A Brief Refresher on Credit Card Penalty Fees
Over the past several months, credit unions have been working diligently to help members work through any financial challenges the pandemic has posed, including allowing members to skip credit card payments. But what happens when a member skips a payment without the credit union’s prior approval? Well, most credit card agreements allow credit unions to impose penalties, such as a late payment fee. When doing so, the credit card agreement is not the only place a credit union should look as section 1026.52(b) puts limits on the dollar amount of fees a credit union may charge as a penalty.
The general rule is the penalty fee must “represent a reasonable proportion of the total costs incurred” by the credit union for the violation. In determining the costs incurred for a late payment, the commentary to this rule explains a credit union may look at the costs of collecting a late payment, notifying members of delinquencies and processing delinquencies in order to determine the appropriate amount of the late fee. The rule also provides a safe harbor for the dollar amount of penalty fees. For 2020, these amounts are $29 for the first violation and $40 for a second violation within six billing cycles. These amounts are adjusted annually for inflation but will remain unchanged for 2021.
Even if a penalty fee complies with the safe harbor amounts, section 1026.52(b)(2) prohibits a credit union from imposing a fee in excess of the “dollar amount associated with the violation.” For late fees, the commentary explains this is “the amount of the required minimum periodic payment due immediately prior to assessment of the late payment fee.” For example, if the minimum payment due is $25, the late payment fee cannot exceed $25, even if a higher fee would be permitted under the safe harbor.
For example, if the late payment fee amount stated in the agreement or fee schedule exceeds any set floor amount of a minimum payment, this may mean a credit union will need to make a case by case determination on the permissible amount of the late fee. Consider this scenario: suppose the minimum payment amount is the greater of 2 percent of the outstanding balance or $25 and the late fee is $29. If the outstanding balance is $900 so the credit union imposes the $25 floor amount (2 percent is only $18), then the late fee is capped at $25. However, if the outstanding balance is $1,500 so the minimum payment is $30 (2 percent of outstanding balance), then the full $29 late fee may be imposed.
In addition to the limits on the amount of fees, section 1026.52(b)(2)(ii) also prohibits a credit union from imposing more than one fee for a single event or transaction. When it comes to late fees, this can get rather complicated operationally and depends on whether fees and outstanding payments are added to the minimum payment amount. The commentary provides some helpful examples that illustrate when additional fees are permitted and when they are not.
Here’s an example that ties both of these concepts together: The minimum payment due is $25, the late fee and returned payment fee are each set at $29. Suppose a member makes a full payment of $25 on September 1, the payment due date. On September 3, the payment is returned for insufficient funds, resulting in the payment being considered late. Under the rule, either a late payment fee or returned payment fee may be charged. However, the rule prohibits charging both fees because they are based on the same event. In either case, the amount of the late fee or the returned payment fee cannot exceed $25, as that is the dollar amount associated with the violation.