Credit card late fees could be slashed under a proposal the Consumer Financial Protection Bureau is expected to publish soon. Some analysts predict late fees could be cut in half to as low as $15, while consumer advocates want the CFPB to lower late fees to as low as $9 or make them proportional to the cardholder’s debt. .
CFPB director Rohit Chopra launched a broad attack last year against so-called “junk feesand has said it specifically wants to reduce the $12 billion a year in late fees charged by credit card companies. The CFPB is expected to publish a notice of proposed rulemaking this month on late fees, but analysts expect the proposal to be published. in February.
“Our expectation is that the CFPB will reduce credit card late fees through the rulemaking process to between $15 and $25, although there are some advocates who want the fees to drop to $9,” Ed Groshans said. , Principal Research and Policy Analyst at Compass. Research and trade points.
Banks and credit card companies argue that a reduction in late fees would hurt low-income, high-risk consumers the most. Any reduction in late fees would force credit card issuers to increase fees on other products, reduce credit, increase APRs for all cardholders, and potentially even cut rewards and cards. of cash back, argue commercial banking groups.
Robert Maddox, a partner at the law firm Bradley Arant Boult Cummings, noted that most big banks cut or overdraft fees waived last year under pressure from the CFPB and other regulators.
“The fact that banks cut overdraft fees opened up almost all consumer-related fees as a possible target,” Maddox said.
Currently, banks and credit card issuers can charge $29 for the first credit card late payment and $40 for subsequent late payments within six billing cycles. Some credit card executives have said they are not concerned about the changes made by the CFPB because nearly all late fees currently meet the maximum amounts set by the Credit Card Liability Disclosure and Accountability Act, known as the CARD Act.
In its next proposal, the CFPB is expected to re-examine whether Regulation Z, the implementing regulation of the CARD Act and the Truth in Lending Act, should continue to have a safe harbor provision that was created by the Board of the Federal Reserve in 2010. Safe Harbor allows credit card companies to increase late fees annually in line with inflation. It also allows higher late fees for second violations to discourage consumers from paying late.
Chopra has also signaled that changes are coming.
“The Fed created a set of immunity provisions that has been going up [due to] inflation every year,” Chopra said at a conference last year. “We’re going to review whether that number makes sense or whether there needs to be a new framework.”
Credit card companies are coming off three years of abnormally low levels of delinquency and charge-off rates. Even with a recession looming, credit card delinquencies are expected to rise to 2.6% by the end of this year, up from 2.1% last year, according to a forecast released this week from the TransUnion credit bureau. The number of new credit cards opened is at its highest point in 10 years, TransUnion found.
“As we face headwinds with a potential recession, and more and more people carry a significant amount of debt on their credit cards, consumer advocates have been pushing for late fees to drop,” Maddox said. .
Banks and credit card issuers say late fees should be set at a level that covers costs, and that a penalty is not a hidden cost, but necessary to reduce how often a consumer makes late payments. Dan Smith, executive vice president and head of regulatory affairs for the Consumer Bankers Association, said efforts to reduce credit card late fees are misguided and would hurt the same consumers with high-risk credit scores that the office is trying to help.
“Late fees are intended to encourage responsible spending behavior and empower consumers to avoid negative impacts to their credit scores that can arise from defaults and delinquencies,” Smith said. “Removing or drastically lowering the safe harbor threshold will undoubtedly affect consumer access to these valuable products, as credit card issuers would be forced to drastically modify their business models to mitigate the risks associated with rising cases. of missed payments”.
The CFPB is considering changes to the CARD Act, including the safe harbor for fines. Currently, credit card companies cannot impose a late payment penalty unless they have determined that the dollar amount of the fee represents “a reasonable proportion of the total costs” incurred by the financial institution, the CFPB said in advance notice of the proposed rulemaking in June.
Groshans at Compass Point said he thinks the office may decide to change the safe harbor language to favor consumers over financial institutions.
“The entire industry has been operating under that safe harbor for over a decade, so don’t think that safe harbor is going away,” Groshans said. “But the risk is that the CFPB tries to change the basis of the safe harbor.
“Right now the base [of the safe harbor] it’s whether the fee is reasonable … relative to the cost incurred by the financial institution,” he said. “Are they trying to change that to whether the fee is reasonable and proportional to the harm to the consumer? That’s a very different safe harbor and it looks like it could be doable.”
Consumer advocates say credit card late fees disproportionately impact subprime borrowers and serve as an ultimate profit center for banks and credit card companies. Advocates want late fees to be adjusted to the amount of cardholder debt and suggest that the CFPB include a mandatory waiting period of several days before a late fee can be assessed.
“Late fees imposed by card issuers exceed the amounts they incur costs, especially for accounts with smaller balances and short delinquency periods,” said Chi Chi Wu, an attorney with the National Center for Consumer Law.
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