WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) finalized a rule to cut excessive credit card late fees by closing a loophole exploited by large card issuers. The rule will curb fees that cost American families more than $14 billion a year. The CFPB estimates that American families will save more than $10 billion in late fees annually once the final rule goes into effect by reducing the typical fee from $32 to $8. This will be an average savings of $220 per year for the more than 45 million people who are charged late fees.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.
Concerned that credit card companies were building a business model on penalties, fee harvesting, and bait-and-switch tactics, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The law banned credit card companies from charging excessive penalty fees and established clearer disclosures and consumer protections.
In 2010, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act, which made clear that banks could only charge fees that recover the bank’s costs associated with late payment. However, the rule included an immunity provision that allowed credit card companies to sidestep accountability if they charged no more than $25 for the first late payment, and $35 for subsequent late payments, with both amounts to be adjusted for inflation each year. Those amounts have ballooned to $30 and $41, even as credit card companies have moved to cheaper, digital business processes. Congress transferred authority for administering CARD Act rules from the Fed to the CFPB.
After a thorough review of market data related to the 2010 immunity provision, the CFPB’s final rule adopts a lower threshold of $8 and ends automatic inflation adjustments for that amount for issuers that have 1 million or more open accounts.
The CFPB has found that since 2010, issuers have generally been charging consumers more in credit card late fees each year—growing to over $14 billion in 2022, and representing more than 10 percent of the $130 billion issuers charged consumers in interest and fees. Late fees are layered on top of many other punitive measures credit card companies impose on consumers who miss payments, including extra interest charges, loss of their grace period, negative credit reporting, reductions in their credit limit, and a higher interest rate on future purchases. The average late fee for major issuers has steadily ticked up since the passage of the CARD Act, going from $23 at the end of 2010 to $32 in 2022. For some large credit card companies, late fees are a major driver of their profit model.
The CFPB’s final rule applies to the largest credit card issuers, those with more than 1 million open accounts. These companies account for more than 95% of total outstanding credit card balances. CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of the largest issuers charge close to the maximum allowable late fee amount. Today’s final rule:
- Lowers the immunity provision dollar amount for late fees to $8: Based on data analyzed by the CFPB, a late fee of $8 would be sufficient for larger card issuers, on average, to cover collection costs incurred as a result of late payments.
- Ends abuse of the automatic annual inflation adjustment: The CFPB found that many issuers hiked their late fees in lockstep each year without evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. The CFPB will instead monitor market conditions and adjust the $8 late fee immunity threshold as necessary.
- Requires credit card issuers to show their math: Larger card issuers will be able to charge fees above the threshold so long as they can prove the higher fee is necessary to cover their actual collection costs.
The rule does not change the credit card issuer’s ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late. In fact, the rule would increase the desire for credit card companies to facilitate on-time payment, since it would lower incentives to build a business model on late fees.
The U.S. Chamber of Commerce responded to the CFPB in opposition to the new rule and filed a lawsuit in the Northern District of Texas seeking a preliminary injunction to stop the agency (CFPB) from implementing a rule that punishes responsible credit card users who pay their bills on time. In promulgating its rule to limit credit card late fees, the CFPB not only exceeded its statutory authority but did so by relying on the use of secret data collected for an unrelated purpose.
“American consumers benefit from a variety of credit cards that best suit their needs, and a large majority of credit card users understand the requirement to pay their credit card bills on time in addition to the costs that come with a late payment,” said Neil Bradley, U.S. Chamber Executive Vice President, Chief Policy Officer, and Head of Strategic Advocacy. “By significantly limiting late fees, the CFPB is not only discouraging responsible credit card use but also imposing higher costs on consumers and limiting choices in credit card options and benefits.”
“The agency’s own analysis has found that by limiting late fees, associated costs will be passed onto all credit card users, even those who have never made a late payment. The CFPB is acting outside its authority and the Chamber’s lawsuit seeks to protect American cardholders who pay their bills on time and enjoy the numerous benefits of diverse credit card offerings from America’s financial institutions.”
