Fed proposes limits on credit card penalty fees
Thursday, March 4, 2010
The Federal Reserve proposed restrictions Wednesday on penalty fees that credit card issuers can charge consumers, including limiting the amount of late fees.
One of the most significant changes would prohibit card companies from issuing penalty charges larger than the amount of the violation, a common consumer complaint. For example, a person who is late on a $20 minimum payment could not be hit with a $39 late fee. In addition, if a card's spending limit is exceeded by buying a $2 cup of coffee, the penalty fee cannot exceed $2.
The proposed regulations represent the Fed's latest efforts to comply with the sweeping credit card reform legislation passed by Congress last spring. The final phase of the legislation, slated to take effect in August, requires that any penalty fees be "reasonable and proportional" -- and lawmakers left it to the Fed to determine exactly what that meant.
The proposal also bans inactivity fees that some card companies have charged if consumers do not make new purchases and prohibits multiple penalty fees for a single transgression. Card issuers must notify consumers of the reason for any interest rate increases and are required to take a second look at any accounts that have had rate increases since Jan. 1.
The American Bankers Association, an industry trade group, said the reforms give consumers broad new powers to determine their financial fate. But Kenneth J. Clayton, the ABA's senior vice president and general counsel, warned that the restrictions could result in higher prices for some customers and even account closures as the industry adjusts its business model.
A 2006 government report found that the average fees for late payments or over-limit charges more than doubled over a decade, to $34 and $31 respectively. Penalty fees accounted for an estimated 10 percent of revenue for card companies.
Consumer groups welcomed the regulations as a step forward but said they do not do enough to curtail excessive penalty fees. Linda Sherry, a spokeswoman for Consumers Action, said the nonprofit group had hoped the Fed would cap late fees at a 5 or 10 percent of the amount due. In effect, she said, the proposal allows a 100 percent penalty rate for late fees.
Nick Bourke, manager of the Safe Credit Cards Project at the Pew Charitable Trusts, said the Fed also did not address penalty interest rate increases, on which he had urged a limit of 7 percentage points above the original rate. The reform legislation bans issuers from raising rates on outstanding balances unless consumers are at least 60 days delinquent. But it does not prohibit them from raising rates on new charges, and it does not limit the rate increase on outstanding balances for delinquent consumers.
"They didn't fully seize the opportunity," Bourke said.
The Fed will accept public comments for 30 days before issuing its final ruling.