The CFPB has issued a report titled “Credit card late fees” that discusses the consumer impact of late fees by card type, credit score, and geography, and market reliance on late fees. (Late fees are also among the fees at which the CFPB has taken aim in its “junk fees” initiative.) Following a pattern established under former Director Cordray, the CFPB used relatively neutral language in its report and more judgmental language in Director Chopra’s comments contained in the Bureau’s press release.
Director Chopra commented as follows:
"Many credit card issuers have made late fee penalties a core part of their profit model. Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost. Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise."
The report’s primary findings are:
- Many major issuers charge the maximum late fee allowed under the TILA/Regulation Z safe harbor created pursuant to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).
- Cardholders with subprime and deep subprime credit scores are far more likely to incur repeat late fees in a given year than cardholders in higher credit score tiers.
- In 2019, credit card accounts held by cardholders living in the poorest neighborhoods in the U.S. paid twice as much on average in total late fees than those in the richest areas. Cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019 than majority white areas.
- Late fees account for 99 percent of penalty fees and over half of the credit card market’s consumer fees.
Neither the CFPB’s report nor Director Chopra’s comments suggest that card issuers are charging late fees unlawfully or without making required disclosures. Rather, the implication of the report and even clearer implication of Director Chopra’s comments is that card issuers are charging excessive amounts in late fees and should not make inflation-based adjustments. However, as the report acknowledges, the CARD Act requires that late fees imposed by credit card issuers be “reasonable and proportional” to the violation of the account terms. It also acknowledges that Regulation Z establishes a “safe harbor” for specific fee amounts and provides that those amounts are to be adjusted annually by the CFPB for inflation. In 2022, the safe harbor allows a card issuer to impose a fee of $30 for a first late payment and $41 for a subsequent late payments. (Regulation Z also permits an issuer that can demonstrate that a higher fee is justified as a reasonable proportion of its internal costs to assess a penalty fee that is higher than the safe harbor fees.)
When the Federal Reserve Board initially set the safe harbor amounts in 2010 at $25 for a first late payment and $35 for subsequent late payments, it indicated that it believed those amounts were generally sufficient to cover issuers’ costs and to deter future violations and also recognized the need to annually adjust those amounts for inflation to cover increases in issuers’ costs. 75 Fed. Reg. 37526 (June 29, 2010). Perhaps Director Chopra is suggesting that the current safe harbor amounts are too high or that annual adjustments for inflation are unwarranted. However, he offers no empirical evidence indicating that the safe harbor amounts do not generally represent issuers’ costs. Even more significantly, any changes to the safe harbor amounts (including their elimination) or the elimination of annual adjustments would require rulemaking by the Bureau.
It seems unlikely that the CFPB intends to launch a new rulemaking in order to lower the maximum permissible credit card late fees. Such a rulemaking would be opposed by the industry, would be very time consuming, would absorb lots of bandwidth, and its success would be in doubt. Thus, it appears Director Chopra is once again using his favorite strategy–jawboning.
That strategy seems misplaced here. If credit card issuers eliminated or significantly reduced late fees, there would be less incentive for cardholders to make timely payments. Also, it may lead issuers to increase their interest rates, particularly in an economic environment in which market interest rates are rising. Such an increase in interest rates would result in one segment of cardholders – those who revolve and pay their bills on time – subsidizing those who do not pay their bills on time.