CFPB gets earful on limiting credit card late fees

Banks and credit unions are pushing back hard against an effort by the Consumer Financial Protection Bureau to put a halt to a roughly 9% hike next year in credit card late fees pegged to inflation.

The issue has been moot for years because inflation has been so low. But with the Consumer Price Index up 9% in the past year, the CFPB is calling into question whether credit card late fees should be tied to inflation, a provision set by the Federal Reserve in 2010. 

Under the “safe harbor” provision, institutions can raise late fees due to inflation without any cost-benefit analysis as long as the fees being charged are “reasonable and proportional.” To receive the safe harbor, credit card issuers can charge $30 for the first late payment and $41 for subsequent late payments within six billing cycles. 

The Consumer Financial Protection Bureau is taking heat from banks and credit unions over its proposal to limit increases in credit card late fees that would otherwise increase because of rising inflation.

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Under a complicated formula, credit card late fees are expected to rise next year to an estimated $33 for the first late payment and $45 for subsequent late payments.

Consumer advocates and critics of the Fed’s safe harbor suggest that the CFPB intervene and put a halt to the inflation adjustments. CFPB Director Rohit Chopra wants to lower credit card late fees generally and has already called out financial institutions for charging consumers roughly $12 billion a year in late fees.

The CFPB received 42 comments to an advance notice of proposed rulemaking in June that seeks to determine how credit card issuers set late fees.  A core part of the CFPB’s review involves determining whether late fees are generating more revenue than is necessary to cover their cost, a requirement set by the Fed. 

But Chopra also has raised concerns about whether the Fed initially set late fees too high more than a decade ago and whether giving financial firms a safe harbor, with immunity from enforcement actions for setting fees at the safe harbor level, gives issuers an incentive to hike late fees every year. 

David Silberman, a former acting CFPB deputy director who is now a lecturer at Harvard Law School, said the bureau should issue an interim final rule to prevent late fees from rising in 2023. Silberman, who is also an adjunct professor at Georgetown University’s McCourt School of Public Policy, said the increases pegged to inflation do not meet the Fed’s own standards.  

“There is ample reason to doubt whether a safe harbor which increases with the current cost of living increases meets the reasonable and proportional requirement,” Silberman wrote in a comment letter. “Even if the safe harbor levels were set correctly in 2010 to cover costs and deter violations, there is no basis to presume that the current levels are reasonable and proportional to the violations (i.e. the late or missed payment) that triggers the fee.”

Bankers, trade groups and others took the opposite tack, raising a litany of defenses to keep the CFPB from making any changes to late fees.  

“These late fees are calculated as a business judgment to establish a deterrent effect to mitigate the risk of extending credit,” said Ann Petros, vice president of regulatory affairs at the National Association of Federally-Insured Credit Unions, or NAFCU. The Bureau should not second-guess this business judgment or further limit fees across the board by reducing the safe harbor fee amounts.”

Of the 20 largest card issuers, 18 charge late fees at or near the maximum allowed. Many small banks and credit unions charge late fees of $25 or less though Petros said that credit card payment processors set most fee limits and then pass their costs onto credit unions.

Bankers consider late fees to be a deterrent to consumers piling on debt. (Late fees and interest are charged to cardholders that fail to make the minimum payment by their credit card’s due date.)

“This is an example of a regulation functioning as it is intended to,” said Mickey Marshall, director of regulatory legal affairs  at the Independent Community Bankers of America. “The supply of U.S. Dollars has ballooned dramatically, customers’ deposit account balances remain high, and the buying power of the dollar has diminished. If late fees are not permitted to increase along with inflation, the real cost of late fees will decrease, causing them to lose their necessary deterrent effect.”

Some commenters said the CFPB should look elsewhere for culprits charging excessive fees such as fintechs and Buy Now pay Later companies. 

Others said that reducing late fees or eliminating the safe harbor would cause some level of havoc for the industry, forcing financial institutions to raise fees elsewhere or raise the cost of credit overall, which would impact small banks and credit unions.

“Any reduction in the safe harbor amount or elimination of the safe harbor would have an impact on the thousands of credit card issuers operating in this market, including small issuers,” wrote Paige Pidano Paridon, senior vice president and senior associate general counsel at The Bank Policy Institute. 

The CFPB has the authority to regulate late fees under the Truth in Lending Act and Regulation Z, the Card Act’s implementing regulation.  

Chi Chi Wu, a staff attorney at the National Consumer Law Center, said credit card late fees should be proportional to the debt owed. She suggested that the CFPB create a sliding scale under the safe harbor so that late fees are proportional to the account balance. 

“A late fee should be no more than 1% of the balance and no more than 25% of the missed payment,” Wu wrote in a comment letter. “A fee harvester card with a $300 maxed-out credit limit could charge no more than $3, and a subprime card with a $1,000 balance could charge no more than $10.”

Technology also has lowered the cost of collections, making it easier and cheaper for credit card issuers to use automated methods to collect overdue payments and delinquent debts, Wu said. 

Another wrinkle involves minimum credit card payments. Currently, a late fee cannot exceed the minimum amount required. But if late fees go up, issuers also will have to raise the minimum payment floor, Silberman said. 

Some commenters said the CFPB needs to spend more time studying the issue. Others suggested vulnerable communities would be hit the hardest if late fees could not rise with inflation. 

“Any effort to reduce permissible fee amounts would result in tighter credit, with more stringent lending criteria that makes it difficult for consumers with lower credit scores to obtain access to credit,” Petros said. 

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