The Consumer Financial Protection Bureau (CFPB) has taken decisive action today by finalizing a rule aimed at reducing excessive credit card late fees and closing a loophole that has been exploited by large card issuers. This CFPB rule is poised to curb fees that have been costing American families over $14 billion annually. Under the new rule, the CFPB estimates that American families stand to save more than $10 billion annually in late fees, with the typical fee being reduced from $32 to $8. This translates to an average yearly savings of $220 for the over 45 million people subjected to late fees.
CFPB Director Rohit Chopra emphasized the significance of this rule in putting an end to exploitative practices by credit card giants, which have been capitalizing on loopholes to generate billions in fees from American consumers. Director Chopra remarked that the rule signifies the termination of an era where big credit card companies could hike fees on borrowers, citing inflation as an excuse, while bolstering their profits.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was enacted by Congress to address concerns about credit card companies building business models on penalties, fee harvesting, and bait-and-switch tactics. This law aimed to prohibit excessive penalty fees and introduce clearer disclosures and consumer protections.
Ending Exploitative Practices in Credit Card Fees
Following the enactment of the CARD Act, the Federal Reserve Board of Governors implemented a regulation in 2010, which outlined that banks could only charge fees sufficient to cover the costs associated with late payments. However, this regulation included an immunity provision that allowed credit card companies to bypass accountability if they charged no more than $25 for the first late payment and $35 for subsequent late payments, with these amounts subject to annual inflation adjustments. Despite advancements in digital processes, these amounts have increased to $30 and $41, respectively, further burdening consumers. The administration of CARD Act rules was later transferred from the Fed to the CFPB.
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Empowering Consumers and Fostering Competition in the Credit Card Market
After a comprehensive review of market data related to the immunity provision, the CFPB rule establishes a lower threshold of $8 and discontinues automatic inflation adjustments for issuers with more than 1 million open accounts. This move is intended to prevent issuers from excessively raising late fees without evidence of increased costs.
The rule applies primarily to the largest credit card issuers, accounting for over 95% of total outstanding credit card balances. It requires these issuers to justify any fees exceeding the $8 threshold by demonstrating their actual collection costs. However, it does not restrict issuers’ ability to raise interest rates or take other actions to deter late payments.
This CFPB rule is an ongoing effort to address issues and promote competition in the $1 trillion credit card market. By assisting consumers in finding lower interest rates and facilitating fair comparison shopping, the CFPB aims to alleviate the financial burdens faced by American families while fostering a more equitable credit card landscape.
