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Oct 16, 2009
Categories: Consumer Lending

Reg Z Proposal: Subprime Fee Credit Cards; See You in Charleston

Posted by Steve Van Beek

The Credit CARD Act included a restriction on charging subprime fees on a credit card account during the first year the card is opened.  The Federal Reserve has proposed to implement this restriction in Section 226.52 of Regulation Z.  The Fed provides a description of these subprime cards on page 3 of the above PDF (page 159 of the proposed rule).

The limitations in Section 226.52 apply to fees assessed during the first year a credit card account is opened.  If a card issuer charges any fees to a credit card account during the first year an account is opened:
"(i) The card issuer must not charge to the account during that period [the first year] fees that in
total constitute more than 25 percent of the credit limit in effect when the account is opened; and

(ii) The card issuer must not require the consumer to pay any fees in excess of the total amount permitted by paragraph (a)(1)(i) of this section with respect to the account during that period [the first year]." 
The limitations in Section 226.52 apply throughout the first year the credit card is opened rather than only at account opening.  Pages 11-12 of the cut-out PDF contains a detailed example of Section 226.52's application.  

Comment 52(a)-3 clarifies that the credit limit to be used in the 25% calculation is the credit limit at account opening even if the credit limit is raised during the first year.  This restriction makes sense.  If a card issuer could raise the credit limit and use the new, increased credit limit to calculate the 25% ratio - the consumer would not receive the benefits of the increased credit limit because the card issuer would then be allowed to charge additional fees on the account.

Which fees does Section 226.52 apply to?  Comment 52(a)(2)-1 lists which fees are limited by Section 226.52 (page 13-14).  Covered fees include:
  • Fees the consumer is required to pay for issuance or availability of credit (including an activity or inactivity fee);
  • Any fee a consumer must pay to receive a particular credit limit; 
  • Fees for insurance or debt cancellation coverage if required for the account; and 
  • Fees the consumer is required to pay for transactions on the account (such as cash advance fees, balance transfer fees, foreign transaction fees, and fees to use the account for purchases). 
Fees for expedited payments, reproduction of periodic statements, or fees to reissue a lost or stolen card are not covered fees for Section 226.52.  Additionally, late payment, over-the-limit, or returned-payment fees are not subject to this restriction because they are fees related to the member's behavior rather than simply imposed by the credit union as a condition of the credit.  

The credit union will be required to refund or waive any fees that exceed the 25% threshold during the first year.  And, the credit union will not be able to collect these fees in any other manner.  See page 13 - Comment 52(a)(1)(ii)-1 for an example.

If your credit union offers credit card accounts with low credit limits, be sure to analyze whether these new restrictions will impact your cards.  Remember, the restrictions apply to fees assessed throughout the first year an account is opened. 

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Have a great weekend everyone!  If you are heading down to Charleston next week for Compliance Seminar, have a safe trip.  Anthony and I will see you down there.

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