Does new federal rule on credit card late fees punish responsible consumers?


By A.J. Kaufman, Managing Editor

A coalition of business groups are requesting that President Joe Biden withdraw new Consumer Financial Protection Bureau (CFPB) late fees rules that they deem punitive.

The CFPB rule would cap the amount of fees financial institutions can charge for late credit card payments – new guidelines aim to reduce fees to a flat $8 rate — but opponents believe the regulation will hurt consumers and hinder economic growth.

In a letter sent to the president, CFPB Director Rohit Chopra, and a half-dozen congressional leaders of banking, financial or small business committees, 30 pro-growth groups outlined their “strong opposition” to the new rule.

“A stricter price cap will harm not only small businesses and the economy at large but also the low-income workers that the administration is intending to help,” the groups wrote, before adding that “History indicates that consumers are the ones who bear the brunt of regulations like this one because, to offset the resulting costs, financial institutions ultimately impose new fees and higher interest rates while reducing Main Street’s credit access. Your new late fee cap will similarly increase financial institutions’ operational costs, which American consumers will again inevitably bear. What’s more, the regulation may cause smaller lending institutions…to struggle to sustain their operations, which will reduce the availability of credit and diversity of financial products on the market.”

Effectively, they argue rule changes would mean higher costs for existing credit card users who pay their bills on time.

A more sympathetic Washington Post story in January claimed these late fees historically have fallen the hardest on American households earning under $65,000 annually, while enriching major banks.

But would the proposed rule change end up punishing the 75% of credit card users who pay their bills on time, by forcing them to subsidize the costs of those who don’t? In their report, the CFPB conceded that “Cardholders who never pay late will not benefit from the reduction in late fees and could pay more for their account if maintenance fees in their market segment rise in response – or if interest rates increase in response and these on-time cardholders carry a balance.”

In a 2023 poll from North Star Opinion Research, a whopping 99% of respondents believe in the importance of paying their credit card bill on time; more than four in five make all their payments on time. Additionally, nearly all surveyed were cognizant that not paying their bill on time can decrease their credit score, while three in four realize their bank charges a fee for late payments.

The U.S. Chamber of Commerce is particularly irritated with the Biden administration’s efforts. They filed a lawsuit March 7.

Bill Hulse, Senior VP for the Center for Capital Markets and Competitiveness at the U.S Chamber, says the new rules mean less choice.

“In addition to higher costs, consumers should expect fewer credit card options and benefits given the red tape the CFPB’s rules would impose,” he recently wrote. “Faced with rising costs and increased complexity, credit card issuers would have no choice but to curtail offerings. The upshot is that credit card users should expect fewer benefits than they do today – the CFPB’s rule will likely cause a reduction in popular perks such as cashback rewards, discounts on groceries and gas, and travel perks with airline and hotel partners.”

Hulse noted that credit card issuers provide disclosures that are more extensive than those required under the law, specifically because they want consumers to pay on time. That’s in addition to communications via email, text and push notifications, as well as online banking capabilities that display the consumer’s next payment due date.

But supporters of the CFPB’s goals say that in recent years banks have been taking advantage by monetizing the practice of overdraft to take billions in fees.

“There are families struggling, paycheck to paycheck, are getting hammered, and it is a real tax on access to their deposit funds,” President of the Center for Responsible Lending Michael Calhoun told the Washington Post earlier this year.

The view from local banking leaders is more nuanced but there’s still cause for concern.

“While all banks offering credit cards would be forced to re-evaluate their business model, enactment of this proposal would have the greatest impact on small depository institutions. In fact, many community banks would likely be forced out of the credit card market altogether,” First Community Bank Chairman Will Stafford told the Business Journal. “This reduction in competition would be bad for all consumers, but the resulting increase in the cost of, and decrease in access to, credit would be felt most by individuals and small businesses who rely on their local banks to provide this credit vehicle. Sadly, the overwhelming percentage of those who would be detrimentally impacted by this proposal will not receive any benefit from the rule because they already manage their credit responsibly.”

The federal government already has ramped up its enforcement, with the CFPB stepping in to penalize TCF Bank, TD Bank and Regions Bank in recent years for various charges related to the way they marketed overdraft services or imposed fees.

As part of a nearly $4 billion settlement with Wells Fargo Bank roughly 15 months ago, the CFPB deemed the bank’s overdraft policies illegal, alleging that the company erroneously charged customers even when they had sufficient funds in their accounts.

Yet all these fines and changes have not satisfied the CFPB, which recently reported that more than a quarter of surveyed Americans claim they still faced overdraft fees during the past year.

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