WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) has finalized a rule it said will “cut excessive credit card late fees” by “closing a loophole exploited by large card issuers.” When the final rule goes into effect it will reduce the typical fee to $8 from $32 to $8. The rule applies to issuers with more than one-million open card accounts, which it said account for more than 95% of total outstanding credit card balances.
America's Credit Unions has responded by blasting the rule, saying it will have the opposite of its intended effect to foster competition. The CFPB, has in recent years targeted fees and “junk fees” of all types, saying business models are being built on “penalties, fee harvesting, and bait-and-switch tactics.”
In announcing its new rule, the CFPB said fees cost American families more than $14 billion a year, and it is estimating American families will save more than $10 billion in late fees annually, with an average savings of $220 per year for the more than 45 million people who are charged late fees.
The announcement from the Bureau comes at the same time America’s Credit Unions is holding its Governmental Affairs Conference in Washington, where the issues of fees, interchange and more are the subject of several breakout sessions.
Credit Unions Call Rule a 'Clear Misunderstanding'
America's Credit Unions quickly responded by criticizing the rule.
"The CFPB's misguided final rule on credit card late fees clearly demonstrates a misunderstanding on how credit cards work and potentially traps millions of consumers in a cycle of debt instead of fulfilling their intended purpose of protection," said ACU President and CEO Jim Nussle. "Credit unions work to empower their members’ financial decision making and clearly define their late fees. An $8 late fee, approximately the cost of a Big Mac and a large Coke, does nothing to protect the issuer and throws consumer accountability to the wayside.
"It’s laughable today’s rule is being released under the guise of increasing competition when its byproduct will be exactly the opposite," Nussle continued. "The bureau is racing toward a future with fewer choices, greater homogenization, and limited access for at-risk consumers. This rule is yet another death blow in the CFPB’s latest trend of dismantling real protections and stifling access to the competitive and safe services that credit unions provide."
Based on CARD Act
The CFPB noted Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), which law banned credit card companies from charging excessive penalty fees and established clearer disclosures and consumer protections.
In further noted that 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.”
Immunity Provision
“However, the rule included an immunity provision that allowed credit card companies to sidestep accountability 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,” the CFPB said. “Those amounts have ballooned to $30 and $41, even as credit card companies have moved to cheaper, digital business processes. Congress transferred authority for administering CARD Act rules from the Fed to the CFPB.”
The CFPB said that after a “thorough review” of market data related to the 2010 immunity provision, its 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.
What Bureau Said it Has Found
The CFPB reported 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% 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 CFPB said. “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.”
What Final Rule Does
The final rule:
- Lowers the immunity provision dollar amount for late fees to $8. “Based on data analyzed by the CFPB, a late fee of $8 would be sufficient for larger card issuers, on average, to cover collection costs incurred as a result of late payments,” the CFPB said.
- Ends abuse of the automatic annual inflation adjustment. “The CFPB found that many issuers hiked their late fees in lockstep each year without evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. The CFPB will instead monitor market conditions and adjust the $8 late fee immunity threshold as necessary.”
- Requires credit card issuers to show their math. “Larger card issuers will be able to charge fees above the threshold so long as they can prove the higher fee is necessary to cover their actual collection costs.”
What Isn’t Changing
The CFPB said the rule does not change the credit card issuer’s ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late.
“In fact, the rule would increase the desire for credit card companies to facilitate on-time payment, since it would lower incentives to build a business model on late fees,” the CFPB said.
The text of the final rule can be found here.
Additional CU Response
In its response to the CFPB rule, America's Credit Unions issued a statement that states:
- Credit card late fees are not “surprise” or “junk” fees – they are required by the CFPB to be clearly detailedupfront for consumers.
- By signing a credit card agreement, consumers know the costs if their payments are tardy.
- The CFPB’s own research shows that 74% of American pay their bills on time. There is no need to penalize those who follow the rules.
- The proposed rule will negatively impact the ability of credit unions to offer viable credit card programs, manage the risks associated with those programs, and increase the costs of credit cards for all cardholding members – not just those that incur late payment fees.
- The CFPB and the Administration have repeatedly classified a broad range of ordinary fees in the consumer financial services market as so-called “junk fees” obscuring the true cost of financial services.
- "This government-wide effort to characterize all fees as “junk fees” appears to be a public relations tactic intended to divert the public’s attention away from the runaway inflation and other economic pressures impacting American’s budgets."
- America’s Credit Unions has received comments on this rule and many credit unions said their credit card programs targeted toward those with lower credit scores or thin credit profiles would be the first cut, tightening credit availability.