In new rules defining “unreasonable” penalty fees under credit card reform laws, the Federal Reserve today proposed prohibiting so-called “inactivity fees” and other fees that exceed the dollar amount associated with the card customer’s violation.
As an example, the Fed said card issuers would no longer be allowed ”to charge a $39 fee when a consumer is late making a $20 minimum payment.”
The Fed is also requiring card issuers that have increased interest rates since January 1, 2009 to “evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.”
Credit card issuers will also be prohibited from charging multiple penalty fees based “on a single late payment or other violation of account terms.”
The Fed is required to accept public comments on the proposed rules and then issue final provisions. The regulator rarely reverses itself on such consumer protection rules.
Credit card issuers have come under fire from consumers, their advocates and lawmakers for raising rates and establishing “inactivity fees” during the nine-month “grace period” originating with President Obama’s signing of reform legislation in May 2009 and ending with the Credit CARD Act’s full compliance on Feb. 22.
Fees for “inactivity” are based on a consumer’s failure to use a credit card over a specific period of time or on a balance that is kept at zero for a prolonged time.
“This proposal addresses two key costs of using a credit card — fees and interest rates,” said Federal Reserve Governor Elizabeth A. Duke. “The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year.”
The Fed and its rulemaking authority over Truth in Lending Act amendments was required to define “reasonable and proportional” penalty fees to suit provisions of the Credit CARD Act. The final phase of the reform takes effect August 22 with the addition of today’s proposed rules.
In recent months, consumer groups have pushed the Fed to get tough on penalty fees.
The Fed’s New Rules would:
- Prohibit credit card issuers from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer’s violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
- Ban inactivity fees, such as fees based on the consumer’s failure to use the account to make new purchases.
- Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Require credit card issuers to inform consumers of the reasons for increases in rates.
- Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.
Here’s a link to the Fed’s proposed rules public notice.
