Federal Bid To Curb Credit Card Late Fees Faces Tough Road Ahead

The Consumer Financial Protection Bureau proposed a new rule on February 1 that would dramatically reduce the late fees banks can charge consumers who miss credit card payments. The banks, which were surprised by the severity of the proposal, are already gearing up for a fight.

Under current regulations, credit card issuers, primarily banks, can charge cardholders up to $30 for an initial late payment and $41 for subsequent missed payments. The proposal would chop that down to a flat $8, unless a bank could show that its cost of collection is more than that $8. ditionally, the Bureau moved to end an automatic annual inflation adjustment for this exemption threshold.

The CFPB proposal also takes an ax to a second standard for allowed late fees, which allows banks to charge up to 100% of the minimum payment due as a late fee. The proposed rule change would limit late fees to 25% of the minimum payment. (Banks are required to meet whichever standard is lower, the fixed fee or the balance percentage.)

“Many credit card issuers have made late fee penalties a core part of their profit model,” CFPB Director Rohit Chopra said in an announcement. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.” In 2020, late fees funneled $12 billion into banks’ coffers, the CFPB reports.

The proposed rule change comes as the CFPB and the Biden administration move to crack down on a variety of so-called “junk fees” including service charges attached to ticket prices, resort fees and undisclosed fees on phone bills. “In many cases the fees are mysterious and can leave an individual unsure of the purpose. With overdraft fees, a cup of coffee can go from $3 to $35,” a post on junk fees from the CFPB reads.

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The CFPB estimates that bank income from late fees is roughly five times greater than their collection costs. Though a regulation reigning in late fees was expected from the CFPB, the depth of the proposed cuts in fees caught industry leaders by surprise.

“It was not expected that it was going to be as Draconian as what has been proposed from the standpoint of the credit card industry,” Alan Kaplinsky, Senior Counsel of Ballard Spahr’s Consumer Financial Services Group says. “The industry is livid over this.”

The proposed regulation has significant challenges ahead, including lobbying from credit card companies. One argument countering the proposed regulatory changes is that late fees are clearly disclosed and should not be thrown in the same bucket as often-hidden fees from less-regulated industries like entertainment. Another argument: if banks are forced to curb late fees, they could become less risk-tolerant and curtail access to credit for consumers with lower FICO scores. At the same time, to make up for lost revenue, card issuers would likely increase interest rates.

“This announcement is just the latest example of the Bureau seeking to advance a political agenda that will harm, rather than help, the very people they are responsible for serving,” the Consumer Bankers Association wrote in a post responding to the proposal.

An additional hurdle for the proposed legislation is ongoing scrutiny of the CFPB’s funding structure. The Bureau receives funding directly from the Federal Reserve instead of through a Congressional appropriations committee. The design was meant to insulate the regulator from political gridlock, but was deemed unconstitutional by an appeals court in October. In the same ruling, the fifth circuit court pulled back restrictions on payday loans from the CFPB.