The Consumer Financial Protection Bureau announced on Tuesday a new rule to force most banks to cap credit card late fees at $8.
The CFPB, which under President Joe Biden has also gone after “junk” fees charged by financial institutions, said that by finalizing the latest rule, it is closing a “loophole exploited by large credit card issuers.”
The CFPB said that fees cost consumers some $14 billion per year and that the new rule would go far toward curbing that, saving consumers an estimated $10 billion annually.
“Because banks are allowed to charge fees far in excess of costs, the current rule means large banks profit when borrowers inadvertently miss a payment or struggle to pay on time, and many do, repeatedly,” CFPB Director Rohit Chopra said.
Legislation passed in 2009 mandated that credit card companies could charge consumers no more than $25 for the first late payment and $35 for subsequent late payments. In addition, the law made it so that banks could only charge fees that recover the bank’s costs associated with late payment.
The fees were indexed for inflation and have risen since to $30 for the first late payment and $45 for subsequent late payments, even as business operations have become cheaper with more online processes, the White House said.
The new rule would cap all credit card late fees at $8 and would no longer index that total to inflation. The Biden administration contends that the move will result in average savings of $220 annually for the more than 45 million consumers who end up being charged late fees.
“This rule only applies to the largest card issuers, those with over 1 million open accounts,” Chopra noted in a statement. “These companies account for more than 95% of the total outstanding balances. Smaller banks and credit unions will not be affected.”
Consumer Bankers Association President and CEO Lindsey Johnson blasted the new rule on Tuesday. Johnson said that the final rule would end up helping only a small minority of consumers who face late fees. The Biden administration rule would offset the costs of their late payments by increasing costs among the overwhelming majority of cardholders who pay their bills on time, according to Johnson.
“While the administration is messaging this rule as a ‘win’ for consumers going into an election year, it’s anything but,” she said. “By normalizing being late on credit card payments, the Administration is knowingly putting consumers’ financial health at risk.”
Senate Banking Committee ranking member Tim Scott (R-SC) said that while lowering the cap on credit card late fees might sound like a good idea, in practice, it would reduce the availability of credit card programs for those most in need of them.
“Lawful and contractually agreed upon payment incentives promote financial discipline and responsibility. Ultimately, these commonsense practices protect consumers’ access to credit and enable a wider range of services,” Scott said.
House Financial Services Committee Chairman Patrick McHenry (R-NC) also trashed the move. He accused the Biden administration of “weaponiz[ing] financial regulators to play politics in an election year.”
This latest rule is in line with other actions from the Biden CFPB.
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Last year, the CFPB announced new guidance to stop large banks from charging excessive or “junk” fees for providing basic customer service.
Under federal law, big banks and credit unions are required to provide complete and accurate account information when requested by customers. That CFPB guidance aimed to clarify that people are not allowed to be charged fees for those basic requests.
