CFPB Proposes Cutting Credit Card Late Fees to $8

Credit union trade groups push back against proposal, saying rule would limit access to safe credit.

The CFPB on Wednesday proposed slashing credit card late fees to a maximum of $8—the latest attack on what the Biden Administration refers to as “junk fees.”

In its long-awaited rule governing the fees, the CFPB said it preliminarily has found that late fee income exceeds collection costs by a factor of five. Currently, credit card issuers may charge a late fee of up to $41, the agency said, adding that issuers have used a regulatory loophole to increase their fees.

Under the proposal, companies would still be permitted to charge higher fees as long as they could demonstrate the fee is needed to cover their incurred collection costs.

The rule would also eliminate the annual inflation adjustment for the permitted late fee, as well as cap any late fee charge to 25% of the minimum payment.

Rationale Behind the Rule

“No one says banks should lend money,” President Biden said during a meeting of his Competition Council Wednesday. “That’s what interest is for.”

In a separate statement, CFPB Director Rohit Chopra accused companies of exploiting loopholes in existing regulations.

“Over a decade ago, Congress banned excessive credit card late fees, but companies have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee,” Chopra said, in explaining the reason for the rule. “Today’s proposed rule seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”

Background and Context

Financial services trade groups, including CUNA and NAFCU, have long feared that the agency would crack down on credit card late fees. Last month, those groups, along with the American Bankers Association, said they believe the CFPB would be violating federal law if it did not convene a small business impact panel before issuing the credit card rule.

They said because the rule would have a substantial impact on community banks and credit unions with assets below $850 million, the agency was required under federal law to convene a Small Business Review panel.

However, the CFPB did not propose convening that panel. Instead, the agency said that “The small share of revenue coming from credit cards, together with the fact that late fees make up only a fraction of credit card revenue, implies that even a significant drop in late fee revenue would not have a significant economic impact for the large majority of small credit unions.”

The agency did however say it specifically wants feedback on the impact on smaller financial institutions.

Comments on the proposed rule must be received on or before April 3, 2023, or within 30 days after publication of the Notice of Proposed Rulemaking in the Federal Register, whichever is later.

Criticism From Credit Union Trade Groups

Credit union trade groups sharply criticized the proposal.

“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/CEO B. Dan Berger. “Cutting protections for credit card providers will price smaller, community-based financial institutions like credit unions out of the market.”

He added, “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 reducing the benefits of other financial programs.”

Groups in Support of the Proposal

Consumer and progressive groups, on the other hand, praised the move.

“Regulations seldom deliver such concrete benefits to consumers as the plan that the CFPB has set in motion today,” said Elyse Hicks, consumer policy counsel at Americans for Financial Reform.

The progressive organization Accountable.US sounded a similar note, with its U.S. director of economic security and corporate power program Liz Zelnick saying, “The CFPB’s crackdown on these exploitative charges will redirect billions from the pockets of big banks to consumers’ wallets and our economy.”

What Comes Next?

The CFPB issued its rule as the Biden Administration prepared to hold the fourth meeting of its Competition Council. The administration also called on Congress to pass a Junk Fee Prevention Act, which would crack down on other so-called “junk fees.”

The legislation would target excessive online fees for tickets to sports and entertainment events; ban airline fees for family members to sit with young children; eliminate large early termination fees for TV, phone and internet service; and ban surprise resort and destination fees.

The legislation does not, however, propose a crackdown on credit card overdraft fees—another proposal long opposed by financial trade groups.