CFPB Limits Credit Card Late Payment Fees

March 8, 2024
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The US Consumer Financial Protection Bureau (CFPB) has finalised a rule to reduce excessive credit card late fees charged by large card issuers.

The US Consumer Financial Protection Bureau (CFPB) has finalised a rule to reduce excessive credit card late fees charged by large card issuers.  

The rule will reduce the typical fee issuers can charge customers for making late payments from $32 to $8 and applies to credit card issuers with more than 1m open accounts.

These companies account for more than 95 percent of total outstanding credit card balances. Smaller card issuers tend to charge lower rates and fees, while most of the largest issuers charge close to the maximum allowable late fee, CFPB data shows. 

The CFPB estimates that credit card holders will save more than $10bn in late fees annually, for an average saving of $220 per year for the more than 45m people who are charged late fees. 

The final rule: 

  • Lowers the immunity provision amount for late fees to $8, which CFPB has found sufficient for larger card issuers to cover collection costs for late payments. 
  • Ends abuse of the automatic annual inflation adjustment. Many issuers tend to hike their late fees each year without evidence of increased costs, according to the CFPB’s analysis. Eliminating the automatic annual inflation adjustment for the $8 late fee threshold was added by the Federal Reserve Board and is not required by law. However, the CFPB will monitor the market and adjust the $8 late fee immunity threshold as necessary. 
  • Requires credit card issuers to show proof that fees above the threshold are necessary to cover their actual collection costs. 

The regulation does not change credit card issuers’ ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late.  

“In fact, the rule would increase the desire for credit card companies to facilitate on-time payment, since it would lower incentives to build a business model on late fees,” the CFPB stated. 

The final rule will come into effect 60 days after publication in the Federal Register. 

Its introduction follows a review of market data related to the immunity provision included in a 2010 regulation issued by the Federal Reserve Board of Governors implementing the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act passed by Congress.  

While the regulation stated that banks could only charge fees that recover the costs associated with late payment, it included an immunity provision if credit card companies charged no more than $25 for the first late payment and $35 for subsequent late payments, with both amounts to be adjusted for inflation each year. 

But those amounts have since increased to $30 and $41, even as credit card companies have moved to cheaper, digital business processes.  

Congress has transferred authority for administering the CARD Act from the Fed to the CFPB, and the CFPB has found that since the Act’s passage, card issuers have been charging consumers more in credit card late fees each year — growing to more than $14bn in 2022, and representing more than 10 percent of the $130bn issuers charged consumers in interest and fees.  

The rule adjustment is part of ongoing efforts by the CFPB to address problems and foster competition in the $1tn US credit card market. This includes work to help consumers find lower interest rates. 

Last week, the CFPB issued guidance to rein in rigged comparison-shopping results for credit cards and other products, and it is developing a tool to give consumers looking for a new credit card an unbiased way to compare credit card terms and interest rates. 

The CFPB has also recently taken enforcement action against credit card companies for illegal conduct. 

That includes ordering Bank of America to pay a $30m fine and repay consumers for withholding credit card reward bonuses and opening unauthorised accounts. Citizens Bank was ordered to pay a $9m fine for failing to refund consumers who reported fraud or billing errors, while Citibank was ordered to pay $25.9m for intentional, illegal discrimination against credit card applicants the bank identified as Armenian American. 

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