Will CFPB’s $8 cap on credit card late fees encourage late payments?

On March 5, 2024, the Client Monetary Safety Bureau (CFPB) finalized a rule capping bank card late fee charges at $8 for the largest card issuers after inviting public touch upon the matter final yr. In response to the buyer safety company, the transfer is an effort to rein in “extreme” bank card late charges.

“For over a decade, bank card giants have been exploiting a loophole to reap billions of {dollars} in junk charges from American shoppers,” Rohit Chopra, the CFPB’s director, stated in an announcement. “At present’s rule ends the period of massive bank card corporations hiding behind the excuse of inflation once they hike charges on debtors and increase their very own backside traces.”

The rule will apply to the most important card issuers, which, based on the regulatory company, have greater than 1,000,000 card accounts open and account for greater than 95 % of excellent card balances. Smaller issuers are likely to cost decrease charges, the CFPB notes.

The CFPB stated that, in 2022, late charges accounted for greater than 10 % of the $130 billion issuers charged prospects on bank card curiosity funds and costs. In consequence, the company expects that the rule going into impact may save American households greater than $10 billion a yr by bringing down late charges to $8 from the $32 that’s usually charged presently.

Whereas the CFPB expects the legislation to enter impact 60 days after it’s revealed within the Federal Register, there may be some speak of litigation in opposition to the company to forestall the legislation from being carried out. Due to this fact, it’s presently not clear if or when the rule will truly take impact — or when shoppers will see aid from excessive late charges.  

Late fees aren’t in keeping with assortment prices

At present, bank card late charges are capped at $30 for a primary late fee and $41 for a second late fee inside the subsequent six bank card billing cycles. Issuers can cost greater late price funds if they will justify that their late fee assortment bills benefit greater late price fees.

In keeping with the Credit score Card Accountability Duty and Disclosure Act (CARD Act) of 2009, the Federal Reserve Board of Governors issued a regulation clarifying that card issuers had been required to maintain late charges in keeping with the prices they incur due to late funds. At the moment, issuers may cost as much as $25 for a primary late fee and $35 for any subsequent late funds. These quantities have been adjusted for inflation yearly to reach at at this time’s cap of $30 and $41 on late price funds. On the similar time, card issuers have benefited from decrease prices as they’ve moved to digital assortment processes.

In response to the CFPB, “many issuers hiked their late charges in lockstep every year with out proof of elevated prices.” Contemplating this, the CFPB’s new rule may also remove the automated annual inflation adjustment allowance. As a substitute, the regulatory company will “monitor market circumstances” yearly and resolve whether or not to lift the $8 secure harbor, or base charge, cap. Larger card issuers can nonetheless cost a better bank card late price if they’re able to justify it based mostly on their prices. 

Banking business says late price cap will increase price of credit score

The banking business is against the CFPB rule and says that the transfer will find yourself elevating the price of credit score for all shoppers as banks search to recoup prices that decrease late charges don’t cowl.

In a media assertion, Rob Nichols, president of the American Bankers Affiliation (ABA), a banking business commerce group, stated that the CFPB’s “misguided resolution to cap bank card late charges at a degree far under banks’ precise prices” will trigger card issuers to chop credit score traces, toughen requirements for brand spanking new accounts and lift rates of interest for all shoppers, together with for individuals who pay on time.”

He added, “Simply days earlier than the State of the Union, this supposedly impartial company is clearly selecting to place politics over sound public coverage.”

Client Bankers Affiliation (CBA), one other banking business commerce group additionally weighed in in opposition to the rule. In a media assertion, Lindsey Johnson, CBA’s president and CEO, stated that as bank card rates of interest rise, “this last rule will profit a small minority of frequent late-payers by offsetting the prices of their late funds by growing prices amongst the 74 % of cardholders that pay their payments on time.”

