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Federal Reserve Enters Third Phase of Credit Card Act Rulemaking

Dennis Cuevas, Project Director and Chief Counsel, Consumer Protection

The Federal Reserve Board has entered the third stage of its rulemaking implementing the “Credit Card Accountability Responsibility and Disclosure Act of 2009” (Credit CARD Act; P.L. 111-24). The Credit CARD Act, enacted in May 2009, improves consumer disclosures and ends specific practices in the credit card industry.

On March 3, the Federal Reserve proposed rules amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable penalty fees and to require credit card issuers to reconsider increases in interest rates. The proposed amendment -- which is open for 30-day public comments -- would become effective on Aug. 22, 2010. The proposed rules prohibit credit card issuers from charging penalty fees, late payment fees, and over-the-credit limit fees, that exceed the dollar amount associated with the consumer’s violation of the account terms. For example, a consumer who exceeds his credit limit by $5 could not be charged a penalty fee higher than $5. Card issuers could not charge a $39 fee if a consumer is late making a $20 minimum payment. Instead, the fee must not exceed $20.

Credit card issuers would also be banned from charging inactivity fees, such as fees based on the consumer’s failure to use the account to make new purchases, or fees for closing accounts or declined transactions. Several banks have recently added these fees as a way to offset lost revenue from credit card reforms that are already in effect. Credit card issuers would be prevented from charging multiple penalty fees based on a single late payment or other violation of the account terms. Lastly, credit card issuers must inform consumers of the reasons for increases in rates, and the proposed rules require issuers that have increased rates since Jan. 1, 2009, to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. Banks would begin the process six months after the regulations are finalized.

In January 2010, the Federal Reserve approved credit card rules that went into effect in February. These rules protect consumers from a number of costly practices. Specifically, the rules generally prohibit increases in interest rates during the first year after an account is opened and increases in a rate that applies to an existing credit card balance. The rules prohibit creditors from issuing a credit card to a consumer who is younger than age 21 unless he or she has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so. The rules also require creditors to obtain a consumer’s consent before charging fees for transactions that exceed the credit limit, limit the high fees associated with subprime credit cards, ban creditors from using the “two-cycle” billing method to impose interest charges, and prohibit creditors from allocating payments in ways that maximize interest charges.

In July 2009, the Federal Reserve began the first stage of implementing the Credit CARD Act by establishing fair and transparent practices for credit cards. The new rules require creditors to provide written notice to consumers 45 days before the creditor increases an annual percentage rate on a credit card account or makes a significant change to the terms of a credit card account. Creditors also must inform consumers in the same notice of their right to cancel the credit card account before the increase or change goes into effect. If a consumer does so, the creditor is generally prohibited from applying the increase or change to the account. Creditors generally must mail or deliver periodic statements for credit cards and other open-end consumer credit accounts at least 21 days before payment is due. These rules went into effect in August 2009.

With all the new changes, the Federal Reserve has created an interactive Web site to help cardholders understand the new safeguards. One of the site’s features is a summary of the new law’s main provisions. In addition, several consumer groups, as well as credit card companies have created similar consumer education Web sites.

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