CRS Reviews Proposed CFPB Regulation on Credit Card Late Fees
Previously, we reported on the Consumer Protection Financial Bureau’s (CFPB) proposed amendments to Regulation Z. The amendments come as part of the President’s Competition Council, an initiative to promote competition in the American economy by limiting junk fees, such as credit card late fees.
On April 28, 2023, the Congressional Research Service (CRS) has reviewed [1] the competing arguments for and against the amendments.
Cost of Late Fees.
The proposal would reduce the late fee safe harbor from $30 to $8 for initial and subsequent violations.
The CFPB notes that current credit card issuers generate more money in late fees than the cost incurred by the credit card companies, [2] therefore, the fees are not “reasonable or proportional[.]”
This perspective has been countered by the lending industry, which posed that lowering late fees would result in increased costs for credit card issuers, which would, in turn, reduce consumer access to credit and an increase in consumer interest rates.
Deterring Late Payments.
Despite recent academic research suggesting when a late fee is reduced it often result in an increase in late payments, the CFPB argues that other consequences, such as negatively impacting credit score, will act as a deterrent for consumers to provide late payments.
Those who oppose this approach assert that late fees are necessary to promote repayment of credit cards, and that lowering late fees may cause the cost of credit to increase, negatively impacting customers who pay on time.
Impact on Small Institutions.
The CFPB determined that it was not required to complete a small business review process (SBREFA) because the proposed amendments would not have a “significant economic impact on a substantial number of small entities[.]”This claim was supposed by an assertation that credit cards may make up “less than 5% of most small banks’ and credit unions’ assets and revenues.” [3]
Counterarguments question the statistics that the CFPB based their conclusion on, citing industry analyses that estimates “more than half of credit-card-issuing banks and 85% of credit-card-issuing credit unions are small.” [4] This opposition was echoed throughout the industry as many participants believe the analysis “may not be representative of smaller issuers.”
[1] https://crsreports.congress.gov/product/pdf/IN/IN12146
[2] https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-collection-costs-large-bank_2023-01.pdf
[3] https://files.consumerfinance.gov/f/documents/cfpb_credit-card-penalty-fees-nprm_2023-01.pdf#page=140
[4] https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/comments-on-late-fee-rulemaking#page=2