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CFPB bans excessive credit card late fees and reduces typical fee from $32 to $8
WASHINGTON DC – The Consumer Financial Protection Bureau (CFPB) today finalized a rule to reduce excessive credit card late fees, closing a loophole exploited by large card issuers. The rule will reduce fees that cost American families more than $14 billion a year. The CFPB estimates that American families will save more than $10 billion in late fees annually once the final rule takes effect, reducing the typical fee from $32 to $8. This will represent an average savings of $ 220 per year for over 45 million people who pay late fees.
“For more than a decade, credit card giants have exploited a loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “Today’s rule ends the era when big credit card companies hid behind the excuse of inflation when they raised borrowers’ rates and boosted their own bottom lines.
Concerned that credit card companies were building a business model based on penalties, fee charging, and bait-and-switch tactics, Congress passed the Credit Card Liability and Accountability Disclosure Act of 2009 (Act CARD). The law prohibited credit card companies from charging excessive fines and established clearer disclosures and consumer protections.
In 2010, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act, which made clear that banks could only charge fees that recovered the bank’s costs associated with late payments. However, the rule included an immunity clause that allowed credit card companies to avoid liability if they charged no more than $25 for the first late payment and $35 for subsequent late payments, with both amounts to be adjusted by the inflation every year. These values have increased to $30 and $41 even as credit card companies move to cheaper digital business processes. Congress transferred authority to administer the CARD Act rules from the Fed to the CFPB.
After a thorough analysis of market data related to the 2010 immunity provision, the CFPB’s final rule adopts a lower limit of $8 and ends automatic inflationary adjustments for that amount for issuers that have 1 million or more open accounts .
The CFPB it found that since 2010, issuers have generally charged consumers more in credit card late fees every year – growing to more than $14 billion in 2022, and representing more than 10 percent of the $130 billion that issuers charged consumers in interest and fees. Late fees are in addition to many other punitive measures that credit card companies impose on consumers who miss payments, including extra interest fees, missed grace period, negative credit reports, credit limit reductions, and a fee higher interest rate on future purchases. . The average late fee for major issuers has been rising steadily since the passage of the CARD Act, rising from $23 at the end of 2010 to $32 in 2022. For some large credit card companies, late fees are a major driver. your profit model.
The CFPB’s final rule applies to the largest credit card issuers, those with more than 1 million accounts open. These companies account for more than 95% of total outstanding credit card balances. CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of larger issuers charge close to the maximum allowable amount of late fees. Today’s final rule:
- Reduces the dollar value of the late fee immunity provision to $8: Based on data analyzed by the CFPB, a late fee of $8 would be enough for large card issuers, on average, to cover collection costs incurred as a result of late payments.
- Ends the abuse of automatic annual inflation adjustments: The CFPB found that many issuers increased their late fees simultaneously every year, with no evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment to the $8 late penalty limit. This adjustment was added by the Federal Reserve Board and is not required by law. Instead, the CFPB will monitor market conditions and adjust the $8 late fee immunity threshold as necessary.
- Requires credit card issuers to show their accounts: Large card issuers may charge fees above the limit, as long as they can prove that the higher fee is necessary to cover their actual billing costs.
The rule does not change a credit card issuer’s ability to raise interest rates, reduce lines of credit and take other steps to dissuade consumers from paying late. In fact, the rule would increase credit card companies’ desire to facilitate on-time payments, as it would reduce incentives to build a business model based on late fees.
CFPB Credit Card Efforts
Today’s final rule is part of an ongoing effort by the CFPB to resolve issues and promote competition in the $1 billion credit card market. The CFPB is working to help consumers find lower interest rates, as consumers paid a record $130 billion in credit card interest and fees in 2021, and the average cardholder has a balance of more than 5,000 dollars.
A recent CFPB report found that increases in the APR margin charged by the largest issuers generated about $25 billion in additional interest income in 2023. Data submitted to the CFPB by credit card companies shows that Small banks and credit unions offer significantly lower rates, about 8 to 10 percentage points below the top 25 credit card companies. Last week, the CFPB issued guidance to control fraudulent price comparison results for credit cards and other products, and is developing a consumer-facing tool that, once completed, will give people looking for a new credit card an unbiased way to compare credit card terms and interest rates.
The CFPB has also taken enforcement action against illegal conduct by credit card companies. Recent actions include orders Bank of America pay a $30 million fine and refund tens of millions of dollars to consumers for illegal conduct, including withholding credit card rewards bonuses that the company explicitly promised and opening unauthorized accounts. The CFPB also ordered Citizen’s Bank pay a $9 million fine for failing to reimburse consumers who reported fraud or billing errors and ordered Citibank pay $25.9 million for intentional and unlawful discrimination against credit card applicants the bank identified as Armenian-Americans.
Read the text of today’s final rule.
The effective date of the final rule will be 60 days after publication of the rule in the Federal Register.
Consumers can lodge complaints about financial products or services by visiting the CFPB website or calling (855) 411-CFPB (2372).
Employees of companies that believe they have violated federal consumer financial laws are encouraged to submit information about what they know to whistleblower@cfpb.gov.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces federal consumer financial laws and ensures that markets for consumer financial products are fair, transparent and competitive. For more information visit www.consumerfinance.gov.