CFPB finalizes rule to reduce excessive credit card late fees

The Consumer Financial Protection Bureau (CFPB) finalized a rule this week that would cut excessive credit card late fees.

The rule would close a loophole that is often exploited by large card issuers and save consumers more than $10 billion in late fees annually once the final rule goes into effect. It would do this by reducing the typical fee from $32 to $8, resulting in an average savings of $220 per year for the more than 45 million people who are charged late fees.

Specifically, the final rule lowers the immunity provision dollar amount for late fees to $8, which the CFPB said would be sufficient for larger card issuers, on average, to cover collection costs incurred as a result of late payments. It also eliminates the automatic annual inflation adjustment for the $8 late fee threshold. The CFPB found that many issuers hiked their late fees each year without evidence of increased costs. The CFPB will instead monitor market conditions and adjust the $8 late fee immunity threshold as necessary. Finally, it requires credit card issuers to show their math, meaning that larger card issuers will be able to charge fees above the threshold as long as they can prove the higher fee is necessary to cover their actual collection costs.

“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. “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 genesis of this rule goes back t0 2009 when Congress passed the Credit Card Accountability Responsibility and Disclosure, or CARD, Act. It banned credit card companies from charging excessive penalty fees and established clearer disclosures and consumer protections.

Then, in 2010, the Federal Reserve approved a rule implementing the CARD Act, which included an immunity provision that allowed credit card companies to charge 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. Those amounts have now grown to $30 and $41.

Since then, Congress transferred authority for administering CARD Act rules from the Fed to the CFPB. After a review of market data related to the 2010 immunity provision, the CFPB’s final rule adopts a lower threshold of $8 and ends automatic inflation adjustments for that amount for issuers that have 1 million or more open accounts.

The CFPB has found that since 2010, issuers have generally been charging consumers more in credit card late fees each year—growing to more than $14 billion in 2022. Further, CFPB found that late fees are layered on top of many other punitive measures credit card companies impose on consumers who miss payments, including extra interest charges, loss of their grace period, negative credit reporting, reductions in their credit limit, and a higher interest rate on future purchases. As a result, the average late fee for major issuers has gone from $23 at the end of 2010 to $32 in 2022.

This final rule applies to only the largest credit card issuers, those with more than 1 million open accounts, which account for 95 percent of total outstanding credit card balances. CFPB found that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of the largest issuers charge close to the maximum allowable late fee amount.

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 was met with criticism by the Bank Policy Institute, which outlined several problems with it.

Among them, BPI said the lower late fees will likely cause more consumers to pay late, which risks damaging their credit score and shifts higher costs to consumers who pay on time in the form of annual fees and higher APRs. Further, the institute said the CFPB failed to publish comprehensive data, analysis or the methodology that led to the rule. In addition, the organization said the “deficient analysis” violates the law — the Administrative Procedure Act. In addition, they say it disregards congressional intent, portraying fees as inherently bad without acknowledging the role they play in encouraging responsible financial behaviors and enabling banks to offer maximum benefits at the lowest cost. BPI said this is a statutory requirement outlined in the CARD Act. Finally, it only applies to large institutions and creates a two-tiered price system.

“As the CFPB guts an important risk management tool using junk economic analysis, all consumers who pay on time will now pay more, and low- and moderate-income borrowers who pose greater risk will lose some access to credit. Given the rule’s multiple deficiencies and shortcomings, its fate is likely to be resolved in federal court,” BPI President and CEO Greg Baer said.

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