Fed Lays Out New Caps on Late Payment Penalties
In the latest wave of consumer protection to come out of Washington, the Federal Reserve today issued a new set of rules for credit card companies to limit certain penalties they can levy on cardholders.
The new rules come only a few months after a new federal law took effect that made significant changes to the banking laws that govern revolving credit accounts. This latest round of changes requires card issuers to review their interest rate increases that came in the midst of last year's banking crisis. If that rate increase is unnecessary, then it must be rolled back.
"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," said Federal Reserve Governor Elizabeth A. Duke. "Card issuers must also reevaluate recent interest rate increases and, if appropriate, reduce the rate."
Among other things, the final rule, which amends Regulation Z (Truth in Lending):
- Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs its incurs as a result of violations.
- Prohibits credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
- Bans "inactivity" fees, such as fees based on the consumer's failure to use the account to make new purchases.
- Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Requires 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.