Banks Say CFPB Cut Corners in Credit Card Late Fee Cap Proposal

The Consumer Financial Protection Bureau cut corners in developing a proposed rule that would cut credit card late fees, banks and credit unions told the agency.

The CFPB’s proposal, issued in February, would cap late fees collected by credit card issuers like Bank of America Corp. and Capital One Financial Corp. at $8. It would also end a provision that increases fees automatically along with inflation.

But the proposal is riddled with procedural problems, including the use of incomplete data in a cost-benefit analysis and the failure to use a panel to study the impact on small banks and credit unions, credit card issuers said in public comments submitted to the agency. The proposal would also lead to higher interest rates and the potential return of annual fees, they said.

The proposal could reduce late fees by around $9 billion a year, the CFPB estimated. Objections from industry groups, outlined in comment letters submitted ahead of a May 3 deadline, point to legal challenges the agency will likely face should it issue a final rule that mirrors the proposal.

“The bureau’s flawed assumptions, overly narrow estimations, and deficient analyses have resulted in the bureau reaching incorrect conclusions about the benefits and harms to consumers, as well as the costs issuers face in the marketplace,” the Consumer Bankers Association said in a May 3 comment letter.

The CFPB’s proposal is part of President Joe Biden’s broader push against “junk fees,” a term vehemently rejected by banks.

The proposal also comes as Americans’ credit card balances are rising amid stubborn inflation, the expiration of pandemic-era financial supports, and the risk of a coming recession. Credit card balances rose $61 billion in the fourth quarter of 2022 to $986 billion, surpassing the pre-pandemic high of $927 billion, the Federal Reserve Bank of New York said in its latest quarterly report.

Credit card issuers “exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee” CFPB Director Rohit Chopra said in a February statement accompanying the proposal’s release.

The CFPB didn’t respond to a request for further comment.

Safe Harbor

Card issuers currently can charge $30 for a first missed payment and $41 for a subsequent missed payment within the next six billing cycles, under a 2009 law known as the Credit CARD Act and safe-harbor rules originally overseen by the Federal Reserve.

Banks, credit unions, and other card issuers have long taken issue with characterizing the safe harbor as a loophole.

The CFPB found that, of the $12 billion in late fees card issuers charged in 2020, around 75%, or $9 billion, were unnecessary and meant to pad profits, according to the agency’s proposal.

Card issuers took exception with the CFPB’s study used to determine that $8 is the appropriate fee limit, and said the agency released incomplete data to the public.

“The public, therefore, has no meaningful way to review and comment on the data and analysis upon which the Bureau has relied,” the Bank Policy Institute said in a May 3 comment letter.

The CFPB said $8 should be sufficient to cover the costs card issuers incur collecting on outstanding balances.

‘Really Shaky’

Smaller financial institutions said the CFPB should have conducted a small business review mandated by federal law when crafting the rule.

That review would’ve required the CFPB to provide an outline of its proposal to card issuers and take their feedback on the ideas.

The CFPB said in its proposal that it opted not to convene a review panel because credit cards “represent only a small fraction of both assets and revenue for small banks,” according to the proposal.

Only 13 of 3,780 banks that qualify as small under the Small Business Regulatory Enforcement Fairness Act reported at least 1% of their assets in credit cards, the proposal said. A larger share of small credit unions—closer to half—met the 1% credit card asset threshold, the CFPB found.

The CFPB’s reasoning for skipping the small business review was “really shaky” and based on politics, said Ann Petros, the vice president for regulatory affairs at the National Association of Federally-Insured Credit Unions, on a May 1 call with reporters.

“The CFPB just wants to move swiftly and seem like it is taking concrete actions to help consumers, especially as we see a rise in credit card use by consumers and a decrease in savings,” Petros said.

Make-up Fees

Capping late fees would likely lead to more people falling behind on their credit card bills, risking hits to their credit scores, according to a May 3 joint letter from the American Bankers Association and other banking and credit union trade groups.

Limiting late fees would also likely force credit card issuers to find other ways to cover the costs of offering cards, including the return of annual fees, higher interest rates, and the removal of popular rewards programs, the groups said.

Consumer advocates have rallied behind the CFPB’s proposal, saying the proposed $8 fee cap is fair. Card issuers can always charge more if they can prove to the CFPB that it’s necessary to meet the costs of dealing with late payments, advocates said.

“The CFPB showed its math in coming up with the amount of $8,” said Ruth Susswein, director of consumer protection at Consumer Action. “To date, credit card companies have failed to provide adequate explanation for any alternative figure.”