Credit card issuers were somewhat spared in the Federal Reserve Board’s final rules issued June 15 regarding card penalty fees, which analysts say were not as severe as some had feared.
In the third and final phase of implementing the Credit Card Accountability, Responsibility and Disclosure Act, the Fed capped penalty fees issuers may charge customers for late payments at $25 for the first offense and at $35 for additional late payments within the next six billing cycles. The new penalty-fee rules go into effect Aug. 22.
The $25 cap is significantly lower than the current industry average of $39 for late credit card payments to large issuers, but it did not sink to $20 or less as some had expected. (The Fed noted that the penalty fees community banks and credit unions charge tend to range between $17 and $25.)
According to the Fed’s final rules, a charge card issuer that has not received the required full payment for two or more consecutive billing cycles may impose a late-payment fee that does not exceed 3% of the delinquent balance.
“The Fed’s fee cap is in line with expectations, if not slightly better than what some had expected,” Sanjay Sakhrani, an equity analyst with New York-based Keefe, Bruyette & Woods Inc., tells PaymentsSource. “It’s a net negative for what issuers are generally getting now for late fees, but it is at the higher range of expectations.”
Issuers will see a decrease in card revenue as result of the ruling, but for most issuers it will not be a major bottom-line hit, Sakhrani says. “Most were expecting a slight decrease in penalty-fee income as a result of the new law,” he says, not specifying how it might affect issuers’ 2010 profits.
The Fed established the $25 cap as part of a “safe harbor” developed after gathering industry comments following the March announcement of the proposed rules (
The final rules also prohibit issuers from charging penalty fees exceeding the dollar amount borrowed, and it bans “inactivity” fees for not using an account.
Issuers also must a review any interest-rate increase levied on consumers since Jan. 1, 2009, to evaluate whether the reasons for the increase have changed and return the rate to its previous level if appropriate.
The final rules also provide card issuers the opportunity to prove to the Fed that any penalty fees they choose to charge above the $25 cap are “reasonable and proportional” to the issuer’s actual costs for violation of the account terms.
In its 252-page rules, the Fed clarified variables issuers may consider in determining the true cost of penalty fees, if they choose to do so.
Most account-term violations have not actually resulted in card-issuer losses, the Fed said its data show. “While issuers generally conceded that most violations do not result in losses, the cost associated with those that do is extremely high,” the Fed said.
Most major issuers PaymentsSource contacted declined to comment on the Fed’s penalty-fee rules, but some analysts believe large issuers may argue in favor of higher late and penalty fees.
“It is uncertain right now how many issuers will jump through hoops to prove that when customers are late with payments it costs them more than $25 for each infraction, but some will probably do some kind of cost analysis,” Scott Strumello, an associate with Westbury, N.Y.-based Auriemma Consulting Group, tells PaymentsSource. “Issuers will look at this carefully.”
In the short term, many large issuers will adopt the Fed’s $25 cap, especially because of the timing, Sakhrani speculates. “Some issuers that are more dependent on penalty-fee income than others may make efforts to protect it” by creating new cost-analysis models for the Fed, he says.
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