Bankers are gearing up to oppose an effort by the Consumer Financial Protection Bureau (CFPB or Bureau) to prevent an increase in allowable late charges for credit cards. In letters dated August 1, the American Bankers Association, Consumer Bankers Association, Credit Union National Association, and National Association of Federally‐Insured Credit Unions (Associations), as well as the Bank Policy Institute, expressed their collective displeasure with the idea.
In an Advance Notice of Proposed Rulemaking published in late June, the CFPB announced it was seeking data as to whether late fees charged by credit card companies are “reasonable and proportional” to the amount owed. This action was spurred by the fact that the cap on allowable late fees provided under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) is tied to inflation. And, as everyone knows, inflation is at a record high.
As a result, the maximum allowable late fee under the CARD Act could increase by as much as 9% next year — an increase the CFPB has indicated it would try to halt using its regulatory authority under the Truth in Lending Act and Regulation Z. CFPB Director Rohit Chopra explained the CFPB’s position as follows: “Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago. This effort is particularly timely since current rules might give companies the incentive to impose big hikes based on inflation.”
For background, the Federal Reserve Board of Governors (Fed) in 2010 voted to implement provisions of the CARD Act that required penalties to be “reasonable and proportional to the omission or violation.” However, the Fed also included a provision that allowed credit card issuers to escape enforcement scrutiny if they set fees at a particular level, that is, a “safe harbor.” But the Fed also stated that it would adjust the safe harbor amount annually, based on changes in the consumer price index. In 2010, the safe harbor limit on late fees was $25 for the first late payment. Since then, the late fee limit has increased to $30 for the first late payment and $41 for subsequent late payments within six billing cycles. Now that inflation has spiked, late fees are expected to rise next year to $33 for the first late payment and $45 for subsequent ones. Critics of the Fed’s safe harbor provision have called upon the CFPB to put a halt to inflation adjustments, pointing out that financial institutions already charge consumers roughly $12 billion a year in late fees, and there is no reason to presume that the current fees are reasonable and proportional to the impact of consumers’ late payments.
But bankers and trade groups have vehemently opposed any attempts to limit the late fee safe harbor, explaining that late fees act as a deterrent to consumers overextending their means. As the Associations explained in their August 1 letter “When set appropriately, late fees encourage consumers to pay on time and develop good financial management habits. However, if late fees are too low, consumers are more likely to pay late and miss payments, leading to lower consumer credit scores, reduced credit access, and higher credit costs.”
Others say that reducing late fees or eliminating the safe harbor would impact small banks and credit unions because financial institutions would be forced to raise fees elsewhere or increase the cost of credit overall. As explained by the Bank Policy Institute in their August 1 letter, “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.”
Another unintended impact of the CFPB’s proposed regulation that the Associations noted in their August 1 letter could be that vulnerable communities are disproportionately affected by the limiting of late fees. “Tighter underwriting standards and lower credit lines for new customers would have the greatest impact on those who do not have an established or strong credit history. Without the lever of late fees to mitigate the risk of late payment, issuers may need to be more conservative about approving credit cards for those in this group. Issuers could also reduce credit lines for existing accounts to mitigate risk, an issue about which the Bureau recently expressed concern.”
The Associations also suggest that if late charges fail to keep up with costs, then issuers would look to make up for losses elsewhere, which “could include reducing credit lines, tightening standards for new accounts, and raising annual percentage rates (APRs) and fees for all cardholders, including those who pay on time.”
Troutman Pepper will continue to monitor important developments involving the CFPB, credit card late fees, and the Fed’s safe harbor provision and will provide further updates as they become available.