Final Credit Card Rules on Penalty Fees and Interest Rate Review

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By Consumers Union on Tuesday, June 15th, 2010

The Federal Reserve has issued the final regulations for the last provisions of the CARD Act which go into effect on August 22nd, including limiting the size of penalty fees that banks can charge credit card customers and requiring banks to periodically re-evaluate interest rate hikes to see if higher rates are still justified.

The Fed’s proposal on these provisions came out in March and CU commented on the proposal, along with thousands of consumers, highlighting ways to strengthen the proposal. Read CU’s statement.

Here is a summary of the new rule:

Reevaluation of Rate Increases

When an issuer raises a consumer’s interest rate based factors such as credit risk or market conditions, it must review the increase every 6 months and reduce the rate if appropriate.

Issuers must review all future rate increases as well as rate increases made since January 1, 2009.

For rates raised between January 1, 2009 and February 21, 2010 for reasons that were not specific to the customer (ex: market conditions), card issuers may not keep rates elevated solely because market conditions or the economy has not improved. Instead, the issuer must review the rate using the same factors currently used in setting the APR on similar new card accounts. For individuals who saw substantial rate increases between these dates, this review may result in some relief if new card accounts are being charged lower rates.

For all other rate reviews the card issuer may review either:
• The same factors on which the original increased was based; OR
• The factors currently considered in setting the APR on similar new card accounts.

The review is not required for rates that have increased because of a change in the variable rate or an expiration of a promotional rate.

The first review must be completed by February 22, 2011.

Limitations on penalty fees

These practices are prohibited:
• A penalty fee can never exceed the dollar amount associated with the conduct. Example: A late fee cannot exceed the amount of a minimum payment which was paid late.
• Multiple penalty fees can not be charged for the same event.
• No fees for declined transactions, account inactivity, or account closure.

A penalty rate on your credit card account can be no more than $25 for the first violation of a particular type and no more than $35 for additional violations of the same type during the following six month period. These amounts will adjust annually for inflation and are subject to the above prohibitions.

Example: If you pay a late $20 minimum payment, the bank cannot charge you more than a $20 penalty fee. If your late minimum payment was $40, the bank can only charge you $25 if it’s the first late payment, but $35 for subsequent minimum payments in a six month period.

A bank can charge more than the above fee caps, if it can show that the amount of the fee is proportional to the total costs incurred by the issuer for that particular violation. Cost must be reevaluated every 12 months and are subject to the above prohibitions.

For charge card accounts which are due in full at each billing cycle, then a late fee can be applied after two missed payments, which equals 3% of the delinquent balance.


To print a summary of the rule, click here.

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