CUNA Comment Letter
Proposed Rule on Implementation of the CARD Act
April 14, 2010
Ms. Jennifer J. Johnson
Board of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
|RE:||Docket No. R-1384 Proposed Rule on Implementation of the CARD Act|
Dear Ms. Johnson:
The Credit Union National Association (CUNA) appreciates the opportunity to submit comments to the Federal Reserve Board (Board) in response to the proposed rule that would implement provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) that will be effective as of August 22, 2010. These include provisions that are intended to protect credit card users from unreasonable penalty fees and that require card issuers to reconsider interest rate increases every six months after the increased rate becomes effective. By way of background, CUNA is the largest credit union advocacy organization in this country, representing approximately 90% of our nations 7,900 state and federal credit unions, which serve 93 million members.
Summary of CUNAs Comments
- For determining the amount of the penalty fee, the issuer may choose one of the following three alternatives: 1) fees based on costs; 2) fees based on deterrence; and 3) a safe harbor fee to be determined at a later time by the Board. Credit unions will most likely only be able to use the safe harbor approach, since the other two alternatives are overly cumbersome for smaller financial institutions.
- The Board will determine the safe harbor fees at a later time. We urge the Board to select a fee that is at the upper range of fees charged by credit unions, since credit union fees are reasonable and have always compared favorable to banks and thrifts. We also urge the Board to allow credit unions and others to comment on these specific safe harbor fees before they are finalized.
- CUNA is concerned with the proposed provisions that would prohibit the imposition of multiple penalty fees because the Board deems the event to be a single transaction. We disagree that a late payment fee and a returned payment fee is always based on a single event or transaction, as indicated in the proposed official staff commentary.
- CUNA supports the provisions that would prohibit fees for transactions the issuer declines to authorize, inactivity fees, and fees associated with the termination of an account.
- The proposed rules would require card issuers to review an increase in the annual percentage rate (APR) no less frequently than once every six months until the time the rate is reduced to what it was before the increase. We believe the obligation to review these rate increases should end two years after the date of the initial increase since the burden on credit unions of reviewing these further after this two-year period far outweighs the benefits to the affected members.
- The proposed rules would require card issuers to have reasonable, written policies and procedures for conducting these six-month reviews. Credit unions would appreciate additional guidance in this area. If the Board develops such guidance, we believe credit unions and others should have the opportunity to comment before it is finalized.
- Under the proposal, if a rate is reduced as a result of a six-month review, the rate must be reduced within thirty days after the review. We suggest the Board increase this time period to 45 days to ensure all card issuers and their processors have sufficient time to comply with these new timing requirements.
The CARD Act requires that penalty fees and charges imposed on credit card accounts be reasonable and proportional to the violation. These include late payment fees, returned payment fees, and over-the-limit fees.
The proposal outlines the following three alternatives for determining the amount of the penalty fees:
- Fees Based on costs - the penalty fee for a specific violation must represent a reasonable proportion of the costs incurred by the issuer as a result of the specific type of violation.
- Fees Based on Deterrence - the card issuer may charge a fee in an amount that is reasonably necessary to deter the specific type of violation. For this alternative, the issuer must use an empirically derived and statistically sound model that reasonably estimates the effect of the fee on the frequency of violations.
- Safe Harbor Alternative - Under this third alternative, there would be a specific fee, as determined by the Board, for each violation that would be considered compliant with these provisions, otherwise known as a safe harbor fee. The proposal does not include these specific fees, but the Board has requested input on what the amount should be for these fees. Under this alternative, a penalty fee could exceed the specific safe harbor if it does not exceed five percent of the dollar amount associated with the violation, up to a specific amount, which the Board will also determine at a later time.
We are concerned with these proposed alternatives because we believe credit unions and other small financial institutions will have no choice but to use the safe harbor approach and will not be able to even consider either of the other two alternatives, while larger banking institutions will have the resources to be able to use any of these options. For example, to impose the fees based on the deterrence option requires the use of an empirically derived and statistically sound model that reasonably estimates the effect of the fee on the frequency of violations. Very few, if any, credit unions will be able to conduct or sponsor such a study. If this alternative is included in the final rule, we encourage the Board to provide significant flexibility so credit unions and others will clearly be able to use empirical models developed by others, to the extent these models can be applied to the specific credit union that wants to use them.
The fees based on costs alternative will also be unappealing for credit unions since the burden of calculating the required costs will usually outweigh the benefit of using this alternative, as opposed to the safe harbor approach. In addition, we believe that the range of the costs that may be considered in these calculations is too narrow. For example, the higher rates of losses and other related costs, such as the cost of holding reserves against these losses, would be excluded from the calculation under this proposal.
We disagree with this approach since there is a direct correlation between members who pay late or incur returned payment fees and the losses the credit union ultimately suffers as a result of the actions of these members. Losses for credit unions with regard to credit card accounts occur primarily because members do not pay their credit card bills, and these situations begin when members are late in paying their bills or make payments that have to be returned as a result of non-sufficient funds. For these reasons, we believe the higher rates of losses incurred by the credit unions, as well as the cost of holding reserves against these losses, should be considered in any calculation of the penalty fee.
