The Federal Reserve Board recently approved a final rule to complete the third and final stage of its implementation of the NSBA-supported Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. The Fed approved its first two sets of rules under the bill in January and March.

The new rule pertains to Regulation Z (Truth in Lending) and is aimed at protecting cardholders from “unreasonable late payments and other penalty fees.” It will take effect August 22, 2010.

Fees and Penalties

The rule prohibits issuers from accessing cardholders with penalty fees of more than $25 for late payments or other violations of card terms——unless the cardholder has had repeated violations or the issuer can demonstrate that “a higher fee represents a reasonable proportion of the costs it incurred as a result of violations.”

The rule also prohibits issuers from charging penalty fees in excess of the amount associated with the violation. For instance, a customer cannot be charged a $39 late fee when the customer was late making a $20 minimum payment. In this circumstance, under the new rule, the issuer could not charge the cardholder with a late fee of more than $20.

The rule prohibits issuers from charging cardholders with multiple penalties on a single late payment or other violation.  Previously, issuers could charge multiple fines for a single violation.

The rule also bars issuers from charging cardholders with “inactivity fees.” Issuers no longer will be allowed to charge cardholders for not using their cards.

Interest Rates

Significantly, the rule requires issuers to reevaluate any interest-rate increases they imposed since the beginning of 2009, when Congress began deliberating credit-card reform, and “if appropriate,” reduce the rate.

Issuers also are required to explain the reason for any future interest-rate increases to cardholders.