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The Honolulu Advertiser
Posted on: Sunday, March 21, 2010

Final phase on new card rules: penalty fees

By Michelle Singletary

Hawaii news photo - The Honolulu Advertiser

The third phase of the Federal Reserve's overhaul of credit card regulations goes into effect this summer, and the Fed wants to know what you think about proposed penalty fees.

JAY LAPRETE | Bloomberg News Service

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WASHINGTON In what feels like never-ending regulatory fiddling with the Credit Card Accountability Responsibility and Disclosure Act of 2009, the Federal Reserve now wants to know what consumers think about certain fees lenders charge as penalties for late payments or other issues.

To be fair, the Fed is only following Congress' mandate, which ordered that the CARD Act's provisions be implemented in three phases. The first went into effect last summer, the second in January. This final phase will take effect this summer.

The Fed has proposed several rules amending Regulation Z, the truth in lending provision. In addition to penalty fees, the rules would also require credit card issuers to reconsider increases in interest rates.

If you use a credit card, take the time to read about these proposed changes and then comment. Read the federal register notice at www.federalreserve.gov/newsevents. You'll find a link to the notice in a press release under Banking and Consumer Regulatory Policy.

Here's a summary of the specific rules:

• Credit card issuers would be prohibited from imposing penalties that exceed the dollar amount of an infraction. For example, let's say you are late making a required $25 minimum payment on your credit card. The lender couldn't charge you a fee that is more than the amount overdue. In another example, a consumer who exceeds the credit limit by $5 could not be charged an over-the-limit fee of more than $5.

The idea is that these types of fees should be reasonable and proportional to the violation. I suspect companies may get around this by increasing the minimum payments on their customers' accounts, which they are allowed to do under the CARD Act, with proper notification.

Because the law allows companies to recover the collection cost of servicing accounts, the proposed rule would require card issuers to re-evaluate those expenses at least annually to ensure that penalty fees are based on relatively current cost information.

• Companies would not be allowed to impose an inactivity fee on customers who fail to use their credit cards to make new purchases. I've heard from quite a number of people who have begun to receive notice of fees for cards they haven't used in years.

• Issuers could not charge multiple fees based on a single late payment or other violation of their account terms. So for instance, if you are late paying your bill, the company couldn't keep charging you a late fee for that one incidence.

• Your credit card lender would have to inform you of the specific reasons for increasing your interest rate.

• If your rate has increased since Jan. 1, the issuer would have to evaluate your account at some point. And if the reason why your rate was increased is no longer an issue, if appropriate, they would have to do a rate reduction.

If you want to comment on the proposed rules, send an e-mail to regs.comments@federalreserve.gov. Include "Docket No. R-1384" in the subject line. You can also comment by fax. Send to 202-452-3819 and also include the document number. Comments must be received on or before April 14.

Consumers Union, the nonprofit publisher of Consumer Reports, is urging people to send comments to the Fed. The consumer advocacy group has provided a template letter for people to use and personalize with their own experiences. For example, the nonprofit recommends the Fed impose a cap to prevent banks from seeking loopholes that would allow them to continue charging high fees.

"It is critical the board issue the strongest rules possible to protect consumers, since the banks continually come up with new ways to get around the consumer-protection laws," wrote one person, who used a Consumers Union sample letter and signed her name as Susan Smith. "I urge you to give me the protections I was promised under the CARD Act, and issue the strongest rules possible."

Yet not all posters are in favor of more regulation. One wondered: "Why don't you just socialize the entire credit card industry? You keep adding regulations on top of regulations, do you not understand that these costs will eventually, somehow be passed onto the consumers? You are incorrectly penalizing the corporations for the incompetence of the consumer."

Another offered: "It is my opinion that this is another set of meaningless rules and regulations that will not affect the banks or their extreme practices whatsoever. These regulations have enough loopholes and delays built in that they will have no 'teeth' with the banks."

I disagree with the last comment. The CARD Act and the proposed changes are better than what was the old rule of the day, which was essentially gouge people at will.