CFPB can limit late fees for credit cards if inflation threatens to increase

Rohit Chopra, Director of the Consumer Financial Protection Bureau, testified at a Senate Banking, Housing and Urban Affairs Committee hearing on April 26, 2022.

Tom Williams | Cq-roll Call, Inc. , Getty Images

The Consumer Financial Protection Bureau on Wednesday signaled a slump in late fees charged by credit card companies, as inflation threatens to increase those so-called “junk” fees charged to consumers.

The watchdog, a federal agency created during the 2008 financial crisis, issued a preliminary announcement of proposed regulations to seek information from card issuers, consumer groups and the public about late fees.

The data will help the regulator draft new rules aimed at “weak spots” in existing laws regulating “back-end fines” imposed by card companies, CFPB director Rohit Chopra said in a press release on Wednesday.

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Public comments are through July 22nd. Timing on a formal rule proposal (and ultimately a definitive rule) is unclear, but bureau officials said they did not expect the process to end before the end of the year.

Officials expect changes to reduce total late fees by billions of dollars each year, they said Wednesday. They also signaled future regulation on other types of fees, without offering specifications.

credit card late fees

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More than 175 million Americans have at least one credit card, according to the CFPB.

Companies generally charge late fees if a customer does not make the minimum card payment on their due date.

In 2019, consumers paid an average of $ 26 for each late payment, according to the CFPB. The fee increases if another late payment is made within six billing cycles, to an average of $ 34.

Total late payments totaled $ 12 billion in 2020, slightly less than a $ 14 billion record set last year, the CFPB said in a recent report.

The costs have disproportionately affected users in low-income and majority-Black weeks, according to the supervisor.

The watchdog characterizes late fees as a kind of “junk” fee charged by credit card issuers. The agency had issued a separate request in January, asking consumers for input on hidden and excessive fees from a variety of lenders.

“This is just one project related to one type of junk fee,” according to a CFPB official, who spoke in the background. “I think it’s fair to say that there will be other projects in the near future related to other fees.”

What is missing from this announcement is the fact that banks – more than any other industry – have taken concrete steps to make their products more affordable and accessible to millions of Americans.

Richard Hunt

president and CEO of the Consumer Bankers Association

Richard Hunt, president and CEO of the Consumer Bankers Association, said additional restrictions would hurt customers and could eventually drive them to riskier types of credit.

“Today’s announcement is another reminder that the Bureau is more interested in pushing a particular agenda than developing fact-based policies that improve the lives of hard-working families,” Hunt said in a statement. “This announcement lacks the fact that banks – more than any other industry – have taken concrete steps to make their products more affordable and accessible to millions of Americans.”

What would the CFPB do?

Current law prohibits credit card issuers from charging customers a late payment fee, except in certain cases. In order to collect a fee, the company must determine that the fee is a “reasonable” part of the total cost the company has incurred to process a late payment.

But the law also provides a legal safety net: Issuers can generally avoid cost analysis (and regulatory control) if they charge $ 30 or less for a late payment, and up to $ 41 for each subsequent late payment made within the next six billing cycles.

“In today’s prior announcement of proposed regulations, the CFPB is asking for information on these fees to assess whether they are really reasonable and proportionate,” Chopra said.

The headquarters of the Consumer Financial Protection Bureau in Washington, DC

Joshua Roberts / Bloomberg via Getty Images

These maximum “safe haven” fees are adjusted every year for inflation – giving urgency to CFPB regulation at a time when consumer prices are rising at their fastest pace in about 40 years.

“This effort is particularly timely considering the rule allows banks to increase their fees based on inflation,” according to a CFPB official. “Folle [people] are currently struggling to reach the end and are struggling with higher costs. “

Most smaller banks and credit unions charge a maximum late fee of $ 25 or less, but almost all of the major issuers have fees up to or near the maximum allowed, according to CFPB data.

Chopra wondered whether the cost of processing late payments would increase with inflation, or whether it was more reasonable to expect those costs to decrease due to improvements in technology.

However, Hunt of the Consumer Bankers Association cited inflation as a major reason why the CFPB should not impose additional rules on the sector.

“Imposing more restrictions on credit products offered by banks will hurt hard-working families the most, forcing them to meet their needs outside of the well-managed banking system,” Hunt said. “This risk is even greater now because families are struggling with the effects of inflation.”

The CFPB said it was seeking information on the following issues, among others: factors used by card issuers to set late fee amounts; costs and losses of companies associated with late payments; the deterrent effects of late fees; late payment behavior of cardholders; methods that companies use to facilitate or encourage temporary payments (such as autopay and notifications); and their use of “safe harbor” facilities.

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