WASHINGTON—The Consumer Financial Protection Bureau (CFPB) has proposed a rule to curb excessive credit card late fees that it says cost American families about $12 billion each year.
Both CUNA and NAFCU expressed strong opposition to the proposal.
“CUNA strongly opposes this proposal, as any reduction in late fee safe harbors will have a significant negative impact on many small, community-based credit unions,” said CUNA President/CEO Jim Nussle. “Not only would this proposal reduce access to safe and affordable open-end credit, but its broad impact clearly warrants the careful consideration of a Small Business Review Panel, and it’s irresponsible for the bureau to bypass its statutory obligations under the Small Business Regulatory Enforcement Fairness Act, which was designed to calculate the impact on small entities.”
CUNA noted that specifically the proposal would lower the safe harbor to $8 (down from $30 for first time and $41 for subsequent late payments), end the automatic annual inflation adjustment, and cap fees at 25% of the minimum payment.
'Financial Chaos'
“The CFPB’s proposed rule on credit card late fees on its face may be about saving consumers money, but it amounts to financial chaos – ultimately sacrificing access to safe, affordable credit for millions of Americans who rely on it to afford daily life," said NAFCU President and CEO Dan Berger "Cutting protections for credit card providers will price smaller, community-based financial institutions like credit unions out of the market. With this rulemaking, the bureau is ignoring its statutory mandated safeguard to protect small institutions and NAFCU’s call to follow the law by conducting a SBREFA panel to analyze its impact. The consumers credit unions serve, many in low-income and underserved populations, will have reduced access to credit as a result. In addition, institutions will likely be forced to raise the price of checking and savings accounts or other loan products and reduce the benefits of other financial programs. This proposed rule, if finalized in its current form, will hit Americans hard.”
‘Immunity Provisions’
In announcing its proposal, the CFPB said major credit card issuers continue to profit off late fees that are protected by an expansive immunity provision.
“Credit card companies have also relied on this provision to hike fees with inflation, even if they face no additional collection costs,” the Bureau said. “The proposed rule would help ensure that over-the-top late fee amounts are illegal. Based on the CFPB’s estimates, the proposal could reduce late fees by as much as $9 billion per year.”
CFPB Director Rohit Chopra said in a statement companies have been exploiting a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee.
‘Exorbitant Late Fee’
“When someone misses a payment due date, even if they paid a few hours after the deadline, the cardholder may be hit with an exorbitant late fee that far exceeds the credit card company’s costs to collect late payments,” the CFPB said. “These excessive late fees may not be needed to deter late payments, nor be justified based on the consumer’s conduct in paying late. These late fees also may be on top of other consequences of paying late, such as a lost grace period on paying interest or a lower credit score, depending on how long the missed payment lasts.”
According to the CFPB, companies currently charge people as much as $41 for each missed payment, resulting in billions of dollars in annual junk fee revenue for credit card companies.
The Proposed Changes
The CFPB said its proposed changes, which would amend regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), would ensure that late fees meet the Act’s requirement to be “reasonable and proportional” to the costs incurred by issuers to handle late payments.
Specifically, the proposed rule would lower the immunity provision for late fees to $8 for a missed payment as well as end the automatic annual inflation adjustment. The proposed rule would also ban late fee amounts above 25% of the consumer’s required payment.
“The Federal Reserve Board, by regulation, created the immunity provisions to allow credit card companies to avoid scrutiny of whether their late fees met the reasonable and proportional standard. Over time, those provisions have risen with inflation to $30 for an initial late payment and $41 for subsequent late payments,” the CFPB said.
‘Five Times Greater’
The CFPB added that it estimates the income generated by the largest issuers from late fees is approximately five times greater than the collection costs that the companies incur for late payment violations. In 2020, for example, credit card companies charged approximately $12 billion in late fees, which represented more than 10% of all credit card interest and fees charged to consumers, the CFPB said.
The newly proposed rule follows a request for comment on junk fees, a research report, and an advance notice of proposed rulemaking on credit card late fees that the CFPB issued last year.
What Rules Would Do
The CFPB’s proposed changes would, if finalized:
- Lower the immunity provision dollar amount for late fees to $8. “The CFPB has preliminarily found that late fee income exceeds associated collection costs by a factor of five. Because the immunity provision currently allows issuers to charge late fees of up to $41, the CFPB believes that a late fee of $8 would be sufficient for most issuers to cover collection costs incurred as a result of late payments. The $8 immunity provision would apply to any missed payment. Companies would be able to charge above the immunity provision so long as they could prove the higher fee is necessary to cover their incurred collection costs.”
- End the automatic annual inflation adjustment. “The CFPB’s proposal would eliminate the automatic annual inflation adjustment for the immunity provision amount. This adjustment is not required by law, nor is it necessarily reflective of how collection costs change over time. The CFPB would instead monitor market conditions and the immunity provision amount for potential adjustments as necessary.”
- Cap late fees at 25% of the required minimum payment. “The current rule allows a card issuer to potentially charge a late fee that is 100% of the minimum payment owed by the cardholder. The CFPB proposes to restrict any late fee charge to 25% of the minimum payment to be more consistent with Congress’s intent to authorize only reasonable and proportional late fee amounts.”
Comment Sought
The proposal also seeks comment on other potential changes to CARD Act regulations, including requesting comment on whether the CFPB’s proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.
Additional information can be found here.
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