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Inflation is hitting consumers in many ways, but contrary to this trend of rising prices, will your credit card late fees actually go down?
In anticipation of rule-making on late fee penalties that could bring these fees down, the Consumer Financial Protection Bureau is looking into whether it is appropriate for card issuers to hike these fees annually based on the inflation rate.
“We are examining whether it is appropriate for credit card companies to receive immunity from enforcement if they hike the cost of credit card late fees each year by the rate of inflation,” Rohit Chopra, CFPB director, noted in prepared remarks. “Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?”
The Credit Card Accountability Responsibility and Disclosure Act allowed card issuers a safe harbor from regulatory scrutiny if they charged $25 for a late payment, and $35 for a repeat late payment violation within six billing cycles, considering these fees to be reasonable (back in 2010, after the CARD Act was passed).
This amount would be revised annually based on inflation. As of 2022, those fees have risen to $30 and $41. The CARD Act also allowed issuers to set their own late fees if they can prove, based on costs, that the fees are reasonable and proportional to the violation.
According to the CFPB, credit card issuers have made late fees “a core part of their profit model,” charging consumers $12 billion in these fees in 2020, representing 10 percent of the total cost of credit cards to card users.
The CFPB is weighing public comment on this issue, as it considers its rule-making.
Are credit card late fees set at a reasonable level?
Various consumer advocacy groups are protesting the level of late fees today. In joint comments, the National Consumer Law Center, the Consumer Federation of America and Americans for Financial Reform Education Fund state that the late fees charged by card issuers are not proportionate to their costs. They would like the laws to require:
- Late fee charges based on the borrower’s actual credit card debt
- A waiting period before the fees are charged
- Fees not to be based on deterring consumers from late payments
- Inclusion of savings from online-only statements in cost calculations
- A snail mail notification before a fee is imposed in the case of online-only accounts
- Exclusion of costs of furnishing information to credit reporting agencies
According to these groups, the average credit card late fee was $12.83 in 1995: “Adjusted for inflation using the Consumer Price Index, a late fee of $12.83 in 1995 translates to $23.86 in 2022 dollars. Moreover, with technology being much more efficient and powerful in 2022, it is much easier and cheaper for issuers to use automated methods to communicate with late borrowers, encourage payments and collect overdue payments and delinquent debts. A simple increase using the Consumer Price Index likely overestimates the cost of collections in 2022.”
Commenting as an individual, David Silberman, who was CFPB assistant director for cards and payments in 2011, says the consumer protection agency viewed the inflation escalation when it was set up as more of a convenience to avoid future rule-making than a real reflection of costs.
Silberman says the main cost the CFPB associated with late payments is the cost of debt collection, and debt collector wages don’t necessarily rise with inflation. Technological innovation since 2010 has also likely helped debt collectors to operate more efficiently.
If the CFPB doesn’t change anything, credit card late fees are set to rise 8.9 percent in 2023, and will likely go up significantly again in 2024. Accordingly, Silberman asks the CFPB to issue an interim rule to suspend the 2023 rise in late fees.
Other than the actual cost associated with late payments, Silverman also asks the CFPB to consider the fact that consumers’ wages have not kept up with the cost of living. Also, given the rise in card interest rates, consumers who miss a payment will pay more in interest. Moreover, consumers, particularly those struggling to make ends meet, are being impacted by today’s economic challenges.
“These penalties are charged in addition to interest when a payment isn’t made by the due date,” says an anonymous commenter. “At this rate, credit card companies may actually desire late payments as a method of increasing revenue. Many people are struggling to make ends meet under higher costs at the moment, and these late fees add on extra financial burden to those that are already struggling and keep them in a negative cycle.”
However, David Pace, manager of regulatory advocacy at the League of Southeastern Credit Unions, notes that most financial institutions set their fees to the maximum allowed because of two reasons. One is that the average hourly salary for a collections agent is $26.50.
Considering that they could spend an hour just trying to reach a customer, and there’s also the cost of monitoring a delinquent account, this labor charge would make up the bulk of a $30 late fee. Besides, the fees serve as a deterrent to late payments, he says.
