Warren to CFPB: Credit card late fees are profit, not a deterrent

Al Drago/Bloomberg

WASHINGTON — Sen. Elizabeth Warren, D-Mass., sought to debunk banks' arguments that they charge late fees as what she calls "tools of punishment," according to a letter sent by the Senate Banking Committee member to the Consumer Financial Protection Bureau. 

In a letter obtained by American Banker, Warren urged CFPB Director Rohit Chopra to finalize the bureau's February proposal to slash credit card late fees to just $8 a month — a significant cut from the current statutory maximum of $41. She included in her letter comments from the ten largest credit card issuers — also obtained by American Banker — that her office received after she requested information on the amount issuers earned and spent on collecting the fees. 

In her letter to Chopra, Warren criticized the core arguments that credit card issuers have made in opposition to the CFPB proposal, saying the institutions have no evidence that late fees prevent late payments. Instead, the letter argues that the evidence indicates that issuers often earn significant revenue off late fees. 

Chopra should finalize the proposal "without making any changes that weaken it," Warren said.

"This proposed rule is necessary to protect American consumers from the predatory practices of greedy financial institutions and furthers the Biden Administration's efforts to root out junk fees," Warren said in the letter. 

In early May, Warren asked the ten largest credit card issuers — PNC, JPMorgan Chase, Capital One, Citigroup, Discover, Bank of America, American Express, Wells Fargo, U.S. Bancorp and USAA — to give her data on how much each company makes off late fees each year and the total cost annually of collecting those fees. 

All ten issuers responded to Warren's request. According to Warren, those institutions "revealed their interest in maintaining exorbitant late fees as tools of punishment." 

Wells Fargo's head of government relations and public policy Brian Smith told Warren in a letter that the CFPB's proposal would lower late fees "below an effective deterrent level." 

"Late fees not only act as an offset of our costs related to collections from customers who have missed payments, but also are an effective way to incentivize customers to make their payments on time," Smith said in the letter to Warren. 

Andres Navarrete, executive vice president and head of external affairs at Capital One, in the letter to Warren compared late fees with speeding tickets, saying that speeding tickets "serve as an important mechanism to incentivize drivers to obey speed limits in order to avoid far greater consequences."

Politics and policy

Credit unions and banks don't get along, but join forces against CFPB

June 29, 2023 1:39 PM

"Given the principal focus of speeding tickets is to incentivize customers to obey speed limits, imagine how ineffective they would be if the dollar amount of speeding tickets was reduced by over 70%," he said. "Put simply, if the risks associated with speeding are not sufficient to incentivize drivers to drive within speed limits, without tickets set at an adequate level, then the significant — but far less severe — risks of paying late will prove still less effective without an adequate late fee to incentivize on-time payments." 

PNC President, Chairman and CEO William S. Demchak said that credit card late fees encourage payments to be made on time, although Warren said that PNC provided "no evidence to suggest that excessive $41 fees are necessary to deter late payment." 

"Credit card late fees encourage timely payment and help PNC meet supervisory expectations to lend in a safe and sound manner," Demchak said in his letter to Warren. "PNC incurs substantial costs in collecting late, delinquent, or charged-off credit card balances, and late payments are a leading indicator of later stages of delinquency. Delinquencies influence the amount of reserves that banks must maintain for their credit card loans, as applicable accounting standards require banks to maintain reserves sufficient to cover the full expected credit losses on their credit card and other loan balances." 

PNC and other credit card issuers could increase reserves and reduce the amount of funds available to extend credit to consumers, should credit card late fees no longer be able to incentivize timely payments, he continued. 

Demchak said that late fees from PNC's consumer credit card portfolio represented about 0.6% or less of the annual revenue from the bank's retail line of business, and 0.3% or less of PNC's annual total revenue from 2020 to 2022. 

Warren said that none of the issuers provided data proving that costs associated with collecting late payments exceeds the total late fees collected — data she asked for in her May letter to them.

"In fact, information provided by Wells Fargo indicates that late fees collected exceed the cost of collections by as much as tens of millions of dollars," Warren said. 

In Wells Fargo's letter, the bank said that it collected $315 million in late fees in 2022, and that the costs related to credit card collection totaled $266 million. In 2021, those figures stood at $265 million in late fees and $253 million in costs. Those cost numbers include such expenses as debt collection, legal costs and the costs of support functions, but not the costs of funding and the expenses the bank receives on principal losses on charged-off accounts. 

Some of the large issuers earn hundreds of millions of dollars in late-fee revenue, Warren said in the letter. American Express told Warren that credit card late fees represented less than 1% of their revenue in 2022, which Warren's letter takes to mean that they collected more than $500 million last year in late fees.