WASHINGTON — The federal government’s consumer protection watchdog proposed a recent rule on Wednesday to ban excessive bank card late fees, potentially reducing them by as much as $9 billion per yr.
Congress banned exorbitant bank card fees under the Credit CARD Act in 2009, but an immunity provision instituted by the Federal Reserve Board of Governors enabled card corporations to dodge enforcement standards, said Rohit Chopra, director of the Consumer Financial Protection Bureau.
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“Over a decade ago, Congress banned excessive bank card late fees, but corporations have exploited a regulatory loophole that has allowed them to flee scrutiny for charging an otherwise illegal junk fee,” Chopra said. “Today’s proposed rule seeks to save lots of families billions of dollars and make sure the bank card market is fair and competitive.”
The proposal follows a March 2022 report that showed bank card issuers charged consumers $12 billion in late fees in 2020. Many issuers charge the utmost late fee outlined by the Fed Board in 2010: $30 for the primary late payment and $41 for subsequent late payments inside six billing cycles. Card issuers that hike fees with inflation are also protected by immunity clauses, in keeping with Chopra.
The CFPB rule proposed Wednesday would lower the quantity consumers can owe for late payments to $8 from as much as $41, end the automated annual inflation adjustment for the availability and cap late fees at 25% of the minimum payment owed by the cardholder.
Chopra said bank card issuers have made late penalty fees “a core a part of their profit model,” and that protections offered by the Credit CARD Act effectively reduced the full cost of credit for consumers. The fees disproportionately affect households living paycheck-to-paycheck, borrowers living in America’s poorest neighborhoods, areas where the population is usually Black in addition to subprime and personal label cardholders.
“Markets work best when corporations compete on price and repair, slightly than counting on back-end fees that obscure the true cost,” Chopra said. “Given their current practices, we expect that bank card issuers will hike fees, based on inflation, as limits proceed to rise.”
Some banking interest groups panned the proposal Wednesday, saying it’s going to increase costs, reduce credit options for consumers and potentially restrict access to credit in local communities.
“By effectively removing those incentives, the proposal would harm the very consumers the CFPB seeks to guard by increasing the general cost, and reducing the provision, of credit,” said Paige Pidano Paridon, senior vice chairman and senior associate general counsel of the Bank Policy Institute, which advocates for mid-to-large size banks.
Rebeca Romero Rainey, CEO of the Independent Community Bankers of America, cautioned the CFPB to solicit feedback from small financial institutions in the course of the decision-making process.
The U.S. Chamber of Commerce, the nation’s largest business advocacy group, also said the rule proposal would punish responsible consumers.
“Late fees not only ensure prompt repayment but additionally help consumers avoid additional interest accruing on unpaid balances and establish good credit history,” said Bill Hulse, vice chairman of the Chamber’s Center for Capital Markets Competitiveness. “Ultimately, what the American bank card user can expect from this rule change is higher costs and reduced decisions as a direct results of the CFPB imposing more red tape on businesses.”
However the American Economic Liberties Project, an anti-monopoly organization, lauded the CFPB for standing as much as bank card corporations.
“For too long, bank card corporations have cashed in on evading the 2009 CARD Act, turning huge profits by slapping consumers with unreasonable and disproportionate fees that usually charge as much as five times the prices related to collecting late payments,” said Shahid Naeem, an AELP policy analyst. “The CFPB’s fight against rip-off junk fees is a transparent demonstration of the ways strong regulators can protect Americans from the company giants profiting from them.”
The CFPB will seek public comment on other potential changes, including whether to make the proposed rule apply to all bank card penalties, eliminate the immunity provision altogether, create a 15-day courtesy period for bank card holders before the assessment of late fees and require bank card corporations to supply autopay services as a condition of immunity provisions.
The rule change also follows a request for comment on the Biden administration’s initiative to scale back certain “junk fees” burdening American consumers.
Late fees cost American families around $12 billion a yr along with billions in interest, the CFPB said.
The Fed Board declined to comment.
The group argued the fees should encourage consumers to pay their bills on time.