542.

With respect to late payments, the Board stated its belief that large issuers generally incur fewer collection and other costs on accounts that experience a single late payment and then pay on time for the next six billing cycles than on accounts that experience multiple late payments during that period.
85

The Board further reasoned that even if $25 is not sufficient to offset all of the costs incurred by some large issuers as a result of a single late payment, those issuers will be able to recoup any unrecovered costs through upfront APRs and other pricing strategies.
86

85

Id.

86

Id.

With respect to the higher safe harbor amount in § 226.52(b)(1)(ii)(B), the Board explained its belief that when an account experiences additional violations that occur during the same billing cycle or in one of the six billing cycles following the initial violation, $35 would generally be sufficient to cover any increase in the costs incurred by the card issuer.
87

As discussed in more detail below, the Board also explained its belief that the $35 safe harbor amount would have a reasonable deterrent effect on additional violations
88

and was consistent with the consumer's conduct in engaging in multiple violations of the same type within six billing cycles.
89

87

Id.

88

Id.

89

Id.
at 37543.

The Board's Consideration of Deterrence.
The Board did not expressly discuss how it took deterrence into account in setting the initial $25 penalty fee amount; instead, the Board limited its discussion of that factor to the role it played in the Board's decision to set a higher safe harbor amount for any additional violation of the same type that occurred during the same billing cycle or in one of the next six billing cycles. While the Board noted that it considered deterrence in setting a higher amount generally, the Board did not have specific data justifying the $35 amount. The Board noted that one commenter on the proposal submitted the results of applying two deterrence modeling methods to data gathered from all leading credit card issuers in the U.S. According to the commenter, these models estimated that fees of $28 or less have relatively little deterrent effect on late payments but that higher fees are a statistically significant contributor to sustaining lower levels of delinquent behavior. While the Board questioned the assumptions used to arrive at the results in these modeling methods, the Board did accept that increases in the amount of penalty fees can affect the frequency of violations.
90

90

Id.
at 37541.

With respect to the higher $35 fee for repeat penalty fees that occur during the same billing cycle or in one of the next

six billing cycles, the Board explained its belief that a higher penalty fee amount is consistent with the deterrence factor set forth in 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 that occur during the same billing cycle or in one of the next six billing cycles.
91

The Board also explained its belief that 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 explained its belief “that imposition of a higher fee when multiple violations occur will have a significant deterrent effect on future violations.”
92

The Board specifically pointed to one study of four million credit card statements, which found that a consumer who incurs a late payment fee is 40 percent less likely to incur a late payment fee during the next month compared to a consumer who was not late, although this effect depreciates approximately 10 percent each month.
93

Although this study indicated that the imposition of a penalty fee may cease to have a deterrent effect on future violations after four months, the Board concluded that imposing an increased fee for additional violations of the same type that occur during the same billing cycle or in one of the next six billing cycles is consistent with the intent of the CARD Act. The Board pointed to this study as evidence indicating that, as a general matter, penalty fees may deter future violations of the account terms.
94

91

Id.
at 37533.

92

Id.

93
Sumit Agarwal
et al., Learning in the Credit Card Market
(April 24, 2013),
https://ssrn.com/abstract=1091623
or
http://dx.doi.org/10.2139/ssrn.1091623.
The Board reviewed a 2008 version of the paper.

94
75 FR 37526, 37533 n.24 (June 29, 2010).

The Board's Consideration of Consumer Conduct.
The Board also took consumer conduct into account in adopting the higher $35 fee for repeat penalty fees that occur during the same billing cycle or in one of the next six billing cycles.
95

The Board explained its belief 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.”
96

The Board noted that, based on data submitted by a large credit card issuer, consumers who pay late multiple times over a six-month period generally present a significantly greater credit risk than consumers who pay late a single time. The Board acknowledged that this data also indicates that consumers who pay late two or more times over longer periods (such as 12 or 24 months) are significantly riskier than consumers who pay late a single time. However, the Board did not explain how adding additional costs to these consumers would make them less of a credit risk or consider whether adding costs to consumers who are unable to pay could increase that risk.

95
The Board did not refer to consumer conduct in setting the $25 safe harbor amount.
See id.
at 37527.

96

Id.

The Board stated its belief that, when evaluating the conduct of consumers who have violated the terms or other requirements of an account, it is consistent with other provisions of the CARD Act to distinguish between those who repeat that conduct during the same billing cycle or in one of the next six billing cycles and those who do not.
97

Specifically, the Board noted that (1) TILA section 171(b)(4) provides that, if the APR that applies to a consumer's existing balance is increased because the account is more than 60 days delinquent, the increase must be terminated if the consumer makes the next six payments on time; and (2) TILA section 148 provides that, when an APR is increased based on the credit risk of the consumer or other factors, the card issuer must review the account at least once every six months to assess whether those factors have changed (including whether the consumer's credit risk has declined).
98

The Board did not, however, explain why this is relevant to the question of penalty fees.

97

Id.
at 37534.

98

Id.

