Good afternoon. The Consumer Financial Protection Bureau is proposing a rule that we project will reduce credit card late fees paid by Americans by $9 billion each year. Our goal is to ensure that the credit card market is fair and competitive and that the credit card industry is properly following a 2009 law passed by Congress.
Fair and competitive markets
In July 2021, President Biden launched an effort to promote competition in the American economy. Agencies across the federal government have been looking for ways that competition is undermined, like when it comes to surprise and opaque fees.
In markets across the economy, junk fees have unfortunately become the norm. These junk fees aren’t subject to the normal forces of competition. They’re often charged for so-called services that a consumer never wanted and are set at levels far beyond the true cost. Junk fees inflate prices and chip away at monthly budgets by obscuring part of the price from comparison shopping, making it difficult for Americans to shop around.
As part of this whole-of-government effort, the CFPB has been reining in out-of-control junk fees in the financial sector. Americans are charged tens of billions of dollars in fees each year by their financial service providers--through things like late fees, overdraft fees, nonsufficient fund fees, and bounced check fees.
When we asked people to submit their comments on and experiences with junk fees, we were inundated with stories from thousands of individuals about being charged fees for things that weren’t in their control, like in the case of surprise overdraft fees. Many Americans believe these fees are just plain wrong.
New Proposed Rule
That’s why the CFPB is taking action to address excessive credit card late fees that are costing Americans billions of dollars each year.
Credit cards are one of the most common financial products in our country. The majority of American households have a credit card in their physical or digital wallet, and we collectively owe close to a trillion dollars in credit card debt. As interest rates have increased, costs on credit cards are a growing concern.
When someone misses a minimum credit card payment due date, even if they paid a day or two, or even a few hours, after the billing statement date, they can be hit with a cascading series of challenges. People must pay interest on the overdue balance, and may face other consequences, such as a lost grace period or a lower credit score, depending on how long the missed payment lasts. These are serious setbacks for a consumer.
But then, on top of that, many credit card companies hit their customers with a big fee, as much as $41 or up to 100% of their missed payment amount. This is what we are proposing to reform.
First, some background. In 2009, Congress overwhelmingly voted to pass the Credit CARD Act to reform the industry and clean up widespread abuses. Importantly, Congress banned unreasonable penalty fees. At the time, the Federal Reserve Board of Governors was responsible for putting into place the technical details on how the law would be implemented. The Fed Board voted to insert an immunity provision in its rules that allowed credit card companies to escape enforcement scrutiny even if it charged unjustifiably high fees. The Fed Board even allowed credit card companies to hike the fees annually for inflation.
The responsibility to oversee the implementing rules was transferred to the CFPB. We found that, over time, this loophole has morphed into a multi-billion dollar bonanza. We worry that credit card companies are actually hoping that consumers are a day or two late.
While it might be fair to charge customers for extra costs that credit card companies are incurring, that’s not what we see here.
Historically, credit card companies charged relatively small penalty amounts for missed payments. But once they discovered that these fees could be a source of easy profits, late fees shot up, with a surge occurring in the 2000s.
In recent years, these late fees have surged to as much as $41 for a missed payment. These fees add up – with consumers being hit with $12 billion a year in late fees – in addition to the billions of dollars in interest they are paying.
By our estimates, 75 percent of late fees—$9 billion—have no purpose beyond padding the credit card companies’ profits. They’re a reflection of the asymmetry of power that punishes and penalizes consumers when they make mistakes, while credit card companies are often allowed to fine print themselves out of trouble. This isn’t a sign of fair competition.
The guardrails of today are not what Congress intended when it passed the CARD Act, and the CFPB’s proposed rule changes would restore what Congress enacted.
The proposed rule would still allow credit card companies to charge late fees. They will just have to prove that their fees are in line with their collection costs, if they go above the immunity provision. However, we are proposing to slash the amount of the fee that will be presumed to be legal down to $8. We’re also proposing that late fees would not be able to exceed 25% of the required payment. And, we’re proposing to end the automatic inflation hike. We expect that these changes would substantially decrease the late fees that consumers are charged.
This is one of many efforts the CFPB has pursued to restore more competition to the market and reduce the billions of dollars in junk fees drained from family budgets. Our work has already contributed to billions of dollars in savings in fees on bank accounts and other products. We have taken enforcement actions to recover billions of illegal junk fees from companies like Wells Fargo.
At the end of the day, we want to see a marketplace where Americans are treated fairly, where it’s easier to switch, where prices and risks are clear upfront, and where companies compete hard to win their customer’s business.