On Tuesday, the Federal Reserve Board issued its final rules implementing the CARD Act. These rules, among other things, cover those portions of the CARD Act which require that any penalty fee or charge imposed in connection with a credit card agreement, including a late fee or a over-limit fee, be reasonable and proportional to the violation to which it relates.
Under these rules, a creditor cannot charge a cardholder more than $25 unless:
- One of the cardholder’s last six payment was late, in which case the fee can be up to $35; or
- The creditor can show that the costs it incurs as a result of late payments justify a higher fee.
These fee limits, which are described in the rule as a “safe harbor,” were not proposed in the initial rulemaking, and so came as somewhat of a surprise. Moreover, if these “safe harbor” fee limits are not used, the creditor must prove that the costs incurred as a result of the fee, such as costs of notifying customers of the late payment and resolving a delinquency, are proportional to the fee imposed. Higher loss rates and related costs (such as reserves) for particular violations cannot be included in these calculations. The cost analysis then must be updated annually.
In addition to these fee limits, the final rules stipulate that no late payment can be greater than a customer’s minimum payment. Thus, if a customer’s minimum payment is $20, the penalty cannot be more than $20 (despite the $25 fee limit described above). If a customer exceeds her or his credit limit by $5, the maximum fee that can be charged for that over-limit violation would be $5.
No inactivity fees can be charged to a customer if the customer does not continue to make purchases with the card. And only one fee can be charged per payment. Thus, if a cardholder is late, and also has an NSF, the creditor can only charge a late payment fee. A returned payment fee could not also be charged.
The rules also cover the CARD Act’s mandate that creditors must re-consider the APR charged on those credit card accounts where it previously increased a rate at least every six months for possible APR reductions. Creditors are required to both consider factors relating to the specific cardholder’s creditworthiness, as well as general market conditions.
These rules, which become effective on August 22, 2010, are the last of three rulemakings the Federal Reserve has made under the CARD Act. Earlier rulemakings dealt with credit and gift card disclosures. (See our previous blog posts here and here). These latest changes will almost certainly require yet another round of new disclosures and additional programming costs to implement. And the limits will almost certainly reduce issuer revenues further than previous rulemakings: the Federal Reserve noted in the preamble to the rules that late fees and over limit fees have been averaging about $39 - well more than the fee limits set in the rule.
Click here for a more extensive analysis of this development.
