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Rules to Curb Credit-Card Late Fees Get Fresh Look at CFPB (2)

June 22, 2022, 1:52 PMUpdated: June 22, 2022, 5:36 PM

The Consumer Financial Protection Bureau announced plans to draft regulations to potentially curb credit-card late fees estimated to cost consumers as much as $12 billion annually.

The CFPB released an advanced notice of proposed rulemaking on Wednesday that seeks public comment on late fees that the bureau says consumers may not understand when they sign up for cards.

The CFPB wants to review an “immunity provision” in rules implementing the 2009 Credit CARD Act. The provision sets maximum fee amounts and allows “reasonable and proportional” increases for card issuers to cover the costs of borrower late payments.

The rules—which were completed by the Federal Reserve and given to the CFPB after it opened in 2011—also allow late fees to rise with inflation, which recently hit a 40-year high in the US.

The Fed’s original rule allowed credit card issuers to charge a maximum $25 late fee, plus an additional $35 fee for a late payment within six months of the first violation. Those fees have risen to $35 for an initial late fee and $41 for a subsequent violation within six months, the CFPB said.

“These fees have risen significantly with inflation, however late fees continue to generate significant profit for the companies that issue them and cost consumers facing budget shortfalls greatly,” said Rachel Gittleman, the financial services outreach manager at the Consumer Federation of America.

The CFPB said the immunity provision violates the spirit of the CARD Act by potentially allowing banks to charge more than they need to cover reasonable costs when raising fees each year. Credit card companies charged $12 billion in late fee penalties in 2020, according to the bureau.

A CFPB official said on a call with reporters that the bureau is concerned that banks could justify further increases without determining that they are “reasonable or proportional” because of the current inflation spike.

“Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” CFPB Director Rohit Chopra said in a statement.

On the Rise

Credit card late fees are expected to rise again as coronavirus pandemic relief funds work their way out of the financial system and consumers confront higher prices, the CFPB found in a March report.

But the report also found that credit card issuers were charging late fees within limits set by the CARD Act and worked with customers harmed by the pandemic.

Consumer Bankers Association President and CEO Richard Hunt said the CFPB hasn’t properly taken into account the assistance banks and other credit card issuers have given consumers.

“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,” he said in a statement.

Banks that rely on fees may be particularly at risk from any rulemaking, said Fitch Ratings Senior Director Michael Taiano.

“Robust financial sector regulation is generally favorable from our perspective, though the CFPB’s potential actions on credit card late fees could be disruptive to fee revenue streams for certain credit card issuers with greater exposure to the fees being targeted,” he said.

Credit card issuers with a large percentage of subprime or near-prime customers, such as private-label card issuers, face the biggest potential hit from late-fee limits, although most issuers don’t provide data on the fees, Taiano said.

Among the biggest private-label credit card issuers are Synchrony Financial and Alliance Data Systems Corp.

The bureau started a review of what it calls “junk fees” earlier this year, with a sharp focus on credit-card late fees and bank overdraft fees, which are charged when consumers withdraw more money than is available in their accounts.

The CFPB’s announcement is the first step in a rulemaking process that could take years to complete, as public comment on a series of questions will help guide the agency as it drafts rules. Comments are due by July 22.

(Updates with additional detail and comments throughout)

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com, Melissa B. Robinson at mrobinson@bloomberglaw.com