Get Ready for Round 3 of Credit Card Reform

(March 19) -- Don't take the shears to your credit card just yet.

While credit card issuers may have managed to stay one step ahead of consumer-protection regulations, the next round of Credit CARD Act provisions will force them to roll back some of their charges.

"This proposal addresses two key costs of using a credit card -- fees and interest rates," said Federal Reserve Governor Elizabeth A. Duke.

Before the Fed could roll out the first phase of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 in August, credit card issuers used the time to jack up interest rates, slash credit limits and charge excessive overdraft fees.

"The newest rules would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to re-evaluate rate increases imposed since the beginning of last year," Duke said.

As recently as February, when the second round of provisions took effect, credit card issuers were still at it, even charging some consumers for not using their credit cards.

The Federal Reserve Board this month proposed a rule further amending the Credit CARD Act provisions of Regulation Z (Truth in Lending) to put the kibosh on unreasonable late-payment and other penalty fees and to require credit card issuers to reconsider increases in interest rates.

The proposed rules are scheduled to take effect Aug. 22 following public comment.

Among other things, the proposed rules would:

• Prohibit credit card issuers from charging penalty fees (including late-payment fees and fees for exceeding the credit limit) that exceed the dollar amount of the consumer's violation. For example, card issuers would no longer be permitted to charge a $39 fee (the industry average) when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.

If the rule is adopted, spending $5 over the credit limit would could incur no more than a $5 penalty.

(Similarly, effective July 1, new rules for debit cards will prohibit financial institutions from charging consumers fees for overdrafts caused by automated teller machine and debit card transactions, unless a consumer consents, or opts in, to the overdraft service and associated fees for those types of transactions. Critics have considered the fees akin to costly payday loans they didn't ask for.)

• Ban inactivity fees, such as fees based on the consumer's failure to use the account to make new purchases.

• Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.

• Require credit card issuers to inform consumers of the reasons for increases in rates.

• 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. Many card issuers found their rates increased in advance of the effective dates of Credit CARD Act provisions to reduce other fees.

The proposed rule is the third stage of the Federal Reserve's implementation of the 2009 Credit CARD Act, enacted in May. In July, the Fed issued a rule implementing the first provisions of the Credit CARD Act that went into effect on Aug. 20. The central bank issued a rule in January to implement the second round of provisions of the Credit Card Act that went into effect Feb. 22.