WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) has finalized a rule that curtails excessive credit card late fees. This proactive measure promises to close a loophole that large card issuers have been exploiting, saving American families an estimated $10 billion in late fees each year.
Credit card late fees have long been a contentious issue, with big lenders carving out an approximate $14 billion a year from American families. That’s about to change though with the CFPB’s new rule which will reduce the typical late fee from the current $32 to a mere $8. This is a significant win for the more than 45 million Americans who are subjected to 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,” stated CFPB Director Rohit Chopra. “[This] 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.”
Historically, credit card companies have leveraged penalties, fee harvesting, and bait-and-switch tactics as part of their business models, triggering the enactment of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). This law sought to prevent card companies from imposing excessive penalty fees and enforce more transparent disclosures and consumer protections.
Under the CARD Act, a regulation was issued in 2010 which allowed banks to only charge fees that help recover costs associated with late payments. However, this rule included an immunity provision, permitting credit card companies to avoid accountability if they charged no more than $25 for the first late payment and $35 for subsequent late payments, both amounts adjusted for inflation annually.
Over the years, these amounts have surged to $30 and $41, even as credit card companies have transitioned to cheaper, digital business processes. This created a situation where late fees became a significant source of profits for some large credit card companies.
Post a comprehensive review of the market data, the CFPB’s final rule has adopted a lower threshold of $8 for late fees, and importantly, ended automatic inflation adjustments for this amount for issuers with 1 million or more open accounts.
These larger issuers, accounting for more than 95% of total outstanding credit card balances, will have to comply with the new rules. The CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of the largest issuers ramp up almost to the maximum allowable late fee amount.
The final rule makes some critical changes. It not only reduces the immunity provision dollar amount for late fees to $8 but also puts an end to the abuse of the automatic annual inflation adjustment. Large card issuers will now have to substantiate any charges above the threshold with valid proof that the higher fee is necessary to cover their actual collection costs.
This new rule doesn’t restrict credit card issuers’ ability to increase interest rates, slash credit lines, or take other corrective measures to deter late payments. What it does essentially is motivate credit card companies to encourage on-time payment by lower incentives to build a business model on late fees.
This final rule is seen as a significant step in the CFPB’s ongoing efforts to rectify issues and promote competition in the $1 trillion credit card market. The Bureau is actively working on solutions to help consumers discover lower interest rates, considering consumers shelled out an astronomical $130 billion in credit card interest and fees in 2022.
Furthermore, the CFPB’s commitment to uphold consumer rights extends to enforcement actions against any illegal conduct by credit card companies. As part of this, it has recently ordered several major banks to pay hefty fines and refunds to consumers for contravening credit card practices, thus sending a clear message that the era of negligent and exploitative practices is nearing its close.
This groundbreaking measure by the CFPB aims to protect American consumers from excessive financial burden, and could potentially transform the dynamics of the credit card industry in the United States.
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