The Consumer Financial Protection Bureau (CFPB) Tuesday announced a rule to cut credit card late fees.
The rule will curb fees that cost American families more than $14 billion a year, a release stated. The rule is of more than passing interest in Delaware, the headquarters of Chase’s credit card operations. Other issuers also have operations in Delaware.
Critics of the rule, including large banks, claim the rule will raise interest rates and reduce access to credit. Similar objections have been raised in plans to increase capital requirements for banks. That move has led to a television campaign attracking the move.
Many credit card companies waive the first late payment for prompt payers, but some like Target credit card issuer TD have decline to do so in the past.
The credit card fee decision is expected to result in the bureau and Biden Administration clashing with big banks and Republicans, Politico reported. The GOP has claimed the agency exceeds the powers authorized by Congress.
The CFPB estimated that American families will save more than $10 billion in late fees annually once the final rule goes into effect by reducing the typical fee from $32 to $8. It would lead to average savings of $220 per year for the more than 45 million people who are charged late fees.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.
According to the government agency, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The law banned credit card companies from charging excessive penalty fees and established clearer disclosures and consumer protections.
In 2010, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act, which made clear that banks could only charge fees that recover the bank’s costs associated with late payment.
The rule included an immunity provision that allowed credit card companies to get around the provision if they charged no more than $25 for the first late payment, and $35 for subsequent late payments, with both amounts to be adjusted for inflation each year. Those amounts have moved up to $30 and $41, even as credit card companies shifted to cheaper, digital business processes. Congress transferred authority for administering CARD Act rules from the Fed to the CFPB.
The CFPB’s final rule adopts a lower threshold of $8 and ends automatic inflation adjustments for that amount for issuers that have one million or more open accounts.
The CFPB stated it has found that since 2010, issuers have generally been charging consumers more in credit card late fees each year—growing to over $14 billion in 2022, and representing more than 10 percent of the $130 billion issuers charged consumers in interest and fees.
Late fees are layered on top of many other punitive measures credit card companies impose on consumers who miss payments, including extra interest charges, loss of their grace period, negative credit reporting, reductions in their credit limit, and a higher interest rate on future purchases. The average late fee for major issuers has steadily ticked up since the passage of the CARD Act, going from $23 at the end of 2010 to $32 in 2022. For some large credit card companies, late fees are a major driver of their profit model, the agency claimed.
The CFPB’s final rule applies to issuers with more than 1 million open accounts. These companies account for more than 95% of total outstanding credit card balances. CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of the largest issuers charge close to the maximum allowable late fee amount. CFPB’s Credit Card Efforts
A recent CFPB report found that increases in APR margin charged by the largest issuersgenerated around $25 billion in additional interest revenue in 2023. Data submitted to the CFPB by credit card companies shows that small banks and credit unions offer lower rates, about eight to 10 percentage points lower than the largest 25 credit card companies.
According to the CFPB, actions include ordering Bank of America to pay a $30 million fine and repay tens of millions of dollars to consumers for illegal conduct including withholding credit card reward bonuses the company promised and opening unauthorized accounts. The CFPB also ordered Citizens Bank to pay a $9 million fine for failing to give refunds to consumers who reported fraud or billing errors, and ordered Citibank to pay $25.9 million for discrimination against credit card applicants the bank identified as Armenian American.