Unintended consequences of halting late fee hikes
Others favor letting late fees continue their inflation-indexed rise and say issuers could offer less favorable credit card terms if their risk and costs went up. The Independent Community Bankers of America, a trade association for community banks, says reducing the safe harbor late fee penalty amount, or doing away with it altogether (which would require each institution to set its own fee and justify its cost), would have unintended consequences in terms of bank outreach.
“If the late fee safe harbor is set at a level that is too low for small banks to recoup the costs associated with processing late payments, small banks may exit the credit card market or reduce the issuance of credit cards to borrowers at higher risk of late payment,” according to the ICBA.
And the National Association of Federally-Insured Credit Unions, a trade group for credit unions, points to negative consequences for consumers. According to NAFCU, the CFPB’s attempts to rein in fees “risks penalizing responsible consumers who will absorb higher costs in an environment where equitable and efficient allocation of the cost of credit is superseded by government mandate.”
Besides, bringing down fees would likely result in tighter underwriting that would, in turn, result in reduced access to credit for those with lower credit scores. Issuers could even reduce the grace period for payments to tackle their additional risk.
Even if the safe harbor did set the late fee penalty on the high side, taking costs into consideration, the NAFCU says, it serves the purpose of incentivizing consumers to make their payments early. This deterrence factor of late fees also helps financial institutions avoid collection fees and other delinquency costs.
At least one credit union says it charges less than the safe harbor late fee amount of $30. Raleigh, North Carolina-based Coastal Credit Union, is setting its fee at the lower of $25 or the actual minimum payment due since it finds that fee to be “reasonable, consistent, clear and easy to understand for our membership, while contributing to Coastal’s continued operational stability.”
An anonymous commenter says, “With the current economic climate such fees do feel burdensome and oppressive to cardholders who are experiencing the brunt of the lackluster economy especially if the fees are combined with aggressive collection efforts.”
“On the other hand, credit unions point to the fact that credit cards are marginally profitable segments of their overall business and that managing collection efforts for each account is costly and justifies the late fees. Further, the companies indicate that late fees are imposed to influence consumer behavior against late payments.”
Another commenter is in favor of more disclosure by card issuers, which would give consumers, investors and regulators “more insight into possible predatory and excessive behavior from card issuers,” considering there is currently “little to no transparency on these late payment practices in the banking industry.”
Is the CFPB overreaching?
Some comments veered toward the view that the CFPB is overreaching. “DakCU believes this probe is unnecessary and just an extension of the posturing the CFPB took in its request for information concerning fees, or as the CFPB labeled it ‘junk fees’ earlier this year,” says Amy Kleinschmit, chief compliance officer at the Dakota Credit Union Association.
“OCUL is concerned that the CFPB is simply expanding its agency authority through this ANPR (notice of rulemaking) rather than responding to consumer market insights that inform and necessitate future agency action, unnecessarily modifying safe and sound credit union lending processes and impacting consumer access to credit,” say officials at the Ohio Credit Union League.
The CFPB shouldn’t just look at total fees relative to overall revenue, says Alexander Monterrubio, senior director of advocacy at the Credit Union National Association. “Looking at these data points alone without context could obscure the extent to which an institution’s fee revenue is driven by the scale of its service to moderate- and low-income consumers,” says Monterrubio.
“The issuance of the ANPR seems to indicate that the CFPB is considering abandoning this clear standard in favor of a potentially complex rule that could lead to widely varying fees among issuers,” says Bill Hulse, speaking for the U.S. Chamber of Commerce. “Such an approach would contradict Director Chopra’s statements, as recently as last month, that ‘[t]he CFPB is seeking to move away from highly complicated rules . . . and towards simpler and cleaner rules.’”
According to Hulse, card issuers could resort to reducing card rewards or other product features to recoup their costs if the current safe harbor late fee penalty goes down. And if the safe harbor is eliminated altogether, issuers with particularly high costs could hike up late fee charges.
Chopra defended the CFPB’s stand, though. “When Congress enacted the CARD Act, some in the credit card industry predicted that the sky would fall,” Chopra stated. “But it didn’t. In fact, the changes made by the law have lowered the overall cost of credit and saved consumers billions in junk fees. Our effort will continue to make sure that Congress’ goal to ensure a fair, transparent and competitive credit card market holds true.”