NEWS: The Consumer Financial Protection Bureau (CFPB) issued the Credit Card Penalty Fees Final rule today to set a ceiling of $8 per incident for credit card late fees. The rule, which applies to card issuers with at least one million open accounts, also ends automatic inflation adjustments on late fees. The CFPB said it would adjust the fee if needed to cover collection costs, and that card issuers can charge higher fees if they prove they are necessary.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” CFPB Director Rohit Chopra said in the release. “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.” The CFPB estimated that American families will save more than $10 billion in late fees annually once the final rule goes into effect by reducing the typical fee from $32 to $8.
The League submitted a comment letter opposing the changes, stating “this kind of one-size-fits-all regulatory price-fixing is unfair to credit unions and will harm consumers across the United States.” We said that the CFPB should recognize that slashing allowable late fees is likely to have serious consequences for U.S. consumers, including increases in other fees, tighter credit standards, and less access to credit card products.
America’s Credit Unions President/CEO Jim Nussle also indicated in a press release that this rule will have negative implications on consumers and financial institutions.
The CFPB’s misguided final rule on credit card late fees clearly demonstrates a misunderstanding on how credit cards work and potentially traps millions of consumers in a cycle of debt instead of fulfilling their intended purpose of protection. Credit unions work to empower their members’ financial decision making and clearly define their late fees. An $8 late fee, approximately the cost of a Big Mac and a large Coke, does nothing to protect the issuer and throws consumer accountability to the wayside.
The proposed rule will negatively impact the ability of credit unions to offer viable credit card programs, manage the risks associated with those programs, and increase the costs of credit cards for all cardholding members – not just those that incur late payment fees.
The CFPB’s final rule:
- Lowers the immunity provision dollar amount for late fees to $8: Based on data analyzed by the CFPB, a late fee of $8 would be sufficient for larger card issuers, on average, to cover collection costs incurred as a result of late payments.
- Ends abuse of the automatic annual inflation adjustment: The CFPB found that many issuers hiked their late fees in lockstep each year without evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. The CFPB will instead monitor market conditions and adjust the $8 late fee immunity threshold as necessary.
- Requires credit card issuers to show their math: Larger card issuers will be able to charge fees above the threshold so long as they can prove the higher fee is necessary to cover their actual collection costs.
The rule does not change the credit card issuer’s ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late.
The final rule does not adopt these revisions for “Smaller Card Issuers”. Smaller Card Issuers are defined as card issuers that together with its affiliates had fewer than one million open credit card accounts for the entire preceding calendar year. For Smaller Card Issuers, the final rule revises the safe harbor threshold amounts for late fees to $32 for the initial violation and $43 for each subsequent violation of the same type that occurs during the same cycle or in one of the next six billing cycles. For Smaller Card Issuers, the annual adjustment provisions in Regulation Z § 1026.52 will continue to apply to the safe harbor provisions for late fees.
This rule will go into effect 60 days after its publication in the Federal Register.