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Fed issues proposal to rein in credit card fees

Thursday, March 4, 2010

Federal Reserve Board Issues Proposed Regulations to Curb Credit Card Penalty Fees

Consumers Union: Fed Proposal Offers Important Protections
But Should Be Strengthened and Implemented Sooner

WASHINGTON, D.C. — The Federal Reserve Board announced a set of proposed regulations to protect consumers from unfair credit card penalty fees. The new regulations are required under the CARD Act passed by Congress last year. Consumers Union, the nonprofit publisher of Consumer Reports, applauded some aspects of the Fed’s proposal on fees but urged it to develop similar rules to restrict penalty interest rates.
“The Fed’s proposal will help to bring down penalty fees and stop some of the most unreasonable new fees.” said Gail Hillebrand, Director of Consumers Union’s Defend Your Dollars campaign (www.DefendYourDollars.org). “But it doesn’t go far enough because it does nothing to rein in penalty interest charges and lets banks wait another year before reviewing the sky high interest rates imposed on many consumers over the past year”
Under the proposed regulations, credit card companies would be prohibited from charging fees for inactivity, closing accounts, or declined transactions. Card issuers also could never charge fees that are higher than the dollar amount at stake. In other words, if a customer failed to make a $20 minimum payment, the bank could not charge a penalty fee higher than $20.
In addition, penalty fees would be allowed only if they are either a reasonable proportion of the total cost to the bank caused by the customer’s violation of the credit card agreement or if the bank determines that the fee amount is necessary to deter the same kind of violations in the future. A bank could not just claim a fee is needed for deterrence; it would have to be backed up by a study on the effect of the fee.
The rule also proposes a “safe harbor” amount when an allowable fee is always acceptable, which would be five percent of the dollar amount at stake – not the whole balance – or a set dollar amount. The Fed has asked the public to comment on what that dollar amount should be. These fee rules apply only to fees that are imposed because of a violation of a term or requirement of the card issuer. They do not apply to fees for services such as cash advances or balance transfers.
The Fed’s proposal requires banks to tell consumers the principal reason why their interest rates are being hiked in the future. Banks would be required to review interest rate hikes made on customers since January 2009 and to reduce those rates “as appropriate.” However, the bank could keep the higher rate if the reason for the old rate hike is still present, or if the bank comes up with a new reason for the higher rate. Banks would not be required to start this “look back” process until six months after the regulations are finalized – in other words, starting late February 2011.
NOTE: Consumers Union can connect reporters with consumers who have been affected by unfair credit card interest rate hikes and fees. For more information, contact Michael McCauley at 415-902-9537 or mccami@consumer.org
Media Contact: David Butler or Kristina Edmunson, 202-462-6262, dbutler@consumer.org or kedmunson@consumer.org