The Bureau's Proposed Amendments to the Late Fee Safe Harbor Amounts

The safe harbor provisions in § 1026.52(b)(1)(ii) currently provide that a card issuer may impose a fee for violating the terms or other requirements of an account if the dollar amount of the fee does not exceed $30, as set forth in § 1026.52(b)(1)(ii)(A), or $41 for a violation of the same type that occurs during the same billing cycle or one of the next six billing cycles, as set forth in § 1026.52(b)(1)(ii)(B). In addition, § 1026.52(b)(1)(ii)(C) provides a special safe harbor that applies when a charge card account becomes seriously delinquent. Under that provision, when a card issuer has not received the required payment for two or more consecutive billing cycles on a charge card account that requires payment of outstanding balances in full at the end of each billing cycle, the issuer may impose a late payment fee that does not exceed 3 percent of the delinquent balance.

The Bureau proposes to amend § 1026.52(b)(1)(ii) to provide that a card issuer may impose a fee for a late payment on an account under the safe harbor if the dollar amount of the fee does not exceed $8.
99

The Bureau is further proposing to amend § 1026.52(b)(1)(ii) to provide that other than a fee for a late payment, a card issuer may impose a fee for violating the terms or other requirements of an account if the dollar amount of the fee does not exceed the safe harbor amounts in § 1026.52(b)(1)(ii)(A), or (B), as applicable. As such, the proposed $8 safe harbor amount for late fees would be a single fee amount; it would apply regardless of whether the fee is imposed for a first or subsequent violation. However, for all other penalty fees, card issuers could still charge amounts not exceeding the amounts in § 1026.52(b)(1)(ii)(A) and (B).

99
As discussed in more detail below, there is one proposed exception related to charge card accounts as described in current § 1026.52(b)(1)(ii)(C).

In addition, under the proposal, charge card issuers could still impose a fee pursuant to § 1026.52(b)(1)(ii)(C) when a charge card account becomes seriously delinquent as defined in the rule. The Bureau recognizes that the fee described in § 1026.52(b)(1)(ii)(C) is a form of late fee but, for the reasons discussed below, is not proposing to lower the safe harbor amount under this special provision for charge cards. However, as discussed in the section-by-section analysis of § 1026.52(b)(1)(ii)(C) below, the Bureau proposes to revise this provision for clarity to provide that a card issuer may impose a fee not exceeding 3 percent of the delinquent balance on a charge card account that requires payment of outstanding balances in full at the end of each billing cycle if the card issuer has not received the required payment for two or more consecutive billing cycles, notwithstanding the safe harbor late fee amount in proposed § 1026.52(b)(1)(ii). The Bureau emphasizes that the proposed $8 safe harbor late fee amount in proposed § 1026.52(b)(1)(ii) would still apply to fees imposed on a charge card account for late payments not meeting the description in § 1026.52(b)(1)(ii)(C).

After analyzing available evidence and considering the applicable statutory factors, the Bureau preliminarily determines that a late fee amount of $8 for the first and subsequent late payments is presumed to be reasonable

and proportional to the late payment violation to which the fee relates.

The Bureau's Analysis of Data and Consideration of Statutory Factors

Costs.
The Bureau has analyzed the Y-14 data and other information in considering the factor of the costs of a late payment violation to the card issuer. Based on that analysis, the Bureau has preliminarily determined that a late fee safe harbor amount of $8 for the first and subsequent violations would cover most issuers' costs from late payments while providing card issuers with compliance certainty and administrative simplicity and, therefore, reduce their compliance costs and burden. The Bureau requests comments on this preliminary determination, data used, or any alternatives to either.

In considering the costs of late payments to card issuers, the Bureau has taken into account only those (estimated) costs that card issuers are permitted to take into account for purposes of determining the amount of a late fee under the cost analysis provisions in § 1026.52(b)(1)(i) and related commentary, including the proposed clarification to comment 52(b)(1)(i)-2.i. As provided in the commentary to § 1026.52(b)(1)(i), such costs for late fees (1) 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); and (2) exclude losses and associated costs (including the cost of holding reserves against potential losses and the cost of funding delinquent accounts). As discussed in the section-by-section analysis of § 1026.52(b)(1)(i), the Bureau proposes to clarify that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. The Bureau preliminarily finds that considering pre-charge-off collection costs as the “costs” of a late payment is consistent with Congress' intent to: (1) allow card issuers generally to use late fees to pass on to consumers the costs issuers incur to collect late payments or missed payments; (2) ensure that those costs are spread among consumers and that no individual consumer bears an unreasonable or disproportionate share; and (3) prevent card issuers from recovering losses and associated costs through late fees rather than through upfront rates.

As discussed in part III.C, the reported collection costs in the Y-14 data (1) include costs incurred to collect problem credits that includes the total collection cost of delinquent, recovery, and bankrupt accounts, and (2) do not include losses and associated costs. The Bureau concludes that the collection costs data in the Y-14 are consistent with the costs included for the cost analysis provisions in § 1026.52(b)(1)(i) except that the collection costs in the Y-14 data include post-charge-off collection costs. As discussed in part III.C, the Bureau has estimated that approximately 75 percent of collection costs incurred by card issuers are incurred pre-charge-off. Thus, as discussed in part III.C, the Bureau's estimate of pre-charge-off collection costs is based on only 75 percent of the collection costs in the Y-14 data for purposes of its analysis related to the proposed changes to the safe harbor thresholds in § 1026.52(b)(1)(ii), as discussed in more detail below.

