Yesterday, the Federal Reserve proposed a rule amending Regulation Z or the Truth in Lending Act.

The move was made to protect credit card users from unreasonable late payment as well as other penalty fees. It also requires credit card issuers to reconsider increases in interest rates. This rule will go into effect on Aug. 22.

"This proposal addresses two key costs of using a credit card--fees and interest rates," Federal Reserve Governor Elizabeth A. Duke said. "The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year."

The proposed rule would have several effects. The first is that it will ban inactivity fees. Some issuers have recently instituted an inactivity fee if there are no transactions on the customer's credit card for a certain period of time.

The amendment will also force issuers to evaluate rate increases at least every six months. Credit card issuers will be required to reevaluate annual percentage rates increased on or after January 1, 2009.

These companies should also, where appropriate based on their review, reduce the annual percentage rate applicable to the account. This will include changes in the consumer's creditworthiness, and to increases in the rate  as a result of changes in market conditions or the issuer's cost of funds. But, the statute also expressly provides that no specific amount of reduction in the rate is required.

The new regulation will also stop credit card issuers from charging penalty fees that go over the dollar amount that is associated with the consumer's violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

The Fed will also require credit card issuers to offer reasons for increases in rates. This will also hinder issuers from charging multiple penalty fees based on a single late payment or other violation of account terms.

"These are significant changes in the credit card industry that will help every cardholder. But if history is any indicator, credit card issuers will find new ways to make up for the revenue they will lose when these rules take effect in August, and those changes could be in the form of new or increased fees," says Bill Hardekopf, CEO of and author of The Credit Card Guidebook.

The proposed rule represents the third stage of the Board's implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009.

Last July, the Board issued a rule implementing the provisions of the Credit Card Act that went into effect on Aug. 20. Last January, the Board issued a rule to implement the provisions of the Credit Card Act that went into effect on Feb. 22.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.