Trade groups representing credit card companies pushed back on a government watchdog’s plan to cap late fees at $8, saying the result would be increased borrowing costs for millions of Americans.
The proposal set forth this month by the Consumer Financial Protection Bureau seeks to reduce the limit — or safe harbor rate — from $30 for an initial late payment and $41 for subsequent penalties to $8 each. It also seeks to end automatic annual inflation adjustments, limiting late fees to 25% of the minimum payment.
Though the new regulation aims to reduce consumers' financial burden, some industry groups say it would do the opposite by forcing banks to mitigate their increased risk by hiking interest rates, tightening lending standards, and reducing access to credit.
“No one likes paying fees, but that doesn’t make them unnecessary. Instead of helping consumers, the CFPB’s proposed rule would harm Americans by increasing the cost of credit and decreasing credit availability,” Celia Winslow, senior vice president at American Financial Services Association, told Yahoo Finance. “Late fees also help financial institutions manage the risk. If financial institutions are unable to price for risk, they will raise prices across the board, limit rewards programs, or limit credit availability. None of these outcomes is good for consumers, despite the CFPB’s catchy headlines.”
The rule, which doesn’t need congressional support to be enacted, builds on the Biden administration’s aim to reduce exploitative junk fees. It also comes after the CFPB found that credit card issuers charged up to $12 billion in excessive late fees in 2020. Under the new rule, those fees would be lowered by $9 billion.
According to Rohit Chopra, director of the CFPB, major credit card issuers have made late fee penalties a “core part of their business model,” and have been able to profit off of junk fees protected by the safe harbor provision under the CARD Act of 2009.
Chopra also noted that the credit card market continued to rely on revenue from late fees disproportionately paid by economically vulnerable consumers. According to a report by the CFPB, cardholders with subprime credit scores and deep subprime scores were also more likely to miss a credit card payment.
But banking trade groups like the American Bankers Association and others argue that lowering late fees to just $8 would make borrowing more expensive — even for those that pay on time.
“Millions of Americans rely on credit cards to make everyday purchases and cover emergency expenses,” Lindsey Johnson, president and CEO of the Consumer Bankers Association, said in a statement. “It is deeply unfortunate and puzzling that policymakers would take action that could ultimately limit consumers’ access to these valued financial products at a time when they are needed most.”
American credit cardholders have already had a tough time over the past year as credit card interest rates have increased rapidly due to the Federal Reserve’s continued fight on inflation. The average APR on a new credit card was 23.39% in January 2023, according to LendingTree, up 22.91% the previous month.
However, under the proposed rule, smaller community-based lending institutions such as credit unions — which typically have lower interest rates than larger institutions — may also have to hike rates, the Credit Union National Association said.
“CUNA strongly opposes this proposal, as any reduction in late fee safe harbors will have a significant negative impact on many small, community-based credit unions,” said CUNA president and CEO Jim Nussle in a statement, adding that the rule would “reduce access to safe and affordable open-end credit.”
Should the new regulation be enacted, consumers may see a difference as soon as 2024, the CFPB said. The bureau requested comments due 30 days after publication of the proposal in the Federal Register.
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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