Can you solve the mystery of why the Credit CARD Act treats penalty fees differently from penalty interest rates and other fees?

by Jeff Sovern

When Congress enacted the Credit CARD Act of 2009, it provided that credit card penalty fees, like late fees, “shall be reasonable and proportional” and gave the Fed the power–later transferred to the CFPB–to set safe harbor amounts which would presumptively be reasonable and proportional. But it didn’t limit fees for credit cards, like cash advance fees, that are not assessed because of bad behavior by the consumer, and it didn’t limit the amounts of penalty rates (e.g., a higher interest rate charged because of late payments). Congress did say that credit card issuers could charge penalty rates for late payments only if the consumer missed 60 days of payments and it also limited the duration of penalty rates for late payments if the consumer made the minimum payment for six months, but it didn’t say, for example, that penalty rates had to be reasonable and proportional to the greater risk of lending money to those who have paid late. Nor did it impose limits on penalty rates for other events that trigger a penalty, such as exceeding the credit limit, though it did limit the amounts of penalty fees that could be imposed for exceeding the credit limit. I’m trying to understand why Congress treated these items differently. My research assistant and I are still working our way through the legislative history, but I’m hoping someone can point us to something that sheds light on this question.

What we’ve come up with so far is largely speculation. Congress had heard a lot more about excessive penalty fees than other fees, see, e.g., US GAO, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers (2006); Examining the Billing, Marketing and Disclosure Practices of the Credit Card Industry and Their Impact on Consumers: Hearing on S.414, Sen. Comm. on Banking, Housing & Urban Affairs, 2007 WL 184875 (Jan. 25, 2007) (Testimony of Elizabeth Warren, Professor, Harvard Law School), so maybe it concluded other fees could be left alone. But it chose to treat penalty rates and penalty fees differently even though they are triggered by the same event.

What is prompting my curiosity is an article I’m working on with Nahal Heydari. We surveyed 659 consumers about their understanding of credit card disclosures and one of our findings is that consumers understand the penalty fee disclosures significantly better than they understand non-penalty fee disclosures and penalty rate disclosures. In other words, Congress limited the amounts consumers could be charged for things more consumers could understand than for the items fewer consumers could understand–which seems exactly backward if that’s all you consider. There may have been reasons for doing so, such as Congress may have thought consumers would pay less attention to penalty fees than other fees, on the theory that consumers would optimistically assume they wouldn’t make payments late, but that doesn’t explain why they didn’t limit penalty rates because, again, they are triggered by the same events as the penalty fees. I’m wondering if anyone knows. If you do know something about this, please let us know in the comments or email me at

Leave a Reply

Your email address will not be published. Required fields are marked *