Fed’s Credit Card Fee Rules Eye ‘Consumer Conduct’

Credit card purchasesThe Federal Reserve’s newly announced rules restricting fees by credit card issuers focus on “consumer conduct” and what constitutes a reasonable penalty to cover an issuer’s costs.
The rules, which includes prohibitions against so-called “inactivity fees,” will take effect August 22, and will mark the final phase of the sweeping set of reform laws known as the Credit CARD Act. The bulk of the legislation took effect Feb. 22.
The Fed as rulemaking authority has a responsibility to protect card users from unfair practices, such as charging a consumer a $39 fee for briefly going over the limit by $5. It also must consider the card issuer’s financial impact as it relates to a consumer’s violation of a credit card agreement.
“Consumer conduct,” the Fed says, is at the heart of new fee restrictions that protect card users and considers the cost to issuers.
The restrictions do not “require that each penalty fee be based on an assessment of the individual consumer conduct associated with the violation,” the Fed states. Instead, it must take “consumer conduct into account in other ways.”
Based on the premise of consumer conduct matching a fee that is reasonable and proportional, the Fed created a key restriction: Issuers are not allowed to impose fees that exceed the dollar amount associated with the violation. For example, a consumer who exceeds the credit limit by $5 could not be charged an over-the-limit fee of more than $5.
Another provision prohibits issuers from imposing multiple penalty fees based on a single event or transaction.
Yet the Fed is also mindful of its responsibility to credit card issuers and must provide a “safe harbor.”
“Because violations involving large dollar amounts may impose greater costs on the card issuer and require greater deterrence,” the proposed safe harbor permits an issuer to impose a penalty fee that is higher in certain circumstances, the Fed said.
The Fed stipulates that card issuers can impose a penalty that does not exceed 5 percent of the dollar amount associated with the violation — up to a specific dollar limit.
“Thus, for example, if a $500 minimum payment was delinquent, the safe harbor would permit the card issuer to impose a $25 late payment fee,” the Fed states.
The Fed is now accepting public comments that usually includes recommendations from the credit card industry itself. The Fed then considers making modifications to the provisions before the August 22 take-effect date.
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