However, as noted above, credit unions will for the most part choose to use the safe harbor alternative and will charge fees that do not exceed these amounts, as determined by the Board at a later time. CUNA recently provided the Board with information as to the fees currently charged by credit unions and another copy of the information is attached. We suggest that the safe harbor amounts be no less than the upper range of these fees. As member-owned, not-for-profit financial institutions, credit unions charge fees that are, by definition, reasonable and proportional to the violation since there is no profit component associated with these fees. Therefore, the specific safe harbors, as determined by the Board, should be high enough to accommodate the upper range of fees currently charged by credit unions.
To the extent the Board does not use credit union fee information as the model for the safe harbors, we believe these safe harbors should be high enough to encompass all the losses associated with the activities that result in these penalty fees. This would include, for example, processing and collection costs with regard to late and returned payments.
Once these determinations are made, we strongly urge the Board to allow credit unions and others the opportunity to comment on these specific fees before they are finalized. This is especially crucial for credit unions and other smaller financial institutions that will likely have no choice but to adopt these fees since they will not have the resources to utilize either of the other two alternatives.
Under the safe harbor alternative, a penalty fee could exceed the specific safe harbor amount in certain circumstances. Specifically, an issuer may impose a fee that does not exceed five percent of the dollar amount associated with the violation, up to a specific dollar amount that is also not currently specified. The Board has requested comments on this approach.
We certainly appreciate this flexibility in that it would allow fees to exceed the safe harbor in certain circumstances. However, we cannot offer specific comments on this approach until we know the specific amount of the safe harbor fees. In our view, if these safe harbor fees are at the upper range of the average for credit unions, as suggested above, then there may not be a need for this variance, at least for credit unions since they would have no reason to charge fees that exceed these suggested safe harbor amounts. In this situation, it would only be banks and thrifts that would have an interest in charging these higher fees, since their fees are currently much higher than the credit union averages.
We are also concerned with the proposed provisions that would prohibit the imposition of multiple penalty fees because they are deemed to be the result of a single event or transaction. For example, the proposed official staff commentary indicates that a late payment fee and a returned payment fee could not be charged due to a single payment.
However, we disagree that a late payment fee and a returned payment fee is always based on a single event or transaction. A consumer can make a payment late and not incur a returned payment fee. A consumer may also make a payment on time but the payment could then be returned due to non-sufficient funds in the consumers account. As a result, we believe making a late payment and not having funds in the account to cover it are often two independent events and, therefore, it would be appropriate to be able to charge a late fee if the payment is late and to charge a separate returned payment fee if it is returned due to non-sufficient funds.
The proposal would prohibit fees for transactions the issuer declines to authorize, primarily because there is no dollar amount associated with a declined transaction and because the costs are relatively low. In addition, the proposal would prohibit inactivity fees or fees associated with the closure or termination of an account because these are also not associated with dollar amounts. Credit unions generally do not charge these types of fees so we have no objection to these prohibitions.
Re-evaluation of Interest Rate Increases
Consistent with the CARD Act, the proposed rules would require card issuers to review an increase in the APR no less frequently than once every six months until the time the rate is reduced to what it was before the increase. In the proposal, the Board requested comments as to whether this periodic review obligation should end at a certain time period after the rate is initially increased, regardless of whether the rate is ever decreased.
We believe the obligation to review these rate increases should end two years after the date of the initial increase. In our view, the burden on credit unions of reviewing these increases after this two-year period far outweighs the benefits to the affected members. Credit unions would suffer tremendous administrative costs if they were required to monitor these rate increases indefinitely, or until the credit card account is closed.
We certainly understand that rate increases may be the result of infrequent mistakes with regard to the handling of credit in which a decrease may certainly be warranted after a period of time, assuming the member does not repeat these mistakes. However, if a member does not qualify for a rate decrease after two years, then it is much less likely that the members payment behavior will change for the better after that period of time. Therefore, we believe it would no longer be productive for the credit union to continue this review process.
The proposal would require card issuers to have reasonable, written policies and procedures for conducting these six-month reviews, and the Board has requested comments as to whether more guidance is needed on what is considered reasonable. Credit unions would certainly appreciate specific guidance in this area. However, if the Board develops such guidance, we believe credit unions and others should have the opportunity to comment before it is finalized.
Under the proposal, if a rate is reduced as a result of a six-month review, the rate must be reduced within thirty days after the review. A number of credit unions and their processors are concerned that thirty days may not be sufficient to make these required changes. We suggest the Board increase this time period to 45 days to ensure that all card issuers and their processors have sufficient time to comply with these new timing requirements.
Thank you for the opportunity to comment on the proposed rule that will implement these provisions of the CARD Act that will be effective as of August 22, 2010. If you have questions about our comments, please contact Senior Vice President and Deputy General Counsel Mary Dunn or me at (202) 638-5777.
Senior Assistant General Counsel