Podcast - Credit Card Late Fees Have the CFPB's Interest

Good day and welcome to another podcast of "Clearly Conspicuous." As we've noted in previous sessions, our goals in these podcasts are to make you succeed in this current environment, make you aware of what's going on with the federal and state consumer protection agencies and give you practical tips for success. It's a privilege to be with you today.

CFPB's Efforts to Rein in Fees for Credit Card Users

Today we discuss the Consumer Financial Protection Bureau efforts to rein in junk fees on credit cards. The CFPB is finalizing a rule that will lower the typical late fees charged by big credit card issuers from an average of $32 down to $8, in most cases. The bureau estimates this change will save families $10 billion every year, an average savings of $220 per year for more than 45 million people who were charged late fees. The announcement of this rule comes after an extensive process, consideration of thousands of comments and a great deal of research into the credit card industry. According to the bureau, the credit card industry brings in more than $14 billion in late fee revenues each year, which research shows is more than five times the companies' associated costs. They charge these fees to consumers, even when their payment is only a little bit late or when it's out of their control. This is on top of extra interest charges, negative credit reporting and a slew of other consequences.

Bureau Research on Interest Rates, Late Fees and the CARD Act

Last month, the CFPB released a report that found credit card interest rate margins, or the difference between the prime rate and the APR charged at the consumer, are at all-time highs. These excess margins cost consumers an extra $25 billion in annual interest charges in 2023 alone. The research has found that many consumers are trapped in “persistent debt," meaning that they pay more in interest and fees than in principal. Industry data reveals that large banks that dominate the market are charging interest rates 8 to 10 percent points higher than small banks and credit unions, regardless of credit risk. And recently, the bureau issued guidance to address kickback payments that are turning purportedly unbiased comparison shopping tools into digital advertisements, allegedly undermining the competitive process.

More than a decade ago, Congress voted to pass the CARD Act to clean up widespread abuses in the credit card industry. One of the central components of the CARD Act was a prohibition on excessive penalties, such as late fees. In the law Congress allowed credit card companies to charge "reasonable and proportional" fees to incentivize on-time payment and cover the costs associated with late payments. At the time, the Federal Reserve Board of Governors was responsible for developing regulations to implement the law. In 2010, the Fed Board voted to include an immunity provision in those regulations. The immunity provision allowed credit card companies to evade the "reasonable and proportional" penalty fee requirement, as long as they stayed below a threshold. The CFPB found that this has turned into a massive loophole that has allowed companies to charge unjustifiably high fees ever since. The bureau's research shows that borrowers with low credit scores are, on average, charged $138 per year per card and many consumers have multiple credit cards.

The Proposed Rule's Requirements and Companies Affected

The rule requires large card companies to either charge a maximum late fee of $8 or justify a higher amount by demonstrating that they need to charge more to cover their actual collection costs. The rule also eliminates an automatic inflation adjustment, which was added by the Federal Reserve Board and is not required by law. This rule only applies to the larger credit card issuers, those with over 1 million open accounts. These companies account for more than 95 percent of the total outstanding balances. Smaller banks and credit unions will not be affected.

Concluding Thoughts

So here's the key takeaway: According to the bureau's thinking, in credit cards, consumers are beset by junk fees, and they are forced to navigate a market dominated by relatively few who are power players who control the market. The CFPB's philosophy is to ensure that consumers have meaningful choices. So please stay tuned for further programs as we identify and address the key issues and developments and provide strategies for success. I wish you continued success and meaningful day. Thank you.