Credit unions typically incorporate minimal fees, deriving most of their non-interest income from interchange on credit and debit portfolios. As the income from interchange declines, some credit unions look to fees to replace that revenue. What fees can be charged is, in part, limited by “Reg Z”.
Regulation Z is the part of the Truth in Lending Act of 1968 that sets forth rules that protect consumers against misleading practices by the lending industry, which includes credit cards. The regulation requires issuers to abstain from certain unfair practices. More specifically, it requires that penalty fees, such as late fees, be “reasonable and proportional” to the relevant violation of account terms.
As a result, the Fed had proposed that credit unions may charge credit card penalty fee using arrangements that include the “cost method” requiring a financial institution to show that its penalty fee represents a reasonable proportion of the costs incurred by the card issuer for that type of violation. Any card issuer using the “cost” method will have to reevaluate its determination of what those costs are, and the reasonable fee, every 12 months. This obviously entails much bookkeeping, and as a result, most credit unions use the “safe harbor” method. If a credit card issuer charges anything up to the safe harbor amount for certain violations, it is considered to be in compliance with Regulation Z.
Required annual threshold updates on Regulation Z were recently announced by the Consumer Financial Protection Bureau (CFPB). The thresholds remain unchanged from 2017 and will be effective January 1, 2018. A credit union is considered compliant as long as their penalty fees do not exceed the following amounts:
- $27 for a 1st violation, and
- $38 for any subsequent violation
Keep in mind that even with the safe harbor, there are general penalty fee prohibitions that run concurrently. So, for example, penalty fees may not be more than the underlying transaction. So, if a member misses a minimum credit card payment of $15, that is the late fee limit for that transaction.
As stated in the CFPB announcement, the fees remain unchanged from 2017, but this is a perfect time to review current set up and confirm you meet these guidelines.