The “Reasonable Penalty Fees” section of the soon-to-arrive credit card reform laws has certainly not gone unnoticed by the major card issuers.
It is one provision that provides fertile ground for potential new fees that card providers could be allowed to implement as long as the fees are “reasonable and proportional.”
With so much focus of the new legislation falling on late payment and over-the-limit fees, it is this overall “penalty” fee clause that has yet to be full defined.
Some of experimental fees or expansion of existing fees that could pass the “reasonable and proportional” test, are already coming to the surface.
Starting next year, Bank of America has said it will charge a small number of customers an annual fee, ranging from $29 to $99. For now, BofA says the program is experimental. But the fees could be used on customers who under use their account, or possibly pay off their balances every month.
Citigroup has started charging annual fees to card holders who don’t charge a certain amount over a given time period. Other banks are implementing or considering such under use or inactivity fees. In many cases, these fall on customers with good credit standings or unblemished payment histories.
The Federal Reserve, in consultation with the other bank regulatory agencies, must come up with rules to help them “establish standards for assessing whether the amount of any penalty fee or charge …is reasonable and proportional to the omission or violation to which the fee or charge relates,” according to the Credit CARD act of 2009, which takes full effect in February.
Congress has instructed the Fed and other regulatory agencies with the task of establishing final rules, taking into consideration the following factors:
- the cost incurred by the creditor from the “omission or violation” by the customer;
- the deterrence of such omission or violation by the cardholder;
- the conduct of the cardholder; and
- such other factors as (regulators) may deem necessary or appropriate.
The “reasonable penalty fees” provision marks a major change in credit regulation because it is rare for a government agency to dictate fees in private sector transactions, according to Jeff Sovern, an author and professor of law at St. John’s University in New York City.
In the Consumer Law & Policy Blog, Sovern wrote that intervention by Congress, through bank regulators, is necessary because the market will “not restrain credit card issuers from charging fees that greatly exceed the costs the underlying conduct imposes on issuers…”
Credit card issuers “can use fees as a source of profits without any check unless Congress intervenes,” Sovern wrote.
He also said that “consumers contemplating a particular credit card might ignore penalty fees, on the assumption (an assumption that will be mistaken for many) that they will not incur them.”
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