Banking

The Federal Reserve Board of Governors approved a final rule on June 15 that shields credit card users from unreasonable penalty fees. The new rule also requires card issuers to review recent increases in interest rates.

"The new rules require that late payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers," Federal Reserve Governor Elizabeth A. Duke said in a recent statement.

Final rule bans high fees, multiple penalties
The final rule, which amends Regulation Z (the Truth in Lending Act), caps penalty fees for late payments or other violations of the account terms at $25. Credit card issuers may be exempted from the limits if the consumer repeatedly violates the card terms within a six-month period or if the issuer can prove that the cost of dealing with the violation justifies a higher fee.

Additionally, credit card issuers are prohibited from charging penalty fees that are higher than the consumer's violation of the account terms. For example, issuers can no longer charge a $39 penalty fee if a consumer is late making a $20 minimum payment. Instead, the fee would be capped at $20.

The new rule also bans "inactivity fees," which are charged when a consumer fails to use the credit card within a certain time period, and prohibits multiple penalty fees for a single violation of the account terms, such as an over-the-limit transaction or late payment.

More transparency, review of rates required
Credit card issuers that have increased rates since the beginning of 2009 are required to evaluate whether the reasons for the increase have changed and, if appropriate, reduce the rate. Under the final rule, credit card companies must reevaluate rate increases every six months.
The provisions of the final rule will generally take effect August 22 and represent the third stage of the Federal Reserve's implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009.

June 29, 2010