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Fed Begins Final Stage|Of Credit Card Act

WASHINGTON (CN) - Credit card issuers will have to show that penalty fees charged to customers are reasonable and proportional to the consumer's violation of their account terms, as of Aug. 22.

A Board of Governors of the Federal Reserve System proposed rule under the Truth in Lending Act and Credit Card Accountability Responsibility and Disclosure Act also would require credit card issuers to reevaluate at least every six months annual percentage rates on consumer accounts increased on or after January 1, 2009.

The reasonable and proportional test must be based on the actual costs incurred by the credit card issuer when a customer violates the terms of their agreement. For instance, in charging a late fee, the issuer may include the cost of notifying the consumer that they are late and the cost of resolving delinquencies. However costs associated with losses in general may not be considered, such as the cost of holding reserves against losses.

Alternatively the Federal Reserve proposes to allow card issuers to charge penalty fees based on their deterrence value rather than cost, but the issuer must show that the amount of the fee just tips the balance to deter customers from, for example, making a late payment and that a lower penalty fee would increase the frequency of late payments.

If the rule is adopted, consumers also would be protected from multiple penalty charges for the same violation and not be required to pay a penalty fee that exceeds the dollar amount of the violation. For instance if a customer exceeds their credit limit by $20 they can not be charged an over-the-limit fee of more than $20.

Additionally, if card issuers raise the annual percentage interest rate on an account the issuer would be required to review the increase every six months for factors that would lower the interest charged to its original rate such as a decline in the issuer's operational costs, or changes in the underwriting standards they apply to all of its credit card accounts.

The Federal Reserve is accepting public comments on the proposed rule until April 14.

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