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Federal Reserve Board issues final rule regarding credit card late charges and penalty fees

June 15, 2010

The Federal Reserve Board Tuesday approved a final rule to protect credit cardholders from unreasonable late and penalty fees, but the Center for Responsible Lending said the rule does not go far enough to curb widespread abuse among card issuers. 

The final rule, which takes effect Aug. 22, prohibits card issuers from charging a cardholder a penalty fee of more than $25 for a late payment unless the cardholder repeatedly violates the credit card agreement.

Card issuers also are prohibited from charging a late fee that exceeds the cardholder's monthly minimum payment. If a cardholder's minimum payment is $20, and he pays his bill late, the credit card issuer cannot charge the cardholder a $39 late fee.

The regulation bans so-called "inactivity" fees card issuers charge cardholders for not using their cards for new purchases. In addition, the rule prevents card issuers from charging multiple penalty fees for a single late payment.

The final rule requires issuers that have increased interest rates since Jan. 1, 2009, to evaluate whether reasons for the interest-rate increase have changed and, if appropriate, to reduce the rate.

The final rule represents the third stage of the Federal Reserve Board's implementation of the Credit Card Accountability Responsibility Act of 2009, which became law May 22, 2009.

Michael D. Calhoun, president of the Center for Responsible Lending, a Washington, D.C.-based consumer group, praised and criticized the final rule.

The final rule is an improvement over the $39 penalty fee top credit card issuers routinely charge, but it could have been stronger, Calhoun said in a statement. "The $25 limit is too high, and firms have considerable leeway in justifying even higher amounts. Fed rulemakers also failed to limit the interest-rate increases imposed as a penalty," he said.

Calhoun in a slap at the Federal Reserve Board said its actions are another example why it is important Congress complete its work on a consumer-financial protection agency.