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Amid fear of inflation, the US Consumer Financial Protection Bureau (CFPB) is mulling regulatory changes to credit card late fees and to a provision that it says grants immunity for issuers against enforcement scrutiny.
On Wednesday (June 22), the CFPB published an advance notice of proposed rulemaking (ANPR) to review an immunity provision related to credit card late fees and determine whether those fees are “reasonable and proportional”.
“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,” said CFPB director Rohit Chopra.
“This effort is particularly timely since current rules might give companies the incentive to impose big hikes based on inflation.”
The ANPR, which is the first step for an agency to determine whether a rule change is needed, is seeking data about card issuers’ revenue and expenses, the potential deterrent effect of late fees and the role late fees play in credit card companies’ profitability.
In the US, credit card lending is regulated under the Credit CARD Act 2009. The act sets out rules for procedures and disclosure requirements, and limits fees and charges to consumers. These include late fee penalties that are charged in addition to interest when a cardholder does not make the minimum payment by the due date.
In 2010, before the CFPB was established and given the authority over the late fee provisions, the Federal Reserve implemented provisions of the CARD Act.
These regulations require that penalty fees be “reasonable and proportional to the omission or violation” and prohibited credit card issuers from generating more revenue from late fees than was necessary to cover the cost of late payment.
The rules, however, included a safe harbour that allows issuers to set fees at a set level, adjusted by inflation, even if the fees are not necessary to deter a late payment and generate excess profits.
The safe harbour means that issuers can use these caps instead of setting "reasonable and proportional" fees based on a cost analysis.
These provisions in the Fed’s rule give credit card companies immunity from enforcement actions if they charge fees that are not reasonable or proportional, according to Chopra.
"This legal provision to sidestep liability — essentially a go-around — makes it easier on credit card companies to not have to justify their compliance with Congressional mandates governing penalties."
In practice, issuers can now charge $30 for the first late payment and $41 for a subsequent late payment within six billing cycles.
However, the CFPB director notes that the Fed had no cost-basis analysis of its own when it set the fee. Instead, it looked at state laws, research from large issuers, overdraft fees and laws in the UK.
At the time, there was "little evidence to support how much it actually costs a financial institution to process a late fee", Chopra stressed.
Double jeopardy
In its March Credit Card Late Fees report, the CFPB found that 18 of the top 20 issuers set late fees at or near the established maximum level.
The report also found that the credit card market continued to generate sizable profits on $12bn paid by Americans in late fee penalties in 2020.
“Cardholders who miss making the minimum payment by the due date are already punished by paying interest on their debt. For many consumers, these late fees seem like a second penalty for the same event,” Chopra noted.
“In addition, when someone is late, they stand to lose their grace period, meaning they are suddenly paying interest on all new purchases from their transaction date on top of the interest accruing to their last bill.”
The agency is also examining whether it is “appropriate for credit card companies to receive immunity from enforcement if they hike the cost of credit card late fees each year by the rate of inflation”, Chopra said.
“Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?”
In response to the announcement, the American Bankers Association (ABA) and Patrick McHenry (R-NC), the top Republican on the House Financial Services Committee, issued statements rebuking Chopra for treating all financial service fees as exploitive junk fees.
McHenry stressed that “limiting the fees that issuers can charge to cover costs and deter bad behaviour threatens the safety and soundness of our financial system.”
The ABA emphasised that late fees have already been capped by federal regulation and that issuers are routinely supervised for compliance.
“Today, despite that regulatory reality, Director Chopra has declared these fees ‘excessive,’ suggesting he has already made up his mind before the rulemaking process even begins,” the association said.
Public comments can be submitted until July 22, but agency officials told CNBC they do not expect the process to conclude before the end of the year.
Since taking over the leadership of the CFPB, Chopra has significantly sped up the agency’s regulatory and enforcement activity.
Last week, he confirmed that his office is looking at banks’ potentially excessive overdraft fees and how they handle consumers’ requests for information.
Earlier, in December 2021, he launched a broad review of all fees charged by financial institutions, arguing that any fee that is exploitative, back-end, hidden or excessive could be considered a “junk fee”.
Meanwhile, the CFPB has been focusing its enforcement efforts on large firms whose practices may have an impact on a large number of consumers, and repeat offenders.
