CFPB may limit credit card late fees as inflation threatens to raise them

CFPB may limit credit card late fees as inflation threatens to raise them

The Client Monetary Safety Bureau signaled a crackdown on late fees charged by credit card corporations on Wednesday, as inflation threatens to improve these so-called “junk” fees levied on customers.

The watchdog, a federal company created within the wake of the 2008 monetary disaster, issued an advance notice of proposed rulemaking in search of info from card issuers, client teams and the general public on late fees.

The info will assist the regulator draft new guidelines aimed to shore up “weak spots” in present legal guidelines governing “back-end penalties” imposed by card corporations, CFPB director Rohit Chopra stated in a press name Wednesday.

Public feedback are due by July 22. Timing on a proper rule proposal (and in the end a ultimate rule) is unclear, however company officers stated they do not anticipate the method to conclude earlier than 12 months finish.

Officers anticipate modifications to scale back whole late fees by billions of {dollars} annually, they stated Wednesday. Additionally they signaled future laws on different kinds of fees, with out providing specifics.

Credit card late fees

Greater than 175 million People maintain at the very least one credit card, in accordance to the CFPB.

Corporations usually levy late fees when a buyer does not make the minimal card fee by their due date.

In 2019, customers paid $26 for every late fee, on common, in accordance to the CFPB. The charge rises if one other late fee is made inside six billing cycles, to a mean $34.

Whole late fees amounted to $12 billion in 2020, down barely from a $14 billion document set the prior 12 months, the CFPB stated in a latest report.

The prices disproportionately affect customers in low-income and majority-Black neighborhoods, in accordance to the regulator.

The watchdog characterizes late fees as a kind of “junk” charge charged by credit card issuers. The company had issued a separate request in January asking customers for enter on hidden and extreme fees from a variety of lenders.

“This is just one project relating to one type of junk fee,” in accordance to a CFPB official, who spoke on background. “I think it’s fair to say there will be other projects relating to other fees in the near future.”

Richard Hunt, president and CEO of the Client Bankers Affiliation, stated extra restrictions would hurt clients and will in the end push them to riskier kinds of credit.

“Today’s announcement is another reminder the Bureau appears more interested in advancing a particular agenda than developing fact-based policies that improve the lives of hardworking families,” Hunt stated in a press release. “Missing from this announcement is the fact that banks — more than any other industry — have taken concrete steps to make their products more affordable and accessible for millions of Americans.”

What would the CFPB do?

Present legislation disallows credit card issuers from charging clients a charge for a late fee, besides in sure circumstances. To levy a charge, the corporate should decide that the charge is a “reasonable” proportion of the full prices the corporate incurred to course of a late fee.

However the legislation additionally provides a authorized security web: Issuers can usually keep away from the associated fee evaluation (and regulatory scrutiny) in the event that they cost $30 or much less for a late fee, and up to $41 for every subsequent late fee made throughout the subsequent six billing cycles.

“In today’s advance notice of proposed rulemaking, the CFPB is asking for information on these fees in order to assess whether they really are reasonable and proportional,” Chopra stated.

These most “safe harbor” fees are adjusted for inflation annually — giving urgency to the CFPB’s rulemaking at a time when client costs are rising at their fastest pace in about 40 years.

“This effort is particularly timely given the rule allows banks to increase their fees based on inflation,” according to a CFPB official. “Many [people] are struggling to make ends meet at the moment and struggling under higher costs.”

Most smaller banks and credit unions charge a maximum late fee of $25 or less, but almost all of the largest issuers have fees at or near the maximum allowed, according to CFPB data.

Chopra questioned whether the cost to process late payments increases with inflation, or if it’s more reasonable to expect those costs to decrease due to improvements in technology.

However, Hunt of the Consumer Bankers Association framed inflation as a big reason why the CFPB should not impose additional rules on the industry.

“Imposing more restrictions on bank-offered credit products will hurt hardworking families most, forcing them to meet their needs outside of the well-supervised banking system,” Hunt said. “This risk is even greater now as families contend with the effects of inflation.” 

The CFPB said it’s seeking information on the following points, among others: factors used by card issuers to set late fee amounts; companies’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods firms use to facilitate or encourage timely payments (like autopay and notifications); and their use of “safe harbor” provisions.

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