In developing the proposed late fee safe harbor amount, the Bureau carefully considered several sources of data and other information to determine the amount that would cover a reasonable and proportional amount of card issuers' pre-charge-off collection costs. As discussed in part III.C, and described in detail below, the Bureau reviewed and analyzed major issuers' late fee income, collection costs, late fee amounts, and required payment information contained in the Y-14 data, a source that was not available when the Board set the initial safe harbor amounts in 2010. That analysis indicates that late fees generally generate revenue that is multiple times higher than issuers' collection costs. The Bureau also reviewed issuers' stated late fee amounts in card agreements that issuers are required by the CARD Act to submit quarterly to the Bureau. Based on this data, the Bureau expects that even if late fees were reduced to one-fifth of current levels (implying late fees of $8 or less), most issuers would recover pre-charge-off collection costs.

To estimate the fee income to collection cost ratio, the Bureau used the late fee income data and 75 percent of the collection costs contained in the Y-14 data (referred to below as “estimated pre-charge-off collection costs”).
100

Using the Y-14 data, the Bureau analyzed monthly late fee income and estimated pre-charge-off collection costs for the consumer segments of major issuers' credit card portfolios, namely the consumer general purpose and private label portfolios. For the 16 consumer portfolios with continuous cost data for the first three quarters of 2022 (adding up to about 73 percent of total consumer credit card balances at the end of September 2022), total late fee income in the first three quarters added up to $4.46 billion, while total collection costs added up to $1.19 billion with pre-charge-off collection costs estimated to be $896 million.

100
For additional information and data related to this late fee income to collection cost ratio,
see
Bureau of Consumer Fin. Prot.,
Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies,
(Jan. 2023) (Revenue-Cost Report),
https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-and-collection-costs-at-large-bank-holding-companies_2023-01.pdf.

In reviewing the monthly data, the Bureau observed that late payments exhibit seasonal patterns. The Bureau also considered that there may be a delay between when a late fee was assessed and when the issuer incurs substantial collection costs associated with the account. For these reasons, the Bureau compared each month's late fee income for a particular portfolio to the portfolio's average estimated pre-charge-off collection costs for that month, where that estimate was based on estimated pre-charge-off collection costs that occurred two through six months later.
101

The Bureau developed monthly estimates of this late fee income-to-cost ratio for each year from 2013 up to early 2022. The analysis showed that an average of this ratio across issuers and market segments, weighted by the number of accounts reported in the Y-14 data, has been fairly stable since early 2019 (and was higher before 2019). As shown in Figure 1 below, late fee income has always been higher than three times subsequent estimated pre-charge-off collection costs, and more than four times as high in all but five pandemic months (May 2020 and February-May 2021, coinciding with pandemic stimulus payments, when there was a reduction in late fee income without a corresponding decline in average collection costs in subsequent months). Since August 2021, late fee

income has exceeded the relevant estimated pre-charge-off costs more than fivefold, which resembles the period before the pandemic.

101
For example, if an issuer were to report late fee income of $15 million in January for a portfolio and total collection costs for that portfolio of $20 million in March through July, the Bureau estimated $15 million in pre-charge-off collection costs in March through July and calculated an average monthly collection cost of $3 million for purposes of this analysis—resulting in a ratio of late fee income of $15 million to collection cost of $3 million for this portfolio for the month of January. The Bureau found that its preliminary findings based on the weighted average of this ratio across issuers and market segments as discussed in the analysis below are robust to shifting, expanding, or shortening the time period of delay in collection costs as they relate to late fee income.

EP29MR23.067

Based on this analysis, the Bureau expects that the average issuer would recover pre-charge-off collection costs even if late fees were reduced to one-fifth of their current level. All but one issuer among those in the Y-14 data (representing the majority of balances in the credit card market) disclosed late fees “up to” $40 or $41 (the current maximum safe harbor amount) in their most recent card agreements submitted to the Bureau. Given the finding that, in the most recent data, late fee income is greater than five times estimated pre-charge-off costs, the Bureau expects that an $8 late fee would still recover the average issuer's pre-charge-off collection costs, as that fee represents one-fifth of the maximum late fee amount, which is necessarily greater than average fee income per late payment.

The Bureau also notes that average late fees are lower than the disclosed maximum late fees. As discussed in part II.D, in 2019, the average late fee charged by issuers in the Y-14+ data was $31.
102

Reasoning that the average late fees are lower than the current maximum safe harbor of $41 and yet still generate late fee income that is again more than five times the ensuing (estimated) pre-charge-off collection costs since August 2021, the Bureau preliminarily concludes that $8 is likely to recover the average issuer's pre-charge-off collection costs. Because the proposed safe harbor, if adopted, could be used by card issuers generally, and is not tailored to any particular type of issuers or consumers, the Bureau preliminarily finds that is appropriate to consider average issuers' pre-charge-off collection costs in determining the late fee safe harbor amount. The Bureau also preliminarily finds that establishing a generally applicable safe harbor will facilitate compliance by issuers and increase consistency and predictability for consumers.

102
Late Fee Report, at 6. To gain further insights into how the average late fee compares to the disclosed maximum late fee in the agreements, the Bureau analyzed a 40 percent random subsample of tradelines of Y-14 data from 2019 to observe the incidence of late fees and the fee amounts assessed. The Bureau observed that the average late fees have been lower than the amounts in the card agreements for several reasons, including (1) some late fees did not occur within six months of an earlier late fee and thus are set at the lower safe harbor amount; and (2) some late fees reflect the current limitation in § 1026.52(b)(2)(i)(A) and related commentary that prohibits late fees from exceeding the minimum payment amount that is due. The Bureau also observed that some late fees are imposed but later reversed and that some late fees are charged to accounts that never make another payment.

