Proposed federal rule would lower credit card late fees

As Americans continue to struggle with high credit card rates, the Bureau of Consumer Financial Protection has proposed rules to help offset some of their financial burden — in the form of lower late fees.

That new rules will limit late fees to $8. Currently credit card companies can charge up to $41 — a fine that CFPB director Rohit Chopra said was imposed for “no purpose other than increasing the credit card company’s bottom line.”

The CFPB rules amend the regulations implementing the Credit Card Accountability and Disclosure Act of 2009, and address loopholes that provide a lax standard saying late fees must be “reasonable and proportionate”.

The proposed rules would require credit card companies to prove they need to charge a higher late fee to cover costs, and cap the fee at 25% of the minimum payment. Current regulations allow credit card companies to charge as much as 100% of the minimum payment due. The rule would also eliminate automatic inflation adjustments for the amount companies can charge for late fees.

According to the CFPB, an independent comptroller within the Federal Reserve, credit card companies generate an estimated $12 billion in late fees each year. That rule could shrink it by as much as $9 billion every year.

“The regulation emphasizes the fact that credit card late fees are designed to be exaggerated to create incentives for consumer behavior. They are not worth the lenders’ fees,” said Aaron Klein, senior fellow in economics studies at Brookings.

The rule doesn’t need congressional approval, but Klein doesn’t expect it to be in force and felt by consumers until next year because of the rules’ lengthy process, including a public comment period. It is also possible that the banking industry will take legal action against the law, which could delay its implementation.

President and CEO of the Consumer Banks Association, Lindsey Johnson, has done just that respond accusing the CFPB of “trying to advance a political agenda” and saying the rule would hurt credit card holders.

The agency proposed the rule because credit card debt has ballooned in the US. That’s up 18.5% on the last year, jumping up to $930.6 billiona record amount, according to a fourth-quarter report from TransUnion, the consumer credit reporting agency.

Bankrate says the average credit card rate 19.95% on February 1, which was the highest since financial services firms began tracking them in 1985. Credit card balances saw their biggest year-over-year increase in more than two decades by 15%, based on New York Fed’s third quarter report on household debt and credit.

Part of that debt can be attributed to the Federal Reserve’s decision to repeatedly raise interest rates to fight inflation over the past year. The latest hike of 0.25%, announced last week, follows December’s 0.50% hike and four previous rate hikes of 0.75%.

“These Fed rate hikes are basically just passed on to cardholders… if the Fed raises rates by half a point or three quarter points or whatever, your rates should move higher by the same amount typically within a statement cycle or two. ,” said Ted Rossman, senior credit card analyst at Bankrate.

CFPB March 2022 report on late fees it was found that the average late fee was $31 and the recurring late fee was an average of $36. Alabama, Louisiana and Mississippi have them the tallest average late fees per account.

“In 2019, credit card accounts held by consumers living in the poorest neighborhoods in the United States paid an average of double the total late fees compared to those in the wealthiest areas,” the report explains.

“The law differentiates between fees and interest but for consumers it is money out of pocket. This [late fees] is a huge source of costs for consumers who are on the periphery… People who are facing greater economic hardship and hardship are paying more in fees,” said Klein.

He added, “For people who live paycheck to paycheck, and sometimes that paycheck comes a day or two after the credit card bill is due, these late fees really add up and put a lot more pressure on those who are paying for it. living on the razor’s edge. ”