CFPB launches opening salvo in battle against credit card late fees

The Consumer Financial Protection Bureau took its first step toward protecting credit card users from paying excessive late fees.

CFPB Director Rohit Chopra on Wednesday issued an advance notice of proposed rulemaking to assess whether late fees charged by credit card issuers are “reasonable and proportional,” as required by the Credit Card Accountability Responsibility and Disclosure Act, known as the CARD Act.

Chopra has been signaling for months that the CFPB wants to slash the $12 billion in annual late fees charged by credit card companies. The bureau is expected to change a provision of CARD Act regulations that allows issuers to peg late fees to inflation. 

“Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” Chopra said in a press release. “Current rules might give companies the incentive to impose big hikes based on inflation.”

The CARD Act, enacted in 2010, banned excessive credit card penalties. But it also gave card issuers relief from liability if they set late fees at a particular level subject to an annual inflation adjustment. 

Though the CFPB typically cannot change or set bank fees, the bureau has the authority to set so-called safe harbor limits for late fees under the CARD Act. Credit card issuers have been allowed to raise late fees due to inflation because the safe harbor does not require a cost analysis to determine if the fees are reasonable.  

The largest credit card companies typically charge $30 for the first late payment and $41 for subsequent late payments within six billing cycles, the CFPB said. Of the 20 largest card issuers, 18 of them charge late fees at or near the maximum level allowed by the CARD Act. By comparison, many small banks and credit unions charge late fees of $25 or less. 

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Many bankers expect the CFPB will reset the maximum allowable amounts for late fees, which are likely to drop by a few dollars going forward.

Chopra also said the CFPB is looking at the safe harbor provision in Regulation Z — the implementing regulation for the CARD Act and the Truth in Lending Act — that allows credit card companies “to escape enforcement scrutiny.” 

Richard Hunt, president and CEO of the Consumer Bankers Association, said banks are “in clear compliance with existing laws.” Hunt blasted the CFPB for not taking into account that card issuers waived late fees for many consumers and businesses during the pandemic. 

“This continues an emerging and harmful pattern at the bureau of turning a blind eye to many of the bank-led efforts and innovations that have been introduced without regulatory intervention to meet the evolving needs of the customers they serve,” Hunt said.

The CFPB’s move dovetails with Chopra's pledge to crack down on what he calls “junk fees,” or charges that he says don't correlate with the underlying costs of products or services.

Fitch Ratings weighed in on the plan, noting that robust regulation of the financial sector is generally viewed favorably — but not in this case.

The CFPB’s proposal could “reduce certain fee revenue streams, which would be a credit negative for those consumer lenders with significant exposure to the fees being targeted,” Fitch Ratings said in a press release Wednesday.

The CFPB is seeking data about the role late fees play in credit card companies’ profitability and whether companies are generating more revenue from late fees than is necessary to cover the cost of late payments. 

On a call with reporters, Chopra said the cost of processing late payments should have gone down over the years due to advances in technology.

The CFPB listed a number of questions it wants answered by issuers, consumers and advocates including how late fees are set and if revenue goals are a factor in credit card companies’ setting late fees.

The bureau also wants input on what percentage of accounts are late within a 24-hour period versus 30 days. The agency also wants card issuers to provide information on marketing expenses, interchange fees and a breakdown of costs for billing and processing payments. 

The deadline for submitting comments is July 22.