The Bureau acknowledges that not all issuers in the Y-14 data face the average pre-charge-off collection costs. By using estimates of pre-charge-off collection costs per paid incident using the Y-14 data from September 2021 to August 2022, the Bureau estimates that fewer than four of the 12 card issuers in the Y-14 data have estimated pre-charge-off collection costs that are significantly higher than one-fifth of their late fee income. For these issuers, the proposed $8 safe harbor amount may not have been enough to fully recover estimated pre-charge-off collection costs, such that the benefits of using the cost analysis provisions may outweigh the administrative simplicity of using the safe harbor. While the most recent data suggest that the proposed safe harbor amount would cover pre-charge-off collection costs for most issuers, the Bureau recognizes that some issuers may choose to determine the late fee amount using the cost analysis provisions in § 1026.52(b)(1)(i), rather than using the proposed $8 safe harbor amount, if $8 is insufficient to recover their pre-charge-off collection costs.
103

103
The Bureau estimates from the same data that a $5 safe harbor amount would drive half of the market represented in the Y-14 data to use the cost analysis provisions in § 1026.52(b)(1)(i) to determine the late fee amount and that a $4 safe harbor amount would do so for eight issuers holding around three-quarters of the represented issuers' outstanding balances.

The Bureau recognizes that the analysis above is based on data from the largest issuers, and may not be representative of smaller issuers, who do not report to the Y-14 collection. As discussed above, the Bureau did not receive specific cost data in response to its request in the ANPR for data on card issuers' pre-charge-off collection costs, including data on pre-charge-off collection costs incurred by smaller issuers. Although the Bureau does not have data equivalent to the Y-14 data for smaller issuers' pre-charge-off collection costs, it has no reason to expect that smaller issuers exhibit substantially higher pre-charge-off collection costs than larger issuers. On the other hand, the Bureau expects that the proposed $8 amount would have a proportionately smaller impact on smaller issuers' late fee income, due to smaller issuers' having lower late fee amounts. In 2020, the average late fee for issuers in the Y-14+ data was $31.
104

The Bureau collects card agreements from many more smaller issuers than issuers for which the

Bureau has financial data. Based on a review of those agreements from over 500 credit card issuers, each outside the top 20 by outstanding credit card loans and having more than 10,000 credit card accounts, the Bureau established that smaller issuers charged smaller late fees in 2020 than larger issuers, with a modal maximum disclosed late fee for smaller issuers of $25.
105

The Bureau solicits comment on this analysis and the potential impact on smaller issuers of the proposed $8 safe harbor amount, including whether smaller issuers can provide data or evidence related to the cost of collecting late payments. The Bureau also solicits comment on whether the pre-charge-off collection costs for smaller issuers differ from such costs for larger issuers, and if so, how the costs differ.

104
2021 Report, at 55.

105
Late Fee Report, at 14.

The Bureau notes that the analysis based on the Y-14 data discussed above does not take into account any potential changes in consumer behavior in response to the proposed change in the late fee safe harbor amount. In particular, the discussion does not take into account the possibility that reduced late fees will lead to more late payments. However, as discussed below, the Bureau's analysis of Y-14 data and other information suggests that the proposed $8 safe harbor amount for the first and subsequent late payments would still have a deterrent effect on late payments. The Bureau also expects that any increase in the frequency of late payments, as a result of the reduced late fee safe harbor amount, would increase both fee income and collection costs. Even if more consumers pay late because of the decreased amount, the increased number of late payments are unlikely to be more costly, on average, to administer and collect than the current number of late payments. Therefore, the Bureau expects that collection costs to card issuers would not increase by more than fee income. The Bureau seeks comment specifically as to this analysis, including data or evidence as to whether reduced fees would affect the frequency of late payments or collection costs.

The Bureau does not expect the proposal to cap late fees at 25 percent of the required minimum periodic payment due, discussed in the section-by-section analysis of § 1026.52(b)(2)(i), to materially change the late fee income issuers can collect overall when the issuer is using the proposed $8 safe harbor amount. The cap would require issuers to impose late fees lower than the proposed $8 safe harbor amount only when the minimum periodic payment due is $32 or less. Nonetheless, as discussed in more detail in the section-by-section analysis of § 1026.52(b)(2)(i), the instances where 25 percent of the minimum payment may be less than the proposed $8 safe harbor do not appear to be frequent. The Y-14 data from October 2021 to September 2022 shows that for those months in which an account was late, only 7.7 percent of those accounts had a minimum payment of less than $32.
106

106
For more information on the distribution of minimum payments for late accounts in the Y-14 data,
see
Figure 3 and related discussion in the section-by-section analysis of § 1026.52(b)(2)(i). However, issuers could adjust how they determine minimum payments such that the 25 percent limitation on late fees would only affect those accounts with balances of less than $32, whose minimum payment will always be less than $32 as the minimum payment can never exceed the statement balance. Based on the Y-14 data between October 2021 and September 2022, for those months in which an account was late, only 2.1 percent of accounts had balances of less than $32.

