Proposed rule seeks to close loophole exploited by companies to hike fees with inflation
Today, the Consumer Financial Protection Bureau (CFPB) proposed a rule to curb excessive credit card late fees that cost American families about $12 billion each year. Major credit card issuers continue to profit off late fees that are protected by an expansive immunity provision. Credit card companies have also relied on this provision to hike fees with inflation, even if they face no additional collection costs. The proposed rule would help ensure that over the top late fee amounts are illegal. Based on the CFPB’s estimates, the proposal could reduce late fees by as much as $9 billion per year.
Read today’s Notice of Proposed Rulemaking.
Comments 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.
Read Director Chopra’s remarks on credit card late fees and the Notice of Proposed Rulemaking.
When someone misses a payment due date, even if they paid a few hours after the deadline, the cardholder may be hit with an exorbitant late fee that far exceeds the credit card company’s costs to collect late payments. These excessive late fees may not be needed to deter late payments, nor be justified based on the consumer’s conduct in paying late. These late fees also may be on top of other consequences of paying late, such as a lost grace period on paying interest or a lower credit score, depending on how long the missed payment lasts.
Companies currently charge people as much as $41 for each missed payment, and these fees result in billions of dollars in annual junk fee revenue for credit card companies. The CFPB’s proposed changes, which would amend regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), would ensure that late fees meet the Act’s requirement to be “reasonable and proportional” to the costs incurred by issuers to handle late payments. Specifically, the proposed rule would lower the immunity provision for late fees to $8 for a missed payment as well as end the automatic annual inflation adjustment. The proposed rule would also ban late fee amounts above 25% of the consumer’s required payment.
The Federal Reserve Board, by regulation, created the immunity provisions to allow credit card companies to avoid scrutiny of whether their late fees met the reasonable and proportional standard. Over time, those provisions have risen with inflation to $30 for an initial late payment and $41 for subsequent late payments. The CFPB estimates that the income generated by the largest issuers from late fees is approximately five times greater than the collection costs that the companies incur for late payment violations. In 2020, for example, credit card companies charged approximately $12 billion in late fees, which represented more than 10% of all credit card interest and fees charged to consumers.
The proposed rule follows a request for comment on junk fees, a research report, and an advance notice of proposed rulemaking on credit card late fees that the CFPB issued last year. The CFPB’s proposed changes would, if finalized:
- Lower the immunity provision dollar amount for late fees to $8: The CFPB has preliminarily found that late fee income exceeds associated collection costs by a factor of five. Because the immunity provision currently allows issuers to charge late fees of up to $41, the CFPB believes that a late fee of $8 would be sufficient for most issuers to cover collection costs incurred as a result of late payments. The $8 immunity provision would apply to any missed payment. Companies would be able to charge above the immunity provision so long as they could prove the higher fee is necessary to cover their incurred collection costs.
- End the automatic annual inflation adjustment: The CFPB’s proposal would eliminate the automatic annual inflation adjustment for the immunity provision amount. This adjustment is not required by law, nor is it necessarily reflective of how collection costs change over time. The CFPB would instead monitor market conditions and the immunity provision amount for potential adjustments as necessary.
- Cap late fees at 25% of the required minimum payment: The current rule allows a card issuer to potentially charge a late fee that is 100% of the minimum payment owed by the cardholder. The CFPB proposes to restrict any late fee charge to 25% of the minimum payment to be more consistent with Congress’s intent to authorize only reasonable and proportional late fee amounts.
The proposal also seeks comment on other potential changes to CARD Act regulations. For instance, it requests comment on whether the CFPB’s proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.
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.
August 05, 2022 — 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.
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 raise 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.”
“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. “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.)
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.
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.
Click here to read the entire article with quotes.
Courtesy of Kate Berry, American Banker
(Dec. 3, 2021) Fees – both mandatory and maximum allowable — are on the increase for 2022 under actions taken this week by the CFPB and the Federal Reserve.
A 50-cent increase in the maximum allowable fee that a nationwide consumer reporting agency or nationwide specialty consumer reporting agency can charge consumers for their credit reports will raise next year’s fee maximum to $13.50, according to CFPB.
The Fair Credit Reporting Act (FCRA) requires that a nationwide consumer reporting agency provide one file disclosure to a consumer, upon request, every 12 months; it provides for other no-cost disclosures under certain circumstances, the bureau noted. Where a fee is permitted, however, and under the recent adjustment, it may not be greater than $13.50, according to the CFPB’s notice in Monday’s Federal Register.
Also this week: the Federal Reserve announced its priced services fees will increase an average 3.7% in the new year. The Fed said increases in the fee schedule for 2022 are generally like previous years, except 2021 where fees other than the Check Services Participation Fee remained flat.
The priced services are categorized within check services, FedACH, Fedwire® Funds and NSS, and Fedwire Securities, the agency said. The 2022 fee schedule for each of the priced services is available on the Federal Reserve Banks’ financial services website at FRBservices.org®. Specific fee changes are detailed more fully in the Fed’s draft notice for the Federal Register, which also details the Fed-approved $19.4 million “private sector adjustment factor” (PSAF) for 2022.
LINKS
Federal Register notice on consumer credit report fees
Federal Reserve Board approves fee schedule for Federal Reserve Bank priced services