Rohit Chopra, the director of the Consumer Financial Protection Bureau, wants to slash $9 billion a year in late fees currently charged by credit card companies. Since banks and credit unions currently collect $12 billion a year in late fees, the bureau has set itself up for a massive fight that is widely expected to end in contentious litigation.
While the cost to assess a late fee on a credit card may be minimal, the CFPB's
Chopra has said he wants to address what he called "a loophole," created by the Federal Reserve Board in 2010, that set the safe harbor and allowed issuers to raise credit card late fees every year in line with inflation. Chopra has
With billions of dollars at stake, trade groups representing large issuers are
"Our rate and fee schedules reflect an effort to balance the costs of lending programs, fraud prevention, and operations against providing credit to members at a reasonable cost," wrote Deborah Cook, senior vice president and chief financial officer at Sun East Federal Credit Union in Aston, Pennsylvania, in a comment letter. "The [proposed] rule presents a significant threat to operations and places credit unions at a competitive disadvantage to large card issuers."
The CFPB's proposal comes within the backdrop of the Biden administration trying to show that it is helping reduce costs for average Americans. The CFPB has claimed that the income generated from late fees is roughly five times higher than the collection costs incurred by the largest issuers, though the bureau excluded post-collection costs from its calculation.
The Consumer Bankers Association said the costs incurred by credit card issuers when a consumer is late on a payment "likely exceed the amounts that they would be allowed to charge customers under the new safe harbor and the 25% payment cap."
In comment letters, bankers and credit union executives called the CFPB's proposal "misguided," "upsetting" and "an assault" on community banks in particular, claiming the bureau is stigmatizing late fees as "junk fees," to the detriment of all borrowers.
"The CFPB is creating the harmful perception among consumers that late payments are unimportant or trivial, which they are not, and may actually encourage late payments, which is wrong and harms consumers," wrote David Schroeder, senior vice president of federal governmental relations at the Community Bankers Association of Illinois.
Banks and credit unions are defending their right to impose a penalty on borrowers for nonpayment under the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act. While the Card Act primarily limited interest rate increases, it also stated that late fees be "reasonable and proportional," to the total costs incurred by a financial institution, plus other factors. Some commenters dug into the legislative record of the CARD Act to claim that Congress purposefully described late fees as a penalty that could be imposed beyond just recovering costs.
"The term 'penalty' [in the CARD Act] was no accident," wrote Brad Karp, chairman of Paul, Weiss, Rifkind, Wharton & Garrison LLP. "Congress made clear that cost is only one of among several grounds justifying late fees."
Karp said the CFPB's rulemaking "is being rushed," and that the bureau bears the burden of proof in demonstrating that the proposed rule is not "arbitrary and capricious," the standard for judicial review under the Administrative Procedure Act.
The bureau also asked for comment on whether to require a 15-day courtesy period before a late fee could be imposed. Many commenters said the CFPB conducted no analysis of the effect such changes would have on issuers.
A core issue in the upcoming fight over late fees involves what data is being collected on card issuers' costs and losses associated with late payments.
Notably, the Office of Advocacy, an independent office within the Small Business Administration, listed several reasons why it objects to the CFPB's plan to cut late fees due to the impact on small banks and credit unions. Roughly 498 small banks and 2,785 small credit unions have outstanding credit card debts, or assets, on their balance sheets.
"The CFPB does not have the necessary data to develop an adequate factual basis for its certification," of the proposed rule, wrote Major L. Clark, deputy chief counsel in the SBA's Office of Advocacy. "Advocacy is also concerned that the CFPB does not have sufficient information to indicate that small institutions contribute to the problem that is the target of the regulation."
Bankers and credit union executives generally said the CFPB's proposal would eliminate the deterrent effect of high fees, cause more harm than good for average consumers and prompt more people to pay late. The most common arguments — used for nearly all new rulemakings — is that lower late fees would force every bank or credit union to either cut back on credit or raise fees in other areas to make up for the lost late fee revenue.
Many commenters objected to the CFPB's use of so-called Y-14 data to factor in the costs of late payments and come up with the $8 late fee amount. That data is collected by the Federal Reserve Board to assess the capital adequacy of bank holding companies and other large financial institutions.
"It is unclear why [the] CFPB lacks the data necessary to evaluate the cost of this rule for the small financial entities that it regulates," Clark wrote.
Some analysts said the data is just one flaw in the CFPB's proposal, which would amend Regulation Z, the implementing regulation of the Truth in Lending Act.
"There is a high likelihood of this rule being litigated if it is finalized without a material softening," wrote Isaac Boltansky, managing director and director of policy research at the investment banking firm BTIG. "We expect litigation to focus on the lack of a [Small Business Regulatory Enforcement Fairness Act] panel and/or the Bureau's reliance on Y-14 data as the backbone of its proposed fee cap."
Another major bone of contention is the CFPB's view that late-stage collections, known as post-charge-off collection costs, cannot be used for measuring the costs associated with late payments.
"There is no support for this interpretation in statute or regulation," the American Bankers Association wrote in its
Craig Rismiller, senior vice president of business development and strategic partnerships at Amount, a Chicago fintech company that provides lending origination services to banks, said issuers will have to raise annual percentage rates and other fees while potentially reducing credit to some borrowers.
"Either banks will not be able to extend credit to people or they have to increase other levers to make up for the late fees," said Rismiller, a former chief of staff in the financial institutions group at Capital One. "Two things are true in the credit card space: The environment is super competitive and if you are too high in assessing fees or [annual percentage rates], there are multiple other competitors that will take the customer from you."