The Bureau notes that the Y-14 data discussed above on which the Bureau relied in considering card issuers' pre-charge-off collection costs are far richer and more extensive than the data on which the Board relied when it established the penalty fee safe harbor amounts in its 2010 Final Rule. This is due in large part to the Bureau's access to nearly a decade's worth of Y-14 data—a data source that did not exist when the Board was developing its rule. In contrast, as discussed above, the data and other information on which the Board relied was limited, as systematic reporting of card issuers' collection costs was not available and relatively few commenters on the Board's proposal provided any data on collection costs in response to the Board's request for such data, with some providing data that the Board found unreliable.

Similarly, the Bureau did not receive specific cost data in response to its request in the ANPR for data on card issuers' pre-charge-off collection costs, including costs associated with notifying (other than through periodic statements) cardholders of delinquencies and resolving delinquencies (including the establishment of workout and temporary hardship arrangements) prior to charge-off, including payments to third-party debt collectors. In general, card issuers and their trade groups provided information on card issuers' late fee pricing structures, individually or industry-wide, and further provided high-level explanations for those pricing structures, including recovering collection costs, risk management, and the effects of the safe harbor provisions themselves. In a joint comment, for example, several trade groups asserted that the similarity of late fees across issuers is a predictable response to the benefits of legal certainty granted under the law. These trade groups further asserted that the safe harbor allows issuers to recover some (though not all) of the costs associated with late payments and encourages on‐time payments, while also providing issuers with compliance certainty. These trade groups, however, did not provide data on issuers' pre-charge-off collection costs. Neither did any other commenters.

One credit union trade group provided estimates of the hourly labor costs of collecting late payments, based on the average salary of a collections agent that the commenter obtained from a publicly available source. This credit union trade group commenter did not provide estimates of what portions of those hourly labor costs are pre-charge-off and post-charge-off, nor did it provide the number of hours of labor that would be needed per late payment. As a result, it was not possible to determine the late fee cost per account based on the data provided.

The Bureau also notes the current safe harbor amounts of $30 and $41 are significantly higher than the pre-charge-off collection costs as shown in the Bureau's analysis. Moreover, as discussed in part II.E, most large issuers have taken advantage of the increased safe harbors as adjusted for inflation by increasing their fee amounts.
107

Eighteen of the top 20 issuers by outstanding balances contracted for a maximum late fee at or within 10 percent of the higher safe harbor amount in 2020.
108

Although card issuers generally do not impose late fees at the highest contracted-for amount, issuers have steadily been charging consumers more in credit card late fees each year,
109

with the average late fee imposed increasing in amount from $23 at the end of 2010 to $31 in 2019.
110

107
Late Fee Report, at 14.

108

Id.

109
As noted above, the one exception to this trend is a brief period during the pandemic when there was a drop in card issuers' late fee income corresponding with government stimulus payments.

110
Late Fee Report, at 6.
See also
2013 Report, at 23.

The Bureau is thus concerned that credit card late fee amounts imposed pursuant to the current safe harbor amounts—which, as adjusted for inflation, were established in 2010 based on limited data available at the time—far exceed card issuers' actual pre-charge-off collection costs resulting from late payment violations and thus

are not reasonable and proportional. In considering the costs of such violations to issuers, the Bureau has analyzed available data sources and other information, including Y-14 data extending back several years, as discussed above. The Bureau recognizes that the costs of collecting late payments will vary from issuer to issuer and that a late fee safe harbor amount of $8 may not cover all of those costs for all issuers. The Bureau notes, however, that TILA section 149(e) authorizes the Bureau to issue rules to provide, for any penalty fee or charge, a safe harbor amount that is presumed to be reasonable and proportional to the omission or violation to which the fee or charge relates.

The Bureau also considered cost as one of the factors in making that determination. The Act, however, does not require the Bureau to establish a late fee safe harbor amount that covers the costs for all issuers or the entire costs of the omission or violation in all instances. Moreover, the Bureau is concerned that setting a higher safe harbor amount for late fees in order to cover the pre-charge-off collection costs of all card issuers could result in an amount that exceeds the costs for most card issuers. As discussed in part II.E, the Bureau is concerned that card issuers may have a disincentive to charge a lower fee amount than the safe harbor amount, even if their average collection costs are less than the safe harbor amount, given the industry's reliance on late fees as a source of revenue and that many consumers may not shop for credit cards based on the amount of the late fee.

In addition, because the Bureau anticipates that most card issuers would use the proposed $8 late fee safe harbor threshold amount, the proposed safe harbor provisions in § 1026.52(b)(1)(ii) would continue to save costs for most card issuers, by continuing to save them the administrative burden and complexity of using the cost analysis provisions in § 1026.52(b)(1)(i) to determine the late fee amount. As discussed above, in considering the appropriate safe harbor amount for late fees, the Bureau is guided by the factors in TILA section 149(c), which provides that the Bureau can consider such other factors that the Bureau deems necessary or appropriate. The Bureau preliminarily finds that it is both necessary and appropriate, when considering the portion of card issuers' pre-charge-off costs that a late fee safe harbor amount would cover, to take into account the cost savings from compliance certainty and administrative simplicity accorded by a safe harbor. The Bureau also preliminarily finds that a late fee safe harbor amount of $8 for the first and subsequent late payments strikes the appropriate balance of these considerations. The Bureau seeks comment on all aspects of the analysis above, including data or other information to support why the $8 amount is or is not sufficient to cover card issuers' pre-charge-off costs. The Bureau also seeks specific comment on whether the data on pre-charge-off collection costs discussed above accurately reflect the costs that card issuers incur as the result of a late payment violation before charge-off, including data or other information indicating whether the Bureau's analysis over- or underestimates such costs.

