New limits placed on credit card late fees and other penalties

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The Federal Reserve approved a series of new limits on credit card companies that will protect consumers from exorbitant late fees and other penalties, including fees for inactivity and exceeding the maximum credit limit.

The new limits take effect Aug. 22 and are the final step in the Fed's action to implement the Credit Card Accountability and Disclosure Act that Congress enacted last year. That legislation has already benefited consumers and brought a number of restrictions on credit card companies' billing practices, including curbs on arbitrary interest rate increases.

The additional limits announced Tuesday mostly target payment penalties. Now, credit card issuers can only charge a maximum fee of $25 if a consumer pays late (as long as they haven't been late in the past seven months). The new rules also bar credit card companies from charging "inactivity" fees and places new limitations on the fees that they can charge for other violations such as returned checks or exceeding account's maximum credit limit.


Among the new limits:
  • Credit card companies can no longer impose multiple penalty fees for a single late payment or other violation.
  • Any fees charged for violations of a credit agreement's terms have to be in proportion to the amount of a violation. So, the maximum penalty for a consumer whose $20 minimum payment is late or who exceeds a credit limit by $20 cannot be more than $20.
  • The Fed also required credit card companies to reexamine any accounts on which they raised interest rates since Jan. 1, 2009, "to evaluate whether the reasons for the increase have changed and, if appropriate to reduce the rate."
Federal Reserve Governor Elizabeth A. Duke said in a statement that the new rules will lead to fees being assessed "in a way that is fairer and generally less costly for consumers."

U.S. Rep. Carolyn Maloney, D-N.Y., the legislation's sponsor praised the Fed's move. "The Federal Reserve's guidelines issued today are great news for consumers," she said in a statement. "By capping any late fees to a maximum of $25, charged only once per violation, by banning inactivity fees, and by requiring re-evaluation of any rate hikes since January 2009, the Fed has achieved the final set of accountability and fairness steps called for in my bill."

But not everyone is pleased with the new rules. The Center for Responsible Lending noted that the rules have some loopholes. For example, the $25 maximum can be exceeded if the credit card company can prove that it incurred more in costs to collect the payments.

Kathleen Day, a spokeswoman for the group, described the Fed's action as "tepid." "It is better than the status quo, but it isn't what it could have been," she said.

In a statement, Center President Michael D. Calhoun said the $25 limit is still too high and warned that even as the Fed requires credit card companies to reexamine interest rates that they've charged in the past, it also allows them to review and re-impose higher rates every six months.

The American Banking Association, which represents credit card companies, called the changes the "most sweeping overhaul of the industry since the invention of credit cards."

"Most customers handle their credit cards responsibly, but bad behavior by a relative few, increases costs for all customers," Kenneth J. Clayton, the group's general counsel said in a statement. "The rules adopted by the Fed today address so-called 'penalty fees,' and seek to 'make the penalty fit the crime,' so that simple missteps result in minor penalties, while larger or repeated missteps can result in higher penalties."

He said the rules will provide "greater protection, transparency and certainty" for credit card customers.
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