By Ray Birch
WASHINGTON—With the CFPB’s ongoing focus on fees, including overdraft pricing and credit card late charges, credit unions need to take a hard look at all of their fee income and their costs of doing business, according to Carrie Hunt.
“Unfortunately, there may be some credit unions that are going to choose to stop offering card programs,” said Hunt, chief advocacy officer with America’s Credit Unions. “That would be an extremely negative result coming out of this.”
Hunt’s reference is to the CFPB’s newly finalized rule capping late fees on credit cards. As CUToday.info reported, the CFPB has now published its proposal on credit card late fees in the Federal Register that would reduce the credit card late fee safe harbor to $8, down from the current $30 for a first violation and $41 for a subsequent violation within the next six billing cycles.
The new rule applies to issuers of more than one-million active accounts. While Navy FCU is the only credit union that surpasses that threshold, the effects are expected to be felt across the market.
“I just can't help but feel in my gut that even though the CFPB is well-intentioned, the combination of all these various rules means we're going to be left with either a handful of credit unions—and even worse, just a handful of banks—across our country,” said Hunt.
A Bad Vision
While the CFPB may be successful in implementing its vision for what financial services should look like, Hunt contended that vision is not going to benefit the American consumer.
“Credit unions have very limited access to secondary capital and they raise earnings from their members,” Hunt reminded. “We were in a low-rate environment for so long, and regulators wanted institutions to diversify fee income. And now we have been in an environment where rates have risen. But the Fed is likely going to drop rates (this year). The period of even moderate rate increases is very small in the scheme of things.
“So, I don't know where credit unions are going to be able to look to have retained earnings,” she added. “I mean, it's just so challenging with what's happening right now.”
A Case of ‘Interference’
Hunt asserted the late fee proposal is yet another rule in a long list of actions that represent “government interference” on a business practice of a particular industry.
Carrie Hunt
“To be clear, we certainly recognize the Consumer Financial Protection Bureau’s regulatory authority,” she said. “However, we think this particular approach will actually ultimately serve to harm consumers rather than help them. We think that what they're doing does not take into full consideration how credit cards are supposed to work and ultimately what works in the market.”
Hunt pointed out that at its “core,” a credit card is a mechanism for consumers to have an easy extension of credit.
“And, ultimately, the consumer is responsible for paying back that credit under the condition of the terms that are set out,” she said. “Credit unions have favorable rates and terms. There are a variety of credit cards credit unions offer that present an easy, accessible mechanism for their members to make everyday purchases. That being said, we can't forget this truly is an extension of credit and the credit union is on the hook for paying merchants for those (transaction) costs.
“And consumers need to pay those extensions of credit back,” Hunt continued. “If they do not pay on time, the credit union needs to be able to recoup that cost so they can run their credit card programs and continue to offer that service. That's just the basic market or for credit cards.”
‘What is So Challenging’
Pointing out that credit unions are member-owned cooperatives that focus on consumer service and provide consumer-friendly products, Hunt said there does not appear to be a direct link with those traits and what the CFPB is doing relative to consumer protection.
“That is what is so challenging with this particular issue,” Hunt said. “Credit unions, of course, want to have their members pay and pay on time, so they don't get pulled into a deeper debt trap. As we know, with credit cards, there's a minimum payment you have to make every month, and that is a very small percentage of the credit card balance. As a consumer you certainly do not have to pay back the full balance. At the same time, if they miss a payment the late charge is a mechanism for the credit union to cover their expenses and costs.”
No Incentive
If the late fee charge becomes too low, Hunt contended borrowers have little or no incentive to pay the credit union back.
“That raises a lot of concerns for credit unions—they would not have a level of certainty as to whether a member is going to pay back a debt or not,” she said.
Some analysts have suggested that while the CFPB limited its rule on card late fees to only the largest issuers—who control 95% of the cards in circulation in the U.S.–they expect the rule will affect all issuers due to competitive pressures. Hunt agreed.
“The large institutions will be able to absorb the cost due to their scale. And, consumers are savvy. If they have a choice between a credit card that has a very low late fee versus one that has a much higher fee, you know they're going to make the choice for the lower fee card,” she said.
Smaller Issuers May Exit
Hunt added that these pressures may lead to smaller FIs not being able to cover the costs of their card programs. She agreed smaller issuers may begin to cut back on rewards and possibly raise interest rates.
“I will also add another layer to this discussion. The CFPB, over and over again, wants to push consumers from other types of programs—whether it's overdraft or other loans—into credit cards,” explained Hunt. “And they have said that through multiple avenues. While I certainly understand that in certain circumstances that could be a better option for consumers, it's still an extension of credit. I'm very concerned that we do not have enough evidence as to whether or not some of this government intervention is actually going to do the opposite of what the CFPB wants and it's going to push more and more people into cycles of debt because there is not going to be any incentive to pay on time. That's a big concern.”