The Bureau further notes that if the proposed $8 safe harbor amount is not sufficient to cover a particular card issuer's pre-charge-off costs in collecting late payments, the card issuer can charge a higher amount, if consistent with the cost analysis provisions in § 1026.52(b)(1)(i) and the requirements in § 1026.52(b)(2). Card issuers also may undertake efforts to reduce collection costs or use interest rates or other charges to recover some of the costs of collecting late payments. Building those costs into upfront rates would provide consumers greater transparency regarding the cost of using their credit card accounts.

For the foregoing reasons, the Bureau preliminarily concludes that a late fee of $8 for the first and subsequent violations is appropriate to cover pre-charge-off costs for card issuers on average while providing issuers compliance certainty and administrative simplicity.

Deterrence.
As noted above, in the 2010 Final Rule, the Board did not expressly discuss how it took deterrence into account in setting the $25 penalty fee amount; instead, the Board limited its discussion of that factor to the role it played in the Board's decision to set a higher safe harbor amount for any additional violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.

In developing this proposal, the Bureau analyzed available data to consider the extent to which lower late fees for both the first and subsequent late payments could potentially lessen deterrence. The Bureau recognizes that late fees are a cost to consumers of paying late, and a lower late fee amount for the first or subsequent late payments might cause more consumers to pay late. The Bureau also recognizes that it does not have direct evidence on what consumers would do in response to a fee reduction similar to those contained in the proposal, and market participants did not provide data on deterrence in response to the Bureau's ANPR. The Bureau notes, however, that the Y-14 data and other information that has become available since the Board issued its 2010 Final Rule support the proposed reduction.

As discussed in more detail below, the Bureau preliminarily finds that this available evidence suggests that the proposed $8 safe harbor amount would still have a deterrent effect on late payments. Even if the proposed $8 safe harbor would increase the frequency of late payments by some percentage, the Bureau has preliminarily determined that some cardholders may benefit from the proposed $8 safe harbor threshold amount in terms of a greater ability to repay revolving debt. The Bureau also notes that card issuers have methods other than higher late fees (1) to deter late payment behavior; and (2) to facilitate timely payments, for example, automatic payment and notification within a certain number of days (
e.g.,
five days) prior to the due date that the payment is coming due.

In making its preliminary determination that lowering late fee amounts to the proposed $8 safe harbor amount would still have a deterrent effect on late payments, as discussed in more detail below, the Bureau considered (1) a comparison of the proposed $8 late payment safe harbor amount to minimum payment amounts on accounts in the Y-14 data; and (2) available empirical evidence on the effects of credit card late fees on the prevalence of late payments.

The Bureau notes that whether a consumer is late in making a required payment depends in part on the consequences of paying late, including both penalty fees for late payments and other consequences such as increased interest charges and potential credit reporting consequences (as discussed in part II.G and in more detail below). From the point of view of a rational consumer faced with the decision of whether to make a minimum balance payment on time or to put off the payment until later, the decision represents a tradeoff weighing the value to the consumer of retaining the money for longer against the total costs of paying late. For the median minimum payment amount of approximately $100 for accounts that paid late in the Y-14 data from October 2021 through September 2022, the costs of paying late are quite steep both under current late payment fee amounts and under the

proposed $8 safe harbor amount.
111

For example, a consumer who effectively borrows a minimum payment amount of $100 until the next due date (that is, who makes a payment one month late) and pays a $8 late fee would be incurring an effective APR of 96 percent even ignoring other consequences. In addition, a consumer who effectively borrows a minimum payment amount of $40 for 10 days (past due) and pays a $8 late fee would be incurring an effective APR of 730 percent. As the median minimum due was $39 for all cardholders between October 2021 and September 2022 in the Y-14 data,
112

and around half of late payers made a payment in less than 10 days past the due date, the effective APR could be higher than 730 percent for some consumers. Thus, the Bureau has preliminarily determined that the proposed $8 late fee safe harbor amount is still a powerful deterrent to those consumers who pay attention to financial penalties.

111
For more information about the distribution of minimum payment amounts for late accounts in the Y-14 data,
see
Figure 3 and related discussion in the section-by-section analysis of § 1026.52(b)(2)(i).

112
For purposes of the calculations of the distribution of the minimum payment amounts in the Y-14 data, the calculations do not include account-months where a late fee was charged but the minimum due was reported to be $0.

The Bureau also has considered available empirical evidence on the effects of credit card late fees on the prevalence of late payments. In particular, the Bureau considered (1) a 2022 paper analyzing the effect of the reduction of late fee amounts that became effective as a result of the CARD Act in 2010; (2) analysis by the Bureau using Y-14 data of how the prevalence of late payments is affected by increases in late fee amounts during the six months following a violation; and (3) other empirical investigations into the correlates of late fee amounts and late fee incidence as discussed below.

