By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, June 15, 2010; 7:01 PM
The Federal Reserve issued its final regulations on fees for late credit card payments and other violations Tuesday, setting a $25 cap for one-time offenders and a $35 limit for frequent transgressors.
The caps were not included in a proposed version of the regulations released in March. But in its ruling, the Fed said it hoped the limits would strike a balance between protecting consumers from onerous charges and deterring them from bad behavior. In addition, card issuers could be exempted from the limits if they can prove the cost of dealing with the violation is higher. The new rules will take effect Aug. 22.
The American Bankers Association, a trade group, said the regulations sought to "make the penalty fit the crime." Under the rules, consumers can be charged a maximum of $25 the first time they violate the terms of their credit card agreement -- such as by paying late or going over their spending limits. If the same violation occurs again within six billing cycles, consumers can be fined up to $35.
The regulations are a response to a request by Congress that the Fed develop standards for "reasonable and proportional" credit card penalty fees as part of the sweeping reform of the industry passed last year. According to statistics cited in the ruling, the average late fee is $38 while the typical over-limit charge is $36. A government report in 2006 found that penalty fees accounted for 10 percent of revenue for credit card issuers.
The regulation also bans penalty charges that are larger than the amount of the violation, a common consumer complaint. For example, shoppers who exceed their spending limit by purchasing a $2 cup of coffee could be hit with only a $2 fee. Card issuers also cannot charge inactivity fees to consumers who do not use their accounts and must reevaluate any cards that have had rate increases since Jan. 1.
"They seem to have held some ground on good things," said Linda Sherry, director of national priorities for Consumer Action, an advocacy group.
The group had sought a specific cap on penalty charges, though Sherry said the amount still seemed high. She also noted that the Fed did not address the size of interest rate increases after a violation. In its ruling, the Fed noted that interest rates seemed beyond the scope of the legislation.