CFPB Takes Action to Cut Excessive Credit Card Late Fees, Saving American Families Billions
In a move aimed at protecting American consumers from excessive credit card late fees, the Consumer Financial Protection Bureau (CFPB) has finalized a rule that will close a loophole exploited by large card issuers. This rule is expected to curb fees that cost American families over $14 billion annually, resulting in estimated savings of more than $10 billion per year.
The CFPB estimates that the average American family will save around $220 annually, as the typical late fee is reduced from $32 to $8. This will benefit more than 45 million people who are charged late fees. CFPB Director Rohit Chopra expressed his satisfaction with the new rule, stating, “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.”
The rule is a result of concerns that credit card companies were building a business model on penalties, fee harvesting, and bait-and-switch tactics. In response, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), which banned excessive penalty fees and established clearer disclosures and consumer protections. However, a loophole in the law allowed credit card companies to charge up to $25 for the first late payment and $35 for subsequent late payments, with these amounts adjusted for inflation each year.
Since 2010, credit card issuers have been charging consumers more in late fees each year, reaching over $14 billion in 2022. These fees are layered on top of other punitive measures imposed on consumers who miss payments, such as extra interest charges, loss of grace period, negative credit reporting, credit limit reductions, and higher interest rates on future purchases. Major credit card companies have seen late fees become a significant driver of their profit model.
The CFPB’s final rule applies to the largest credit card issuers, which account for over 95% of total outstanding credit card balances. The rule lowers the immunity provision dollar amount for late fees to $8 and eliminates the automatic annual inflation adjustment for this threshold. Credit card issuers will now be required to show their math and prove that higher fees are necessary to cover actual collection costs.
It’s important to note that the rule does not change credit card issuers’ ability to raise interest rates or take other actions to deter late payments. However, it does increase the incentive for credit card companies to facilitate on-time payment, as it lowers the profitability of relying on late fees as a business model.
This final rule is part of the CFPB’s ongoing efforts to address issues and foster competition in the $1 trillion credit card market. The CFPB aims to help consumers find lower interest rates, as they paid a record-high $130 billion in credit card interest and fees in 2022. The average cardholder carries a balance of over $5,000.
The CFPB has also taken enforcement action against illegal conduct by credit card companies, including ordering Bank of America to pay a $30 million fine and repay millions of dollars to consumers for withholding promised credit card reward bonuses. Additionally, Citizens Bank was ordered to pay a $9 million fine for failing to provide refunds to consumers who reported fraud or billing errors, while Citibank was fined $25.9 million for intentional, illegal discrimination against Armenian American credit card applicants.
The effective date of the final rule will be 60 days after its publication in the Federal Register. Consumers who have complaints about financial products or services can submit them through the CFPB’s website or by calling (855) 411-CFPB (2372). Employees who believe their company has violated federal consumer financial laws are encouraged to share information with [email protected].
With this new rule in place, American families can look forward to significant savings on credit card late fees, providing them with more financial flexibility and peace of mind. The CFPB’s efforts to protect consumers and foster competition in the credit card market are crucial in ensuring fair and transparent practices for all.