While most provisions of the Credit CARD Act have gone into effect, there are a couple of key provisions that still have yet to be implemented. The two biggest outstanding issues are the provisions of the Act that describe limits on penalty fees, as well as the requirement that issuers re-evaluate accounts periodically that have been subject to rate increases to determine whether those rates should go back down. These provisions are scheduled to take effect August 22, 2010, after the Federal Reserve Board (FRB) develops guidelines for issuers.
Yesterday, the FRB announced its proposed rule for implementing those provisions. Before it is finalized, however, the FRB must gather feedback on them from anyone who chooses to weigh in. If you would like to comment on the proposed rule, you’ll find instructions for doing so at the end of this post.
Among other things, the proposed rule would:
Limit penalty fees. The CARD Act says that penalty fees (late, over-limit, and bounced check fees, for example) must be “reasonable" and "proportional” to the violation. The Act left it up to the FRB to develop guidelines describing what that means. Under the proposed rule, there is no cap on these fees, but instead the guidelines say that penalty fees must be based on both/either:
a. The cost associated with the violation (a reasonable proportion of the costs incurred by the card issuer as a result of that type of violation, but not the cost of a single transaction); or
b. Deterrence value (how effectively a penalty fee discourages that behavior generally from cardholders).
These must be reevaluated at least once a year.
There are some more specific requirements within the proposed rule that would:
Prohibit credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
Ban penalty fees when there is no cost associated with the violation. For example, inactivity fees if you fail to use the account to make new purchases would be banned. Account closure fees would also be banned.
Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
Allow for a range of late fees to be disclosed. When issuers use tiered penalty fees, for example, they can disclose a range of fees on billing statements.
Rate Increases. Other parts of the Credit CARD Act that have already gone into effect address when and how card issuers raise interest rates. However, the proposed rule would require credit card issuers to:
Inform consumers of the reasons they increased a rate. If your card issuer notifies you of an interest rate increase, you’ll also get a statement of no more than four principal reasons for the rate increase, listed in their order of importance.
Review accounts on which rates have been raised since January 1, 2009, to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. If you are one of the thousands of cardholders who were told your rates were going up due to "market conditions," or a "review of your credit," I wouldn't suggest you get too excited that your rate will drop back down. Even if an issuer determines that the factors that resulted in a rate increase no longer apply:
– Rates don’t have to go back down to original rate, and
– The review factors don’t have to be the same factors on which an increase in an annual percentage rate was based. The card issuer may, at its option, review the factors on which the rate increase was originally based, or may review the factors that it currently considers when determining the annual percentage rates applicable to its credit card accounts.
If you want to submit comments on these proposed rules (make sure you identify them as Docket No. R-1384), follow the instructions on the Federal Reserve website.
Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.
Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.comTalk Credit Radio. Reach Gerri at creditexperts@credit.com.
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