Summary
The CFPB deserves plaudits for taking decisive action to stop an everyday consumer abuse that became standard operating procedure for banks over the past decade.
Your government is about to save you a lot of money, though you might not realize it.
The Consumer Financial Protection Bureau (CFPB) will shove $9 billion per year back into American families’ budgets – with one simple, common-sense move. Credit card companies would be barred from charging late fees higher than $8 under a rule proposed Wednesday by the CFPB.
In 2019, credit card late fees averaged $26. That average may even understate the problem: CFPB data indicates that all but one of the 20 largest card-issuing banks charge $36 or more. These fees are just one example of why the Biden administration has instructed executive branch agencies to combat “junk fees” across the whole of government.
The CFPB’s proposed rule seeks to restore the expectations set out in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), which eliminated some of the most unfair practices used by credit card issuers before 2008, such as double-cycle billing and universal default rate increases. The law also stated that late fees must be “reasonable and proportional.” The CARD Act capped late fees at $25 for the first violation, but the Federal Reserve introduced an “immunity provision” permitting banks to evade scrutiny of whether late fees met the reasonable and proportional standard. Now, by pushing back on fee hikes that undermine demonstrated Congressional intent, the CFPB is reminding us that our government can do tangible, material good for its constituents.
Additionally, the proposal would cap late fees at 25% of the minimum payment, establish a 15-day grace period before fees can be assessed, and eliminate the immunity provision loophole altogether. No longer will a person face a $36 fee for underpaying their outstanding balance by a few dollars.
The vast majority of people in this country will benefit from the CFPB’s action if it is completed in rulemaking. American households had roughly 550 million active credit card accounts at the end of last year. About 83% of American households have a credit card, including 56% of families with incomes below $25,000. Credit card balances currently make up the second-largest category of consumer debt. Almost three-quarters of Americans have a credit card by the time they reach their 25th birthday.
When faced with a choice of helping consumers or allowing banks to extract our dollars through a loophole, the CFPB sided with consumers. Perhaps that’s why industry groups have sued the agency. It puts the people first.
The CFPB and the Biden administration deserve credit for having the political will to put consumers before the interests of big banks. Indeed, the banks have spent a lot of money to discourage our leaders from putting consumers first: The political action committees representing commercial banks gave more than $10 million to Congressional candidates during the last election cycle, splitting their giving 60/40 between Republicans and Democrats.
Bank lobbyists immediately criticized the CFPB’s proposal. Nonetheless, no bank has yet said it would walk away from the lucrative credit card business, where average interest rates on balances now exceed 20%. Between 2018 and 2020, card issuers received $364 billion in interest and fees, with late fees making slightly less than 11% of that sum. So, even if late fees had been capped at $8 during that three-year span, total interest and fee revenue would still have amounted to $337 billion.
That’s $27 billion less than they’d planned to make by continuing to charge unreasonably high late fees in defiance of Congress’s will. Can you hear the sound of a small violin?
Adam Rust is NCRC’s Senior Policy Advisor.
Photo by Dylan Gillis on Unsplash