Johnson additionally added, “The CFPB has skipped vital authorized necessities in its haste to finalize the rulemaking, elevating considerations in regards to the sufficiency of the rulemaking course of beneath the Administrative Procedures Act.”

Is the CFPB inviting litigation and lowering market transparency?

David Gossett, a associate with the legislation agency of Davis Wright Tremaine (who beforehand served because the CFPB’s preliminary assistant common counsel for litigation) stated in an electronic mail that he expects a lawsuit to problem the company’s rule on each procedural and substantive bases. On procedural grounds, the information the CFPB used to help the rulemaking is incomplete and secret, based on Gossett.

Gossett added, “Substantively, the company excludes related bills and prices from its calculation of the suitable degree of late charges; largely ignores the deterrent impact of late charges; and is predicated on the fallacy that late charges are a kind of ‘junk price’ and thus ought to be a part of President Biden’s struggle in opposition to junk charges.”

James Mann, one other Davis Wright Tremaine associate, famous in the identical electronic mail that if the massive cuts to the secure harbor late charges trigger issuers to set completely different late charges which are greater than the secure harbor, that may make it tough for shoppers to comparability store.

Additionally, based on Mann, the rule, as written, does away with an issuer’s proper to get better prices past the secure harbor quantity because it doesn’t permit it to get better assortment fees incurred as soon as a debt is charged off. In consequence, Mann stated, “The Rule encourages issuers to cost transparently but additionally envisions that issuers will increase their APRs. This is not sensible since elevating the APR to compensate for late-payment prices together withreceivables funding prices truly reduces transparency.”

Client advocates level to financial savings

Client advocate teams, nonetheless, lauded the brand new rule for serving to shoppers lower your expenses. In response to Chi Chi Wu, senior legal professional on the Nationwide Client Regulation Heart (NCLC), in a press launch issued by the group, “The CFPB’s bank card late price rule will assist the steadiness sheets of thousands and thousands of households stretched skinny by record-high housing prices and different bills.”

Additional, Ira Rheingold, government director of the Nationwide Affiliation of Client Advocates (NACA), was quoted in a press launch by the company as saying that, “The $8 cap on allowed late charges not solely relieves American households from burdensome fees, it additionally brings bank card practices again in keeping with the statutory necessities of longstanding federal legal guidelines.”

Different deterrents to late funds

Contemplating that the brand new rule would considerably decrease bank card late charges, some argue that it offers an incentive for shoppers to be tardy with their card funds.

The CFPB, nonetheless, expects the rule to create an incentive for card issuers to encourage shoppers to pay on time, since late charges is not going to be a supply of earnings for them.

“Late charges are layered on prime of many different punitive measures bank card corporations impose on shoppers who miss funds, together with further curiosity fees, lack of their grace interval, adverse credit score reporting, reductions of their credit score restrict, and a better rate of interest on future purchases.”

— In response to CFPB

Given the numerous downsides to late funds, shoppers ought to all the time prioritize making their card funds on time. Even when the concept of a smaller late price makes a late fee appear much less daunting, being late on a fee may result in different vital adverse results, similar to greater rate of interest funds and diminished entry to credit score.

The underside line

The CFPB has finalized a rule it proposed final yr and can cap bank card late charges for the most important card issuers at $8. In response to the company, these issuers are benefiting from late charges that don’t replicate their precise prices incurred on account of late funds. Issuers can nonetheless cost a late price that’s greater than the $8 cap, however they must justify it based mostly on their prices. The brand new rule additionally doesn’t permit issuers to routinely regulate their late charges yearly, based mostly on inflation.

Banking teams have opposed the cap, saying that it’ll increase the price of credit score for all shoppers, whereas shopper advocates see it as a measure that may save shoppers cash. Whereas the diminished late price may imply there may be much less incentive for shoppers to pay on time, late funds may trigger you to pay greater rates of interest and cut back your entry to credit score. That’s why you need to all the time intention to make your bank card funds on time, no matter any late price you would possibly pay.

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