In analyzing the available data, the Bureau notes a 2022 paper by Grodzicki
et al.,
containing an empirical analysis that concluded that a decrease in the late fee amount stemming from the Board's 2010 Final Rule raised the likelihood of a cardholder paying late.
113

While the Bureau recognizes that this paper suggests that consumers may engage in more late payments when they are less costly to consumers, for the reasons discussed below, the Bureau does not consider this robust evidence that the proposed $8 safe harbor late fee amount would not have a deterrent effect. The Bureau also notes the paper focused on the late fee variations resulting from the limitations on penalty fee amounts in the Board's 2010 Final Rule and thus could be confounded by other market changes coinciding with the rule going into effect. In particular, the late fee provisions in the Board's 2010 Final Rule were implemented in August 2010, as the U.S. economy was still dealing with the aftermath of the Great Recession,
114

and thus it was difficult to attribute consumer finance statistical trends to particular events. Moreover, the Board's 2010 Final Rule affected all consumers and all issuers, so there was no suitable control group of consumers that were charged the same amount of late fees before and after the implementation of the Board's 2010 Final Rule. Thus, the 2022 paper compared consumer behavior in the year before and the year after August 2010, and the causal attribution of an increase in late payments to a reduction of the late fee amount is hard to prove due to the general economic uncertainty around that time.

113
Daniel Grodzicki,
et al., Consumer Demand for Credit Card Services,
Journal of Financial Services Research (Apr. 25, 2022),
https://link.springer.com/article/10.1007/s10693-022-00381-4.

114
The Great Recession began in the fourth quarter of 2007 and ended in the second quarter of 2009.
See generally
Nat'l Bureau of Econ. Res.,
Business Cycle Dating Committee,
(Sept. 20, 2010),
http://www.nber.org/cycles/sept2010.html.

In developing this proposal, the Bureau analyzed Y-14 data from 2019, where the variation in late fees does not correspond to other big changes or differences that might plausibly affect late payment. As this proposal discusses, the current rule sets a higher late fee safe harbor amount for instances where another late payment occurred over the course of the preceding six billing cycles. The Bureau conducted statistical analysis to investigate whether the lower late fee amount in month seven leads to a distinct rise in late payments (Y-14 seventh-month analysis). Specifically, the Bureau estimated whether there are discontinuous jumps in late payments in the seventh month after the last late payment.
115

This analysis focused on these potential jumps to isolate the potential impact that the lower late fee that would apply in month seven might have on late payment rates, given that month seven is generally comparable to month six other than the lower late fee amount. In a random subsample from account-level data available in 2019 from the Y-14 data, this statistical analysis did not support that the lower late fees in month seven have an effect on the late payment rate, at conventional confidence levels. In addition, as a separate observation, the Bureau observed that for consumers that incurred a higher fee for a late payment during the six months after the initial late payment, the payment of that higher late fee did not lead to a discernibly lower chance of late payment for a third time in the future than for those consumers whose second late fee was lower because they paid late seven or more months after their first late payment.

115
The Bureau observed in the Y-14 data that, consistent with the safe harbor provisions of the current rule, consumers who paid late again within the six months after a late payment paid higher late fees during those six months than they paid after the initial late fee.

The Bureau acknowledges that the variation in late payments in the Y-14 seventh-month analysis discussed above is not the same as the changes that would result from the proposed rule. Nonetheless, this evidence suggests the prevalence of late payments is not highly sensitive to the level of late fees at the current order of magnitude.

An advantage of the Y-14 seventh-month analysis is that it avoids confounding factors that often are found in other studies of late fees, including the 2022 paper by Grodzicki
et al.,
discussed above. Studies that compare behaviors of consumers facing higher or lower fees (if late) with consumers in a comparison group are often fraught with multiple confounding factors that may also vary across time periods, issuers, products, or consumer behavior in each group.

The preliminary finding from the Y-14 seventh-month analysis described above is still contingent upon the fact that some consumers understand that their issuers charge lower late fees starting the seventh month after an initial violation. The Bureau recognizes that the higher late fees for subsequent late payments within the next six billing cycles might be more of a deterrent if consumers understand them better in 2022 than they did in 2019, but the Bureau has no evidence to indicate that is the case. However, this analysis is not dependent on all issuers charging the lower late fee safe harbor amount more than six months after a late payment nor the higher late fee safe harbor amount within the six billing cycles. As long as some issuers made use of the higher safe harbor, and the analysis described above shows they did, the Bureau should still have been able to detect an increase in the deterrent effect of their fee structure.

The Bureau also notes that because the Y-14 seventh-month analysis discussed above focused on a potential discrete jump in late payments more than six months after a preceding late payment, it also allowed for late payments to trend down as more time passed after a late payment. As described above, the Bureau did not see

the lower late fee amount that could be charged in month seven change this downward trend.

The Bureau also has preliminarily determined that other publicly available studies on late fees suggest that the proposed $8 safe harbor amount would still have a deterrent effect on late payments. Empirical investigations into the correlates of late fee amounts
116

and late fee incidence
117

noted that late fee payment can often be avoided by small and relatively costless changes in behavior. This suggests that the lower proposed $8 late fee safe harbor amount would still be higher than the costs of making a timely payment. The Bureau has preliminarily determined that the triggers that make cardholders avoid the current prevailing late fees also would make cardholders avoid a $8 late fee.
118

116
Nadia Massoud,
et al., The Cost of Being Late? The Case of Credit Card Penalty Fees,
7 Journal of Financial Stability, at 49-59 (2011).

