The Consumer Federation of America released the following statement in response to the publication of the CFPB’s credit card late fees rule:

“The CFPB’s new rule prioritizes the needs of cash-strapped households ahead of big bank profiteering,” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “In 2022, credit card companies charged $14.5 billion in late fees. By prohibiting issuers from charging  a $31 missed payment fee when the true cost to credit card companies is less than eight dollars, the rule closes the loophole that permitted this form of price-gouging and injects fairness where it has been sorely needed.”

 

Fact sheet:

The rule will save consumers money. The CFPB estimates the rule will reduce the sum of late fees charged per year from $12 billion to $3 billion. These fees serve no purpose except to pad the profits of big banks.

The rule will not make banks stop offering credit cards: The industry contends that without late fee income, some credit card companies will issue fewer cards or exit the market entirely. This logic is unfounded. Credit card companies charged more than $105 billion in revenues in 2022 – and with increases in interest rates and outstanding balances since then, their revenues are likely to be higher regardless of how much they can charge for a missed payment.

Applying strong consumer protections to credit cards does not undermine credit availability. Research on the impacts of the CARD Act revealed an interesting pattern. Consumers benefited from the lowered cost of credit, avoided billions in late fees, and still opened more than 100 million new credit card accounts in 2014. Total available credit increased 10 percent from 2012 to 2015.

Curbing late fees will not force banks to lose money. It will just prevent them from making exorbitant profits from a junk fee. The rule still allows them to recover their costs. But it corrects a loophole that has favored credit card companies at the expense of consumers. Over the years, late fee income has been three to five times greater than collection costs on accounts that are  past-due but have not yet been written off. Federal Reserve research shows that collection costs, the main expense of late payments, hover around 25 percent of late fee income.

Consumers like the proposed rule. Fifty-three percent of survey respondents said they “strongly support” lowering the maximum late fee, and another 29 percent “somewhat support” it. Only 7 percent strongly oppose it.

The CFPB created the rule using evidence-based research. The CFPB analyzed financial data from six large credit card banks to determine the real cost of late payments. The choice of an $8 immunity provision is derived from this research. The CFPB rule allows any bank that can demonstrate that its costs were higher to receive an upwardly adjusted cap consistent with these proven costs.

The rule will not cause credit card issuers to curtail rewards programs. The credit card market is better understood as several segments within a single product space. Rewards cards are generally offered to consumers with prime credit or better, whereas below prime consumers rarely receive the same benefits. In its most recent survey of the credit card market, the CFPB found that prime plus and above accounts redeemed approximately 80 percent of all rewards, whereas below-prime cardholders redeemed only about six percent of rewards. Subprime accounts were more likely to carry revolving debt, pay only the minimum balance, and miss a payment. Interestingly, because deep subprime consumers carried higher levels or revolving credit and paid higher interest on those debts, they had higher average minimum payment due amounts. In the same study of 2022 accounts, deep subprime accounts incurred 15 times as many late fees per year than did prime accounts. Accounts that paid off their balances each month – and thus did not incur late fees – redeemed a high share of rewards. There is little evidence to support the theory that lower revenue on credit card late fees will force banks to curtail rewards.