117
Sumit Agarwal,
et al., The Age of Reason: Financial Decisions Over the Life Cycle and Implications for Regulation,
2 Brookings Papers on Economic Activity, at 51-117 (2009).

118
The Bureau notes that several industry commenters on the ANPR discussed a survey conducted by Argus Advisory, a TransUnion Company, in 2010. The commenters indicated that this survey demonstrates that there is a threshold which late fees must reach in order to encourage cardholders to pay on time. The commenters indicated that this survey shows that to deter a majority of cardholders from making a late payment, a fee of $40 to $46 would be required. The Bureau acknowledges that an order of magnitude higher fee amounts is likely to deter more consumers from paying late but finds that questions to consumers on hypothetical late payment amounts are less informative about the effects of late payment fees in practice. The Board also discussed this survey when it adopted the 2010 Final Rule and did not believe that it would be appropriate to give significant weight to the results of the survey. The Board noted: “Although surveys of this type are sometimes used to gauge the prices consumers may be willing to pay for retail products, the Board understands that their accuracy is limited even in that context. Furthermore, the Board is not aware of this type of survey being used to measure the deterrent effect of fees. Accordingly, the Board does not believe that it would be appropriate to give significant weight to the results of this survey.” 75 FR 37526, 37541 n. 43 (June 29, 2010).

Several industry commenters also argued that late fees are often used in other industries, and similar to the card market, higher fees are more effective at encouraging compliance with due dates. The commenters pointed to studies in the video rental market that showed that payment of a late fee decreases the likelihood of a late return the next month by nearly 9 percent, and the deterrent effect of late fees increases with the size of the penalty. Haselhuhn
et al., The Impact of Personal Experience on Behavior: Evidence from Video-Rental Fines,
Management Science, vol. 58, No. 1 (2012). These commenters also pointed to another study on the video rental market that found that (1) paying a late fee reduces the likelihood that the next return will be late by 19 percent; (2) these effects decrease the farther out from the initial payment the customer gets. Fishman and Pope,
Punishment-Induced Deterrence: Evidence from the Video-Rental Market,
Univ. of Cal., Berkeley, Dept. of Econ. (2006). The Bureau recognizes that the results of these studies are in line with the broader literature (
see also
supra note 93) indicating that consumers learn by trial and error of personal experience, but the Bureau finds that these studies are less useful to extrapolate how many more cardholders would make a late payment on U.S. credit cards if the late fee safe harbor amount were lowered.

As discussed above, in support of applying higher late fee safe harbor amounts for the following six billing cycles after a late payment, the Board in adopting its 2010 Final Rule pointed to a 2008 study by Agarwal
et al.,
of four million credit card statements, which found that a consumer who incurs a late payment fee is 40 percent less likely to incur a late payment fee during the next month, although this effect depreciates approximately 10 percent each month.
119

119

See
Agarwal
et al.,
supra note 93.

The Bureau has consulted the last available revision of the cited working paper by Agarwal
et al.,
from 2013, and has preliminarily determined that the study is of limited relevance as to whether the late fee amount impacts late payment incidence, for two reasons. First, the study considers the months following any late fee and compares them to months with no recent late payment. That comparison is not the same as comparing to months in which a payment was late, but a lower late fee (or even a $0 late fee) was charged. Second, even if the study had compared to months where a payment was missed but no late fee was charged, that comparison still would not be relevant to the proposal in that the proposal would reduce the safe harbor amount to $8, not completely eliminate the late fee.

The Bureau notes that the Y-14 seventh-month analysis discussed above shows that in the surrounding months reoffending rates trend down with each month after the last late payment. The Bureau's Y-14 seventh-month analysis, however, does not show a jump in late payment rates in month seven after the last late fee, which suggests that the higher late fee amount during the prior six months is not contributing to this downward trend.

The Bureau also notes that the 2013 study by Agarwal
et al.,
discussed above did not separate the effects of the late fee itself from other possible consequences of a late payment, such as additional finance charges, a lost grace period, penalty rates, and reporting of the late payment to a credit bureau which could affect the consumer's credit score. Given these other consequences of a late payment as discussed in more detail below and in part II.G, it is not clear that the proposal's lower late fee safe harbor amount would meaningfully affect the decreased chance that consumers will pay late again after an initial late payment in ways similar to those established in this 2013 study.

As discussed above, in adopting the safe harbor amounts in its 2010 Final Rule, the Board also considered the limitations that the United Kingdom's OFT placed on credit card default charges in 2006. The Bureau notes that it is not aware of evidence suggesting that the £12 ($21 on the day of the rule, $13.40 in November 2022) limit the OFT imposed on default charges (including late fees) in 2006 meaningfully increased late payments in the United Kingdom (U.K.). The OFT ruled on April 5, 2006, that it would presume default charges higher than £12 unfair and challenge the company unless exceptional business factors drove the decision for the company to charge higher fees. As fees were routinely as high as £25 ($43.75 on the day of the rule) until that spring, this episode is the closest to what the Bureau would foresee as the outcome to its proposal: a salient reduction in late fees impacting the entire marketplace at once, letting both issuers and cardholders learn and adapt to the lower later fees. The Bureau solicits comment from the public for any relevant information on the causal effects of this U.K. fee reform on missed or late payments and longer delinquencies, especially ones leading to more costly collections than before the reform.

For the re

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2023-02393. Public record. Not legal advice.